Strategic Interactions and Innovation: How does it a ect the stability of Joint Venture in a Developing Country

The existence of a JV between a foreign firm and a domestic firm is given exogenously in period 1. The JV maximizes profit, sharing the su- perior technology of the foreign firm and the [r]

Strategic Interactions and Innovation: How

does it affect the stability of Joint Venture

in a Developing Country

Rituparna Kaushik

∗

Working Paper

Abstract

In this paper, we focus on the strategic interaction between firms involved in a joint venture and how this might have led to changes in joint venture stability in the context of a developing country around the period of 1970-90, when most of them liber-alised their economies We have undertaken a theoretical model to explore the situation; where, a foreign firm with superior tech-nology enters into a joint venture in a developing country and forms a joint venture with a local firm having superior knowledge about the local markets and conditions Their joint venture for-mation involves strategic exchange of knowledge of technology and local market conditions Long-term economic value creation of the joint venture depends on the stability of the joint venture and the extent to which they exchange knowledge about technology and

local market condition With this strategic exchange, the inno-vativeness of the local firm also will be affected, as now it will have access to the superior technology Therefore, we investigate theoretically different aspects of this strategic interaction from the perspective of the technologically weaker domestic firm, knowledge transfer and innovativeness of the local firm such that under what condition stability of the joint venture will be affected In the first part of the paper we carryout the analysis by making the R&D investment decision of the domestic firms to be endogenous and in the second part we derive certain welfare conclusions with respect to joint venture and breaking away

JEL Classification: L24; O32; F23; L13

Keywords: Joint venture, Innovation, Strategic Interactions, Tech-nology transfer, R&D

1

Introduction

Most of the current developing nations liberalized their economy during the era of 1970-90, attracting significant amount of foreign investments This move also brought modern high technology to these nations Since then such kind of FDI has been a major source of technology transfer from a developed nation to a developing one (Sasidharan, 2006) Gov-ernment of many developing nations did put some mechanism in place, where a foreign firm entering into the domestic market of that developing nation has to form joint venture with a local firm, in order to ensure a

1Even though many developing countries benefited from opening up but China and

proper flow of technology transfer (Hoekman et al., 2005) Government of many emerging economies encourage such kind of joint partnerships In China, on the other-hand, forming a joint venture with a local firm was government provided mandatory norm2

Initially, for majority of developing nations, acquisition of global tech-nical knowhow appears to be more urgent than creating the same with huge sunk cost at the home, as many economist expected that substantial amount of gains can be appropriated by drawing on the global knowledge frontier The absorption of knowledge actually helps to boost the eco-nomic productivity than creation of knowledge as it comes up with a sunk cost and probability of failure (Dutz and Dahlman, 2007) In case of India, the country benefitted from the technology transfer that oc-curred post liberalization period FDI brought technological knowledge, management and marketing skills and other essential skills to foster the productivity of domestic firms (Lall, 1997) Many would presume that domestic firms experienced growth due to the positive externalities cre-ated by the foreign firms This prompted India to offer different type of incentives to attract foreign investments3 Even though this was true up

to some extent but looking into few years back, it becomes clear that not all domestic firms extracted benefits from the positive externality pro-duced by the foreign firms, some handful of firms, who entered into joint venture type of agreement with foreign firms, benefitted from the foreign technology and R&D On the other-hand, many foreign firms willingly entered into joint venture with many local firms in order to get access

2Chinese government does not allow foreign firms, mainly car manufacturing sector

to have their subsidiaries in their country, rather it requires the foreign firms to tie up with a local firm to form a joint venture to ensure that domestic firm also benefit from the technology transfer (Van Long et al., 2009)

3Most of the concessions were offered in terms of tax benefits, credit easing and

to local market and distribution channels (Chowdhury and Chowdhury, 2001) Entry of many multinational companies mainly in the automobile sector through joint venture with Indian manufactures post 1991, ushered a new era of change in the Indian automobile sector (Sagar and Chanara, 2004)4 In order to get accustom with the local market many foreign firms prefer to enter the domestic market along with collaboration of a domestic firm and creating a structure for joint venture where both of the partners would benefit Most of the indigenous companies having tie-ups with foreign firms look up to the foreign firms for R&D and higher technology (Department of Trade and Industry departmental report, UK, 2006)

Large numbers of studies in economics have focused on the topic of Innovation, R&D and technology transfer since last two-three decades Most of these studies focused primarily on the developed nations mainly United States or developed countries from Europe There have been a few studies regarding the issue in context of developing countries but they were limited by different constrains In most of the cases, one would find large amount of literature either on JV and its stability or on R&D

and innovation separately But finding literature having an intersection of both of the topics is difficult Svejnar and Smith (1984) analyzed the microeconomic behaviour of a joint venture formed between a foreign partner and a domestic partner in a developing country context The essay mainly focuses on the issues of resource allocation and profit sharing under different institutional cases Their analysis emphasizes the role

4It was not just automobile sector; IT and pharmaceutical sector also experienced

the same trend and gained form the superior foreign technology

5Many studies have attempted to address the issue of joint venture stability at the

of bargaining power, transfer price, policies of national government and profit sharing rule of the involved parties

on foreign equity holding in the first period but in the second period, joint venture becomes prone to breakaway, when the foreign equity restrictions are removed by the government In second period, under certain condi-tions, possibility of buyouts may encourages the joint venture formation implying that instability is highly anticipated when the joint venture was formed in the first period than simply licensing

On the similar line with Kabiraj (1999), Chowdhury and Chowdhury (2001) provide a two period leaning based model of joint venture for-mation and breakdown In their work they consider the case where a foreign firm entering into the market of a developing country to form a joint venture or to go alone, if there is an exchange of capital and labour transfer among both of the players They found that with the low level of learning, under a certain level, it is profitable for the foreign firm to break away the joint venture as the low level of learning implies that none of the firms are at advantageous position

stability The essay will mainly explore the issues from the perspective of a joint venture forming in a developing country like India and China In this study we, have undertaken a theoretical model to explore the sit-uation, when a foreign firm enters into a developing country and forms a joint venture with a local firm We have focused mainly on two aspects of this strategic interaction, i.e knowledge exchange about the technology and local market between the domestic and foreign firm and its impact on the stability of the joint venture By doing this exercise we hope to bridge the theoretical gap, in context of a developing country like India and China

The objectives of this paper are: (1) To investigate strategic inter-action between two firms, one from developed nations having edge in technology and other from a developing nation having edge in local mar-ket knowledge and (2) How different aspect of the strategic interaction and innovativeness will affect the stability of the joint venture in the developing country?

2

The Basic Framework

We consider a two period static model, involving two firms, one foreign firm (F) which is technologically advanced and a domestic firm (D), which is less technologically endowed but has superior knowledge about the lo-cal market6 We assume that both the firms produce identical products but having different cost functions Following Chowdhury and Chowd-hury (2001) we assume that the marginal cost is the additive sum of two components; Technology component (T) and Local market component

6This mainly includes knowledge about the local market which includes elements

(M) i.e M C = T +M The technological cost component is lower for the foreign firm whereas the local market knowledge cost component is lower for domestic firm The demand (q) is linear in price (p), defined as,

q =a−p

We assume that the market size is big enough such that a > 2M C In absence of Joint Venture (JV) firm will engage in Cournot game having similar nature of profit function but with different marginal cost

The existence of a JV between a foreign firm and a domestic firm is given exogenously in period The JV maximizes profit, sharing the su-perior technology of the foreign firm and the better knowledge of the local market of the domestic firm During this period domestic firm decides how much to invest in R&D The cost of R&D is a quadratic function7

of intended amount of new knowledge, K For the sake simplicity, we assume that K is common knowledge Let us assume R&D cost is given by

R= γK

2

2 , γ >0

8

The probability success of R&D is exogenously given byθ In other words,

γK2

2 amount of R&D expenditure produces K amount of new knowledge

with probability θ Therefore, the R&D expenditure is sunk cost for the domestic firm We assume that the foreign firm does not invest in R&D as it is already technologically superior At the end of the period they share the JV profit equally

In period 2, both the firms decide whether to continue in the JV or

7The quadratic form here indicates the possibility of having diminishing returns to

R&D expenditure (Cheng, 1984, Dasgupta 1986, p 523)

8The parameter γ is an efficiency parameter and is inversely related to the cost

breakaway If either firms takes the decision of breakaway, the JV does not sustain in period If they continue in JV, the period game is repeated If they breakaway, they play a Cournot game with individual cost functions Let M Cit be the marginal cost of firm i(F, D) in periodt,

ie M Cit =Tit+Mit We assume that without the JV in period 1, they

have the same level of M C but different structure For simplicity we as-sume the cost advantage in technology and local knowledge is symmetric between F and D, ie.,

TF1 < TD1

MD1 < MF1, and

TF1 = MD1 =c

TD1 = MF1 =d, wherec < d

Therefore, with JV in period 1,M CJ V = 2c In period 1, while

oper-ating as JV both the firms internalize each others knowledge Moreover, the domestic firm may reduce its technological component ofM C further through R&D We assume that K amount of technological knowledge through innovation by the domestic firm reduces the marginal cost by

αK 9.

The rate of learning is given by the following equations10

MD2 =MD1, TD2 =µFTF1

TF2 =TF1, MF2 =µDMD1

9The parameterα, takes the values ofα≥0, where, it determines the rate at which

the marginal cost declines with increase in the R&D level It reflects the productivity of the domestic firm’s research effort

10The parameterµshows proportionate factor of reduction in MC due to learning.

The parameters µF1 and µD1 captures the rate of knowledge acquisition

We assume,

µD, µF ∈

h

1,d c

i

In other words, local knowledge cost component of the domestic firm and technological cost component of the foreign firm remain the same over time However, the foreign firm learns local knowledge from the domestic firm at the rateµF and the domestic firm learns technological knowledge

from the foreign firm at the rate µD Moreover, the domestic firm

fur-ther reduces marginal cost through R&D with probability θ There is a bound to the learning parameters as given above We allow the learning parameters to be different It is important to note that higher the vales of µ lower is the learning rate

If they continue to operate in the JV in period 2, theM C remains the same as in period However, if they play Cournot game, they share the market and operate as per their respective cost structure The marginal cost functions in period is given below

M CF2 = (1 +µF)c

M CD2 =

 



(1 +µD)c−αK with probabilityθ

(1 +µD)c with probability 1−θ

The timeline of the game is shown by the figure1

3

Payoffs

Under Joint Venture:

Figure 1: Structure of the Game

in the following profit function of the joint venture;

πJ V = (a−q)q−2cq

Maximising the profit, we obtain the following optimum level of profit for the JV;

˜

πJ V =

(a−2c)2

Following the equal profit rule and incorporating R&D cost for the do-mestic firm, we obtain the following profit shares;

˜

πJ VF =

(a−2c)2

8 (1)

˜

πJ VD =

(a−2c)2 −

γK2

Under Break Away :

In an event of break away in period 2, both of the firm will engage in Cournot style of competition Domestic and foreign firm’s new profit function will incorporate new knowledge and innovation Profit function for domestic firm and foreign firm is given below;

πD2 =θ

(a−qF −qD)qD −(µDc+c−αK)qD +

(1−θ)(a−qF −qD)qD −(µDc+c)qD −

γK2

2

(3)

With θ probability domestic firm will be successful in its R&D and will have desired reduction in its marginal cost On the other hand, if it is not successful then with probability 1−θ it will continue to have the regular period marginal cost Therefore, we finally write the profit functions for both of the firms as,

πD2 = (a−qF −qD)qD−(µDc+c−θαK)qD−

γK2

2 (4)

πF2 = (a−qF −qD)qF −(µFc+c)qF (5)

Solving simultaneously (4) and (5) for the period under Cournot competition, we get following equilibrium level of outputs,

qF2 = 1/3

n

a−c(2µF −µD)−c−θαK

o

(6)

qD2 = 1/3

n

a−c(2µD−µF)−c+ 2θαK

o

(7)

do-mestic and foreign firm under the Cournot competition,

πD2∗ = 1/9

n

a−c(2µD −µF)−c+ 2θαK

o2 − γK

2

2 (8)

πF2∗ = 1/9

n

a−c(2µF −µD)−c−2θαK

o2

(9)

These profits incorporates triple influence of the R&D, via the output, unit production cost and R&D costs themselves Here, it can be observed that profit of the foreign firm incorporates K with a negative sign This intuitively points to the fact that the domestic firm’s R&D activities will always put a dent in the profit of the foreign firm Even if the probability success and effectiveness of R&D is very low; this dent will remain This negative effect could be averted only through very high knowledge acquisition than the domestic firm It is important to note that, if any one of the firm offers for break away then breakaway will take place even if the other firm might have wanted to stay in the JV Therefore, for JV to continue in future, both of the firms strictly have to agree to continue with the JV, otherwise break will be the only viable option11 Given the above individual payoffs and conditions, we can write

down the payoffs for both of the firms under different strategic situations The strategies of each firms are shown by the table Here, the strategies of for both of the firms are either to stay in the JV or not stay in the JV Therefore the outcome of these strategies are either JV or Cournot competition

11if any one of the firm chooses not to stay in the JV then break away will happen

Figure 2: Table 1: Pay off Matrix

4

Comparative Static Analysis

Given the payoffs of each firm under different strategic situations, we may ask what is the dominant strategy for the domestic and the foreign firm, given each firm chooses different actions avialable Since, for rest of the strategic decisions baring (Stay, Stay), payoffs for the domestic and foreign firm remains same i.e even if the foreign firm choose to stay in the JV but if the domestic firm does not choose to stay in the JV then break away will happen and foreign firm will receive break away payoff Therefore, we only consider the below (10) and (11) conditions as the main conditions for dominant strategy for JV and break away for the domestic firm From the table 1, first, consider the domestic firm For whatever the actions foreign chooses, then for the domestic firm “stay in JV” will be a dominant strategy iff

(a−2c)2 −

γK2

2 >1/9

n

a−c(2µD −µF)−c+ 2θαK

o2 − γK

2

Therefore, solving this inequality, it becomes clear that “stay in JV” will be the dominant strategy for the domestic firm iff,

K < a(3−2

√

2)−c(6−2√2) + 2√2c(2µD−µF)

4√2θα (10)

On the other hand, “not stay in JV” will be the dominant strategy for the domestic firm iff,

K > a(3−2

√

2)−c(6−2√2) + 2√2c(2µD−µF)

4√2θα (11)

Define the right hand side of the inequality asKD We can derive similar

conditions of dominant strategy for the foreign firm too For whatever the actions domestic firm chooses, then for the foreign firm “stay in JV” will be a dominant strategy iff

(a−2c)2

8 >1/9

n

a−c(2µF −µD)−c−2θαK

o2

(12)

Therefore, solving this inequality, it becomes clear that “stay in JV” will be the dominant strategy for the foreign firm iff,

K < c(6−2

√

2)−a(3−2√2) + 2√2c(µD−2µF)

4√2θα (13)

As seen above, similarly, “not stay in JV” will be the dominant strategy for the foreign firm iff,

K > c(6−2

√

2)−a(3−2√2) + 2√2c(µD−2µF)

Define the right hand side of the above inequality as KF.

Lemma 1: There exists a value of K, such that if,

(L1.i) K < KD, Stay in JV is the dominant strategy for the domestic firm;

(L1.ii)K > KD, Not stay in JV is the dominant strategy for the domestic firm;

Lemma 2:

(L2.i) K < KF, Stay in JV is the dominant strategy for the foreign firm;

(L2.ii) K > KF, Not stay Break away is the dominant strategy for the

domestic firm

Therefore, a stable JV formation could be expected only when K < KD

and K < KF gets satisfied simultaneously, otherwise any one of the firm might diverge to break away leading to break away ultimately Based on the above lemmas we can confirm that break away will happen if;

1 K > KD orK > KF

2 K > KD orK < KF

3 K < KD orK > KF

On the other hand, the JV will remain its place only iff,

1 K < KD and K < KF

Lemma 3: KD > KF; given that (a/c)>2 at µD+µF ≥2

Proof:

KD > KF if,

a(3−2√2)−c(6−2√2) + 2√2c(2µD −µF)

4√2θα >

c(6−2√2)−a(3−2√2) + 2√2c(µD −2µF)

4√2θα

This inequality yields following condition;

a c >

12−4√2−2√2(µD+µF)

6−4√2 (15)

Since, by the assumption of the ranges for µD and µF i.e. µ

D, µF ∈

h

1,dci; the minimum value that bothµD and µF can take is Therefore,

µD +µF ≥ 2 Inserting the value of µD and µF in the equation (15), it

becomes, (a/c)>2, which is essentially our existence of market condition Therefore, for (a/c)>2 atµD+µF ≥2, we will always haveKD > KF12.

Later on this condition will help us to check for the existence of the optimumK∗ Figure graphically shows the placement ofKD andKF, where the the top plane corresponds toKD and bottom plane corresponds to KF and even though they are not parallel but they not intersect too13.

Proposition 1:

Given that,K > KD i.e the domestic firm’s dominant strategy in period

2 is break away, then under this condition there exists an optimum value of investment in R&D i.e K∗, such that beyond which break away will always be the plausible outcome

Proof:

12Given that KD > KF, we will never have “K > KD or K < KF” as a prime

condition for break up

Given, K > KD, the present discounted value of the profit is

πP V =

(a−2c)2 −

γK2

2 +δ

n

1/9na−c(2µD −µF)−c+ 2θαK

o2 − γK

2

2

o

Here, δ is the discount factor Differentiating w.r.t K, we obtain the K∗

that maximises the first period joint venture and second period crounot profit,

K∗ = δ[cθα(µF −2µD) +θα(a−c)]

9/4(γ)(1 +δ)−2θ2α2 (16)

For simplicity we assume that the value ofδ= Therefore,K∗ becomes;

K∗ = cθα(µF −2µD) +θα(a−c)

9/2(γ)−2θ2α2 (17)

Since we already established that KD > KF, to check for the existence of

K∗, it is sufficient for us to show that, K∗ > KF Therefore,

K∗ > KF iff,

cθα(µF −2µD) +θα(a−c)

9/2(γ)−2θ2α2 >

c(6−2√2)−a(3−2√2) + 2√2c(µD−2µF)

4√2θα

Hence,

Where,

X = (

18 4γ−θ

2α2)

(94γ+θ2α2) and,

Y = c(6−2

√

2)−a(3−2√2)

c(6−4√2)−a(3−4√2)

As long as the (18) is satisfied, K∗ > KF, there exists an optimal value

of K∗ which will maximise the present discounted value of the profit It is important to note here that the inequality is highly conditional on the difference of knowledge acquisition by both of the firms and the market size to marginal cost For all parameter value where K∗ < KF,

proposition will not hold For the second order condition, i.e δKδ2π2 <0,

when for all parameter values K∗ > KF holds This can be visualised

with the help of figure

In the figure 3, the the top plane refers toK∗, second plane refers to

KD and third plane refers to KF From the figure it can be viewed that

the KD lies above KF, whereas theK∗ passes through the both KD and

KF Here, since KD > KF, for all parameter values, the portion where

K∗ > KF, is depicted by the upper part of theK∗ plane which goes right through KF On the other-hand, lower part ofK∗ i.e the part belowKF

is the part where optimal K∗ does not exist and for all parameter values attached to this part of K∗, the second order condition is not valid i.e

δ2π

δK2 >0

After ascertaining the existence of optimalK∗, we can now study the effect of a change of any parameter underlying the model on optimal K∗

Lemma 4:

L4.i When µF goes up then K∗ also goes up

L.4.iii When c goes up then K∗ also goes down, if µD > (1/2)µF or

γ <(4/9)θ2α2.

L4.iv When θ goes up then K∗ will go down conditional on the values of µd, µF, and a, c

L4.v When α goes up then K∗ will go down conditional on the values of µd, µF, and a, c

Proof:

L4.i We have, δKδµ∗

D = cθα and it is clear that cθα > Therefore,

δK∗

δµD > Thus, as the knowledge acquisition of foreign firms falls then

investment in R&D by the domestic will surge up, meaning that domestic firm will take that opportunity to invest in R&D and compete with the foreign firm

L4.ii With respect to µD we have, δK

∗

δµF = −2cθα It is evident that

δK∗

δµD < Therefore, it could mean that as the technological knowledge

acquisition of domestic increases then the optimal amount of investment in R&D for break away falls as the domestic firm now possess much more technological knowledge than it used to hold at the start of the JV L4.iii With respect to the marginal cost; c(cis a part of total MC),

δK∗

δc =

θα(µF −2µD)−θα

9/2(γ)−2θ2α2

The above expression will be <0 if,µD >(1/2)µF Thus, when the

L4.iv With respect to θ i.e probability of having a successful R&D,

δK∗

δθ =

n

cα(µF −2µD) +α(a−c)

o

(9/2γ−2θ2α2)−ncθα(µ

F −2µD) +θα(a−c)

o

(−4α2θ)

(9/2γ−2θ2α2)2

Further, solving this, we arrive at the following condition for δKδθ∗ <0;

µF −2µD <1−(a/c)

With the above condition satisfied, δKδθ∗ < This would indicate that as the probability of success in R&D increases, domestic firm’s optimal R&D investment for breaking up of the JV will fall

L4.v Similarly, differentiating with respect to α i.e effectiveness of the R&D,

δK∗

δα =

n

cθ(µF −2µD) +θ(a−c)

o

(9/2γ −2θ2α2)−ncθα(µ

F −2µD) +θα(a−c)

o

(−4θ2α)

(9/2γ−2θ2α2)2

Further, solving this, likeθ, we arrive at the same following condition for

δK∗ δα <0,

µF −2µD <1−(a/c)

5

Welfare Conclusions

in this section we examine, from the welfare point of view whether joint venture breakdown is preferable to continuing with the joint ventures for the domestic firm Since both of the firms are taking the decision of breaking away or continuing with joint venture in second period, therefore we compare welfare derived from joint venture and breaking away Under the scenario of breaking away welfare of both of the firms will be the sum of consumer surplus (CS) and the profit (π) of the respective firm Let us define the welfare of the domestic firm as W Welfare under joint venture is defined as WJ VD and welfare under breaking away isWBKD

Under Joint venture

WJ VD =CSJ VD +πJ VD WJ VD =CSJ VD +

(a−2c)2

8 −γ

K2

2

Under Break Away

WBKD =CSBKD+πBKD

WBKD =CSBKD+ (a−qF −qD)qD −(µDc+c−θαK)qD−γ

K2

2

For simplicity we also assume that along with the R&D; there is cer-tain amount of learning and some probability of success domestic If such is the case then, marginal cost of the domestic firm is lower than that of joint ventures To prove that welfare from break away is high for the domestic firm we need to prove that πBK > πJ V and CSBK > CSJ V

Proposition

(i) Market size is relatively small i.e ac <1 + (

3−2√2)

(ii) Domestic firm’s learning is higher than that of the foreign firm i.e

µD <(1/2)µF

Proof:

Let us consider the consumer surplus for domestic firm under both sce-narios Given the welfare is increasing in output (q)14, it is sufficient

for us to prove that qBKD > qJ VD to show that CSBKD > CSJ VD For

domestic firm in break away, output level is,

qD2 = 1/3

n

a+c(µF −2µD)−c+ 2θαK

o

here, 1≤µF ≤ dc

1≤µD ≤ dc

α ≥0

K ≥0

It is possible that here value of α and K could be as big as infinity From the equilibrium output (qD2) above, it is clear that slope of µF, α,

θ andK are positive and slope ofµD is negative Therefore, at optimum,

µF =d

µD =

α =∞

θ =

K =∞

Therefore,

qD2 = 1/3

n

a+c(µF −2µD)−c+ 2θαK

o

qD2 = 1/3

n

a+c(2d−1) + 2∞o

On the other-hand, output of domestic firm under the JV is (a−42c) By comparing both of the profits, we get that

1/3na+c(2d−1) + 2∞o> (a−2c)

4 (19)

Therefore, qBKD > qJ VD

Following the same set of operation and logic we can prove that total output in the market under breakaway is higher than total output under the JV Therefore, qBKT otal > qJ V

Now we consider the profit functions under both of the situations The profit from the break away is higher than the continuing with the JV, iff πBK2 > πJ V2

1/9na−c(2µD−µF)−c+ 2θαK

o2 − γK

2

2 >

(a−2c)2 −

γK2

2

Ultimately we get,

c(6−2√2)−a(3−2√2)−2√2(2µD−µF)−c+

√

2θαK >0 (20)

It is evident that (20) will be only satisfied when,

a

c <1 +

3 3−2√2

and

Figure 5: Welfare comparison under breakaway and joint venture

Therefore, combining conditions (19) and (20), we finally obtained thatWJ V2 > WBK From the figure it becomes clear that, welfare under

break away dominates welfare under joint venture for the domestic firm given the above conditions are satisfied In the figure, it clear that,CSJ VD

denoted by the triangle ABX is much smaller thanCSBKD denoted by the

for the domestic firm when µD <(1/2)µF and ac <1 +3−32√2 Therefore,

under these condition total welfare under breakaway for domestic firm denoted by the area AKJFY exceed welfare under joint venture denoted by the area AHIGX Therefore, when the market size is small and learning of the domestic firm is higher than that of the foreign firm, then welfare under breakaway dominates welfare under joint venture for the domestic firm But when the learning is small and the market size is very big then profit under breakaway is less than profit under joint venture and welfare will solely depend on how large is the consumer surplus under breakaway and joint venture The welfare effect in this case may not be very clear and straightforward

6

Some Relevant Examples

slowly capture the market weakening the position of partner from the developing country Also, sometimes domestic partners fail to exploit the transferred technology for their own R&D gain Leaving intricacies of contacts behind, roughly that’s what happened to LML, HCL or Aapar, while their foreign partners capture the Indian market15 While the case of Hero and Honda, one of the most successful joint venture in Indian history, was little bit different Most of the cases, Indian firms rely on foreign partners for technology and majority of the R&D they is may be for tax benefit but Hero actually wanted to expand its R&D capacity and wanted to invest in R&D more This R&D ambition became one of the bones of contention for the joint venture and along other issues like exports16 Therefore, in one hand we have some firms, which failed to

appropriate benefit from the transferred technology and innovate, and on the other hand we have some small numbers of firms whose increment in R&D capacity led to all breaking-off the joint venture

7

Conclusion

In this paper we made an attempt to provide certain theoretical per-spective to the joint venture stability in context of a developing country, mainly countries like India and China, relying mainly on R&D invest-ments and knowledge acquisition from joint venture partners We have tried to show that depending on the important parameter values; mainly knowledge acquisitions and investments in R&D, we have different

re-15India Today (Merger with HP to transform HCL) (1992), Outlook

Money (How to anticipate the break-up of a joint venture), Economic Times (https://economictimes.indiatimes.com/tech/hardware/how-a-split-turned-into-a-boon-for-hps-laptop-and-printer-businesses/articleshow/62226009.cms)

16Deal Impact: Hero’s Journey after joint venture exit with Honda, see

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