Institution for risk sharing : international joint venture

Abstract

International joint venture as a form of business organization has become quite important in the post-liberalization period. Although an international joint venture has an independent legal status, it is organized for the joint benefit of the foreign and local firm. An international joint venture, defined as an agreement about revenue and cost-sharing rules, can be designed to enhance the level of foreign direct investment under the presence of economic risk. For example, foreign direct investment in economies in transition and emerging markets may be discouraged by fluctuations in the value of local currency or market risk when the entire revenue is generated through local sales. We argue that a properly designed joint venture scheme between an international firm (source country) and a local partner (host country) may resolve such an economic incentive problem. (original abstract)