Article ID: | iaor2012691 |
Volume: | 45 |
Issue: | 1 |
Start Page Number: | 1 |
End Page Number: | 15 |
Publication Date: | Feb 2012 |
Journal: | Canadian Journal of Economics/Revue canadienne d'conomique |
Authors: | Chen Yongmin, Horstmann Ignatius J, Markusen James R |
Keywords: | production, knowledge management |
There exist two approaches in the literature concerning the multinational firm’s mode choice for foreign production between an owned subsidiary and a licensing contract. One approach considers environments where the firm transfers primarily knowledge-based assets and assumes that knowledge is non-excludable. A more recent approach takes the property-right view of the firm and assumes that physical capital is fully excludable. This paper combines both forms of capital assets in a single model. There are subtleties, and added structure is needed to establish what ex ante seems a straightforward testable hypothesis: relatively physical-capital-intensive firms choose outsourcing while relatively knowledge-capital-intensive firms choose FDI.