Foreign passive ownership and tariff‐induced free technology transfer under vertical integration

Abstract

This study constructs a vertical structure model in which a foreign firm holds upstream partial passive ownership and examines tariff‐induced free technology transfer from the firm to its downstream rival. We show that a strategic tariff can induce technology transfer when the share of foreign ownership is large, which always yields higher welfare under both vertical separation and integration, while vertical integration can better induce technology transfer. We also consider an extensive analysis with some variations, such as upstream or downstream competition, downstream passive ownership, government commitments to no‐tariff policies, and foreign firm commitments to no‐licensing strategies, and discuss policy implications regarding the pro‐competitive effect of foreign passive ownership when free technology transfer is involved.

Commercial policies, unilateral versus bilateral foreign ownership, and welfare

“…Fanti and Buccella (2021) show that under cross‐ownership, the use of tax by an exporting country as a strategic trade policy can be Pareto‐superior to free trade when products are differentiated. Zhang and Lee (2023) consider a vertical market in which a portion of the upstream is passively owned by a foreign firm, and find that a tariff can strategically improve welfare by inducing technology transfer when foreign ownership is sufficiently high.…”