Information asymmetry and adverse selection are intrinsic to technology transfer across national boundaries. The MNCs therefore offer informal knowledge in the use of technology, in addition to formal technological details, to their joint venture partners. They also share in the capital investments to elicit greater commitment. Theoretical explanation of the channels through which such sharing affects the contract parameters is however inadequate. In particular, the existing models are mostly deterministic and do not account for hidden action on the part of the foreign firms and the associated uncertainty. The principal agent model offers a more suitable framework for analysis. Utilizing the framework of the principal agent model, this study argues that such policies reduce the variance associated with the risk and thereby neutralize deficiencies due to information asymmetry. From a strategic management perspective, this conclusion suggests that MNC policies directed to assessing and reducing overall environmental uncertainties, especially those related to firms in the industry and government policies, will be superior to the provision of firm-specific informal knowledge.
Risk Aversion Information Asymmetry Foreign Country Variable Cost Skill Level
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