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.