Abstract
This paper uncovers and explores a striking empirical pattern, and then develops and begins to test an integrated model of competitiveness, profitability and ownership structure. U.S. multinationals’ majority-owned ventures abroad are more profitable than their joint ventures with non-majority stakes. On average, majority-owned foreign affiliates in manufacturing earned a 6.4% return on assets in 1977-2003, compared, to 3% for other U.S. affiliates abroad. We explain this and related findings with a new theoretical framework, that views both the ownership, structure and the profitability of a foreign venture as functions of the value created by the ownership-specific capabilities that the MNC brings to a host country. Where these capabilities are strong, the MNC is likely to choose a majority ownership; its profits are also likely to be higher in these activities than in non-controlled joint ventures. We test these predictions by constructing measures of the revealed international competitive advantage of U.S. MNCs. Our analysis confirms that the profitability gap is significantly higher in sectors where, U.S. MNCs are more competitive. We also test for the effects of subsidiary size, growth, and for host country characteristics including tax rates, policies towards foreign direct investment and GDP per capita.