Dissipation of Knowledge and the Boundaries of the Multinational Enterprise

This paper provides a theoretical formalisation of the joint-venture contract, as an alternative to Foreign Direct Investment (FDI), within a Dissipation of Intangible Assets framework. In a two-period model, we discuss how the threat of knowledge spillover shapes the boundaries of a Multinational Enterprise. Similarly to the theoretical findings on the FDI-licensing trade off, we show that the integrated solution is more likely to emerge when know-how easily spills over – i.e. when firms are endowed with more Intangible Assets or they belong to high tech industries. Probit estimates, from a new firm-level dataset, show that Japanese manufacturing operations in Europe are in line with these predictions.