Department of Economics, University of Kansas

Department of Economics, University of Illinois at Urbana- Champaign

September 1998

This paper develops a theoretical model of equity composition in foreign direct investment (FDI) projects and applies it empirically to examine the role of firm, industry, and country characteristics in ownership structure. The results show that in choosing the ownership structure, foreign investors, local entrepreneurs, and governments consider the specific, costly-to-market assets that the participants and the country bring to the project. The equilibrium foreign equity share rises with the importance of foreign investor assets and declines with the contribution of local assets towards the amount of surplus generated in the FDI project. Government policy and institutional structure of the host country affect the outcome through the form of regulations that apply to FDI, the environment established for the operation of FDI projects, and the roles created for local entrepreneurs.

Key words: Multinational enterprises, equity structure, firm and country characteristics.

JEL Classification: F23, O27, G32

Please address all correspondence concerning this paper to:

^* We are indebted to Anne Villamil for helpful comments on earlier drafts of this paper. We are grateful for the financial support of the Center for International Business Education and Research at the University of Illinois.