TU

TUPD-2025-005

TITLE Cross-border Partial Equity Ownership
AUTHORS Tomohiro Ara

Associate Professor, Faculty of Economics and Business Admin Fukushima University
Associate Professor, Research Center for Policy Design, Tohoku University

Arghya Ghosh

Professor, UNSW Business School

Hodaka Morita

Professor, Faculty of Economics, Hitotsubashi University

Hiroshi Mukunoki

Professor, Faculty of Economics, Gakushuin University

P D F
PUBLISHED IN RIETI Discussion Paper Series 25-E-026
ABSTRACT

Firms often form a cross-border alliance by partially owning the equity. When and why do firms have cross-border partial equity ownership (PEO)? Under which conditions should a government give approval for firms to form such PEO? To address the questions, this paper develops an international oligopoly model where one foreign firm forms cross-border PEO with one home firm. PEO helps firms adjust production by avoiding trade costs but decreases market competition inducing a rival firm to take aggressive actions. We find that when cost differences between cross-border alliance firms are moderate, they choose PEO in order to shift the output between them most effectively while alleviating a rival firm’s aggressive actions. However, a government should ban this PEO from the viewpoint of welfare, since the negative effect of weakened competition dominates the positive effect of output shifting: only when cost differences are large, should a government approve cross-border PEO.

KEYWORDS Partial equity ownership, cross-border alliance, trade costs, oligopoly
POSTED March 2025

» List of Discussion Papers