TY  - JOUR
AU  - Chen,Yongmin
AU  - Horstmann,Ignatius J.
AU  - Markusen,James R.
TI  - Physical Capital, Knowledge Capital and the Choice Between FDI and Outsourcing
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14515
PY  - 2008
Y2  - December 2008
UR  - http://www.nber.org/papers/w14515
L1  - http://www.nber.org/papers/w14515.pdf
N1  - Author contact info:
Yongmin Chen
Department of Economics
University of Colorado at Boulder
Boulder, CO 80309
E-Mail: Yongmin.chen@colorado.edu

Ignatius Horstmann
University of Toronto
Rotman School of Management
105 St. George St.
Toronto, ON M5S 3E6
Canada
Tel: 416-978-1888
E-Mail: ihorstmann@rotman.utoronto.ca

James R. Markusen
Department of Economics
University of Colorado
Boulder, CO 80309-0256
Tel: 303/492-0748
Fax: 303/492-8960
E-Mail: james.markusen@colorado.edu
AB  - There exist two approaches in the literature concerning the multinational firm's mode choice for foreign production between an owned subsidiary and a licensing contract. One approach considers environments where the firm is transferring primarily knowledge-based assets. An important assumption there is that the relevant knowledge is absorbed by the local manager or licensee over the course of time: knowledge is non-excludable. More recently, a number of influential papers have adopted a property-right view of the firm, assuming the application abroad of physical capital, the owner of which retains full and exclusive rights to the capital should a relationship break down. In this paper we combine both forms of capital assets in a single model. The model predicts that foreign direct investment (owned subsidiaries) is more likely than licensing when the ratio of knowledge capital to physical capital is high, or when market value is high relative to the book value of capital (high Tobin's-Q).
ER  -