The Relationship between Privatization and Regulation on Foreign Investment Policies

Abstract

Using a simple mixed oligopoly model, this paper examines the relationship between mar ket- open ings to foreign capital and privatization of a domestic public firm. Two types of market-openings are considered. First is that, given the number of the firms, the restriction on the share of foreign capital in each corporate joint venture is relaxed. Second is that, given the share of foreign capital in each corporate joint venture, the restriction on the number of the firms is relaxed. The analysis shows that the optimal level of privatization critically depends on the types of market openings to foreign capital. The optimal level of privatization declines as the share of foreign capital in each corporate joint venture increases. By contrast, the optimal level of privatization rises with an increase in the number of the firms operating in the market. The two different strategies for market- openings result in the opposite impacts on the welfare-maximizing government’s incentive for privatization.