Foreign direct investment and local cooperation : a contingent claims approach

Abstract

We address key issues that a foreign investor needs to evaluate when deciding whether to enter into a joint venture with a local partner. We explicitly show how the values depend on the valuation methodology, i.e., the passive and the expanded NPV valuation approach. We derive the parties’ ownership shares in the joint venture by applying the Nash bargaining solution. We find that the ownership shares may vary considerable depending on the valuation methodology. Ownership shares may also be influenced by an option to wait, even if investment takes place today.