International joint ventures, technology licensing and ownership structure

Abstract To enter into a host country market with significant technological distance, a multinational corporation forms a joint venture affiliate with a local partner and collects licensing royalties from the affiliate. Both parties to the joint venture simultaneously decide their respective equity shares and the capital capacity of a continuous investment project via Nash bargaining. Since the multinational corporation receives licensing royalties from its local partner, it will therefore hold a share smaller than its relative bargaining power. In addition, the multinational firm will demand a larger ownership share if the royalty rate is lower, or the repurchase price of capital becomes lower. The joint venture firm will install a higher capital capacity when entering the host‐country market if the price either to repurchase or to resell capital becomes higher. This capacity installation decision, however, will not be affected by the licensing royalty rate.