Partnerships, buy-out options and investment in emerging markets

Asymmetric information and fear of acquiring a "lemon" may explain the pauc ity of foreign investment in emerging market economies. If investors are un certain about the profitability of investments, intrinsically inefficient, temporary partnerships or joint ventures may serve as mechanisms through wh ich information is transmitted. Temporary partnerships with joint investmen ts by the domestic firm and the investor, together with a buy-out option to the investor, may sometimes separate good and bad investment prospects in equilibrium. However, separating equilibria may fail to exist. Implications for foreign direct investment are traced and briefly related to the experi ence of transition economies.