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Date Published:Nov 1, 2007
This paper examines how costly nancial contracting and weak investor protection inuence the cross-border operational, nancing and investment decisions of rms. We develop a model in which product developers can play a useful role in monitoring the deployment of their technology abroad. The analysis demonstrates that when rms want to exploit technologies abroad, multinational rm (MNC) activity and foreign direct investment (FDI) ows arise endogenously when monitoring is nonveri able and nancial frictions exist. The mechanism generating MNC activity is not the risk of technological expropriation by local partners but the demands of external funders who require MNC participation to ensure value maximization by local entrepreneurs. The model demonstrates that weak investor protections limit the scale of multinational rm activity, increase the reliance on FDI ows and alter the decision to deploy technology through FDI as opposed to arms length licensing. Several distinctive predictions for the impact of weak investor protection on MNC activity and FDI ows are tested and con rmed using rm-level data.