Optimal Degree of Foreign Ownership under Uncertainty

Event Date: 19 November 2014

Speaker: Cagatay Bircan, EBRD

We construct a dynamic model of foreign direct investment with incomplete contracts and uncertainty to analyse equity ownership. The productivity of a multinational parent and its supplier is unknown initially and revealed only after joint production. This kind of match-specific learning implies a dynamic market for corporate equity with considerable impact on reallocation within narrowly defined industries.

We identify heterogeneity in productivity to be the key determinant of foreign equity shares, which in turn determine the intensive margin in firm imports and business survival. We test the model implications with plant-level data on ownership shares and find empirical support.

Published: 11 February 2015