Temporary partnerships as an information transmission mechanism - foreign investment in emerging markets
Asymmetric information and fear of acquiring a 'lemon' may explain thepaucity of foreign investment in emerging market economies. If investorsare uncertain about the profitability of investments, intrinsically inefficient,temporary partnerships or joint ventures may serve as mechanisms throughwhich information is transmitted. Temporary partnerships with joint in-vestments by the domestic firm and the foreign investor, together with abuy-out option to the investor, can be used to separate good and bad invest-ment prospects in equilibrium. However, non-revealing equilibria may exist.Implications for foreign direct investment are traced and briefly related tothe experience of transition economies.Keywords: investment, complementary assets, partnerships, joint venturesand licensing, costly signalingJEL: D8, F2, L14, O12
H. Peter Møllgaard, Per Baltzer Overgaard
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