Choosing the Mode for FDI Entry to China's Port Market based on Two-stage Game between the Foreign-funded Enterprises and Government

Abstract

Together with Foreign Direct Investment (FDI) entering the port market in China, some important relationships emerge among three principle parts, foreign-funded enterprises, government, and the existing port enterprises. Among these three relationships, the relationship between the foreign-funded enterprises and government is the main basis in port FDI entry mode choice. The foreign-funded enterprises will consider the FDI to choose a desirable mode through either new investment or acquisitions, in order to achieve profit maximization. The Chinese government has the choice to make incentives or restrictions policies on FDI, with the objective of maximizing its social welfare. This paper applies Game Theory to analyze FDI entry mode by using a two-stage Game model between foreign-funded enterprises and government. In the first stage, this paper builds the government's utility function and the foreign-funded enterprises’ Cobb-Douglas production function, analyzing the optimal strategy for foreign-funded enterprises and government. In the second stage, this paper analyzes the equity allocation of port FDI.