Two approaches may explain how multinational enterprises (MNEs) select ownership structures for subsidiaries. The first argues that MNEs prefer structures that minimize that transaction costs of doing business abroad. The second argues that ownership structures are determined by negotiations with host governments, whose outcomes depend on the bargaining power of the firm. This paper presents a framework integrating these two approaches and uses statistical methods to separate their effects empirically. The statistical analysis supports an important hypothesis of bargaining school—that attractive domestic markets increase the relative power of host governments. But it finds no support for other hypotheses of this school, such as those predicting that firms in marketing- and R&D-intensive industries have more bargaining power than others. These latter factors were apparently more important in determining firm ownership preferences. Furthermore, the paper measures when government ownership restrictions deter firm entry, concluding that relatively large firms, and those with high intra-system sales are deterred more than others. © 1990, Academy of International Business.
