Abstract:
We explore an empirical pattern that has gone unnoticed: U.S. multinationals’ joint ventures abroad have historically been less profitable than their wholly-owned ventures. Majority-owned affiliates in manufacturing earned about a 6% return on assets from the 1970s to the 1990s, compared to 4% for minority-owned affiliates. This pattern held across most industries and regions, though the size of this “JV profitability gap” varied. Surprisingly, starting in the 2000s, this profitability gap narrowed and even reversed itself in some years, regions, and sectors. To explain these patterns, we argue that both the ownership structure and the profitability of a foreign venture are determined by resources that the multinational brings to the host country and that the gap shows the revealed competitive advantage of US multinationals vis-à-vis local firms. We consider alternative explanations, which we do not think explain the full pattern observed.
