JOINT VENTURE BUY-OUTS UNDER UNCERTAINTY*

Abstract

This paper provides a theory of joint venture buy-outs in the presence of demand uncertainty. In an infinite horizon framework with demand uncertainty, we consider a foreign firm's decision on whether to form a joint venture or to open a fully owned subsidiary. Without the possibility of future share adjustment, the foreign firm enters the market through a joint venture if the host-country firm helps to reduce the uncertainty significantly. Consequently, the firm enters at an earlier point in time compared to the situation in which opening a fully owned subsidiary is the only option to the firm. The possibility of future share adjustment in the joint venture further increases the incentive to speed up foreign investment. Although the possibility of share adjustment results in a joint venture buy-out and can reduce the future profits of the host-country firm, it may increase host-country welfare by attracting foreign investment at an earlier point in time. We show the implications of learning in the joint venture.