On the choice of international joint venture: the role of policy moral hazard

This paper examines the choice problem facing a multinational firm, whether to establish a wholly owned subsidiary or form a joint venture with a firm from the host country, as the mode of direct foreign investment. It is shown that, all other considerations aside, the prospect of policy variation toward the venture (restrictive or conducive), which is called policy moral hazard facing the host government, is a factor for joint venture to emerge as the preferred option.