Profit Share and Partner Choice in International Joint Ventures

This paper suggests a new approach to the determination of profit allocation between the partners in international joint ventures (IJVs). We also examine the issue of partnership choice. The foreign firm gives a large share of profits to its partner and in return receives a better tax treatment from the host government. Under linearity of costs and demand functions, it would choose the more efficient domestic firm as an IJV partner, and the domestic firms would happily accept the offer of partnership from the foreign firm. However, the host government, under certain situations, may persuade the foreign firm, by a suitable lump‐sum transfer, to form a partnership with the less efficient firm.