The Effects of Different Structures on Ownership Decisions Essay

The Effects of Different Structures on Ownership Decisions - Essay Example Joint ventures have to be applied in countries where foreign ownership is restricted. Other forms of entry into overseas market are mergers and acquisitions. A merger occurs when an exporter merges with a local company and creates a new unit, while under acquisition the exporting company takes over a domestic company. This research aims to asses the effect of different structures on ownership decisions. According to Raff, Ryan and Stahler (2005), direct exports or Greenfield investment does not change the ownership as it relies on its own assets to produce goods. In the case of M&A the foreign firm acquires the assets of the local target firm and combines them with its own assets but in the case of joint ventures, even though the assets are shared, they continue to choose output independently. Thus the decision to invest in another country would depend upon the extent of investment that the host firm wants to make. This implies that the firm heterogeneity would determine the pattern of foreign direct investment. Research suggests that firms with least assets would not like to disturb the ownership and would prefer to directly export their goods. Firms with highest assets choose Greenfield or direct investment. Those with low assets prefer mergers and joint ventures. Kasuga (2003) clarifies that net worth plays an important role in determining structures and hence the ownership decisions. When the minimum efficient scale for foreign companies is too large, the host firm chooses joint ventures or equity participation rather than wholly owned subsidiaries. The ownership decisions are based on various micro and macro factors as it depends on the host country for support. When the parent firm needs the local partner’s assets, joint venture are preferred. The ownership shares and consequently the profits too get distributed in case of joint ventures. The ownership also affects the degree of technology transfer from the parent firm. Research also shows