Domestic tax policy and international joint ventures

This study mainly explores how a multinational firm sets up a joint venture (JV) in a developing country. The questions associated with this issue are how to select the partner and how to split the profit. Unlike the normal methodology in the existing literature, we develop a three-stage model to examine these questions.; In the first chapter, we summarize the past literature and present the structure of this dissertation.; In the second chapter, we develop a three-stage game to analyze how a joint venture allocates profits in a one-country model. When there are two domestic firms in that country, the foreign firm faces an option of partner choice. In order to get a favorable tax treatment, the foreign firm gives a large part of profits to the domestic partner. Also, it prefers to choose the more efficient of the two firms as JV partner. Both firms would like to join the JV. The host government attitude to the JV depends of the efficiency level of the JV.; In the third chapter, we consider the case of two countries. Each country has one domestic firm. These two countries operate in an integrated market. The foreign firm still offers a large share of profits to the domestic partner and it likes to locate in the country that has a more efficient firm, (Firm A). Whether the domestic firm accepts the offer depends on how efficient the foreign firm is. When the foreign firm is not very efficient, the more efficient domestic firm will turn down the offer, and the JV takes place in the country which has the less efficient domestic firm. When the foreign firm is very efficient, the more efficient firm will accept the offer, and the JV will take place in the country which has the more efficient domestic firm.; In the fourth chapter, we still consider a case of two countries. However, this time, these two countries are in a segmented market. A part of each firm's produce gets exported to the other country. Shipping incurs transportation cost. In this scenario, we could not solve explicitly for the optimal profit share. We use Implicit Function Theorem to obtain some results. We find the foreign firm will prefer the more efficient firm and this partnership will also be in the interest of the more efficient domestic firm.