Abstract
This paper explains how multinational enterprises select ownership structures for their foreign manufacturing subsidiaries. It extends the literature on the economics of the multinational enterprises and provides new statistical tests of its theoretical predictions. Multinational enterprises are found to prefer a joint venture with a host-country firm over a wholly-owned subsidiary when (1) the capabilities of the local firm complement those of the multinational enterprises; (2) the contributions of both firms are costlier to transfer contractually than through ownership channels; and (3) costs due to shirking by partners and conflicts between them do not outweigh the benefits of joint ownership.