Partner Choice and Technology Spillovers in International Joint Ventures Under Ownership Share Regulation

ABSTRACT This study investigates how a foreign multinational firm (MNF) selects a joint venture (JV) partner in a duopoly‐entry market with technology spillovers and local firms' absorptive capacity, and how the MNF determines the level of technology transfer under ownership share regulation, considering local firms' strategic response to the partnership offer. We demonstrate the following results. First, suppose the local firm with lower marginal cost has lower absorptive capacity than the other less efficient firm, and the difference in the marginal costs between the two firms is relatively significant. In that case, the MNF chooses the more efficient local firm as the JV partner. Second, suppose the difference in the marginal costs is less than the threshold, and the less efficient firm has higher absorptive capacity than the more efficient firm. Then, the MNF chooses the firm with higher absorptive capacity as the JV partner. Third, a firm may form a JV even when its profit is less than that before the JV is formed. These results depend on the ownership share level set by the government and arise only when spillover effects exist and local firms are asymmetric in productivity and absorptive capacity.