Foreign Ownership Restrictions: A Numerical Approach

In this paper, we analyze the reason behind the use of foreign ownership restrictions on inward Foreign Direct Investment (FDI). We extend the results developed in Karabay (2005) by changing the condition on share distribution in the model. Due to this change, we are able to analyze the political ec...

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Bibliographic Details
Published in:Computational economics 2009-05, Vol.33 (4), p.361-388
Main Authors: Karabay, Bilgehan, Pulverer, Gernot, Weinmüller, Ewa
Format: Article
Language:English
Subjects:
Asymmetric information
Behavioral/Experimental Economics
Business economics
Business ownership
C63
Central banks
Collocation methods
Computer Appl. in Social and Behavioral Sciences
D82
Economic models
Economic regulation
Economic theory
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Economics and Finance
F23
Firm value
Foreign investment
Government
Joint ventures
L24
Math Applications in Computer Science
Multinational enterprises
Multinationals
Operations Research/Decision Theory
Ordinary differential equations
Ownership
Ownership and control
P16
Political economy
Preferences
Regulation
Restrictions
Singular boundary value problems in ODEs
Studies
Subsidies
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Summary:In this paper, we analyze the reason behind the use of foreign ownership restrictions on inward Foreign Direct Investment (FDI). We extend the results developed in Karabay (2005) by changing the condition on share distribution in the model. Due to this change, we are able to analyze the political economy aspect of this restrictive policy, i.e., we can study the effect of the host government’s welfare preference on the optimal foreign ownership restriction. Since the analytical solution to the optimal share restriction policy cannot be specified in general, we use a numerical approach based on collocation to approximate the solution to the problem. Within this framework, under certain conditions, it turns out that the rent extraction-efficiency trade-off is sharper the less the host government favors the local firm. We show that not only economic factors but also political factors play an important role in the determination of the foreign ownership restrictions.
ISSN:0927-7099
1572-9974
DOI:10.1007/s10614-008-9163-1