DIRECT-INVESTMENT VERSUS LICENSING - AN INCOMPLETE CONTRACT APPROACH

This paper compares Foreign Direct Investments and Licensing by using an incomplete contract approach. The difference of the ownership (FDI or Licensing) generates the difference of control right of a plant. If contracts are incomplete, this difference of control right is importa nt and the difference affects the incentive of specific investment. Th is paper shows that if the investment of the host firm is very specifi c, the Foreign Direct Investment is chosen, but if the investment is n ot so specific, the Licensing is chosen. This paper also points out th at the choice of the ownership is closely related to the degree of fac tor mobility in the host firm; the degree of factor mobility affects t he ownership structure and vice versa.