International joint venture, commitment and host-country policy in an integrated market

To highlight the importance of bargaining power for both host and foreign partners, we envisage two modes, commitment and no-commitment, respectively, to examine the issue on international joint venture (IJV)'s profit-splitting and optimal host-country policy in an integrated market. With a three-stage Nash bargaining model, it turns out that in an integrated market, tax rate under commitment does not exactly equal zero unless the host partner does not benefit at all in terms of production efficiency by the IJV. Government shall subsidize joint venture while the host partner has more bargaining power than the foreign partner. Furthermore, subsidy is the optimal policy under no-commitment. © 2010 Springer-Verlag.