international business research past present and future the editors of the journal of international business studies jibs always try to publish the best international business research unfortunately there will probably never be a simple response to the question what constitutes excellent international business research we might make some progress however if we first attempt to define international business research and then identify several noteworthy examples

a multiobjective approach to vendor selection abstract purchases from vendors involve significant costs for many firms decisions related to these purchases include the selection of vendors and the determination of order quantities to be placed with the selected vendors such decisions are frequently multiobjective in nature that is they are evaluated by more than one criterion at least 23 criteria for various vendor selection problems have been identified in this article we present a multiobjective approach to systematically analyze the inherent tradeoffs involved in multicriteria vendor selection problems the approach is motivated by and demonstrated with an actual purchasing problem facing a division of a fortune 500 company

state characteristics and the location of foreign direct investment within the united states a conditional logit model of the location decision of foreign firms investing in manufacturing facilities in the united states is developed and estimated the authors results for 1981 83 indicate that states with higher per capita incomes and higher densities of manufacturing activity attracted relatively more foreign direct investment in addition higher wages deterred foreign direct investment while higher unemployment rates attracted it surprisingly higher unionization rates were associated with increased foreign direct investment overall higher taxes deterred foreign direct investment however more extensive transportation infrastructures and larger promotional expenditures were associated with increased foreign direct investment copyright 1991 by mit press

industry and country effects on managers perceptions of environmental uncertainties international management research highlights political government policy and macroeconomic uncertainties strategy studies focus on input supply product market and competitive uncertainties this study develops and tests the reliability of an instrument for measuring managers uncertainly perceptions data analyses using an international sample provide insights into the relative importance of country and industry factors for explaining managers perceptions of different environmental uncertainties

an institution based view of international business strategy a focus on emerging economies leveraging the recent research interest in emerging economies this perspective paper argues that an institution based view of international business ib strategy has emerged it is positioned as one leg that helps sustain the strategy tripod the other two legs consisting of the industry and resource based views we then review four diverse areas of substantive research 1 antidumping as entry barriers 2 competing in and out of india 3 growing the firm in china and 4 governing the corporation in emerging economies overall we argue that an institution based view of ib strategy in combination with industry and resource based views will not only help sustain a strategy tripod but also shed significant light on the most fundamental questions confronting ib such as what drives firm strategy and performance in ib

ownership based entry mode strategies and international performance this study examines the relationship between ownership entry modes and performance the ownership entry modes examined are the wholly owned modes of acquisition and new venture entry and the non wholly owned mode of joint venture entry a theoretical relationship is developed for international entry modes that is based on the contingency characteristics of resource requirements and organizational control factors this model suggests that different entry modes have different performance outcomes based upon their resource and organizational control demands the theoretical model although developed using the eclectic theoretical approach is based largely on concepts and relationships previously delineated in contingency theory our hypotheses suggest that new ventures should outperform joint ventures and joint ventures should outperform acquisitions an empirical test using a sample of 321 japanese firms entering the north american market provides supporting evidence

foreign and domestic divestment and investment decisions like or unlike the managerial literature on foreign investment and divestment is much less developed than the economic literature on foreign direct investment theory nevertheless surveyed with the purpose of better understanding foreign divestment decisions the research to date reveals some noticeable differences between investment and divestment divisions whether foreign or domestic and even more substantial differences between foreign divestment and domestic divestment decisions additional research however is clearly in order

the disparity between willingness to accept and willingness to pay measures of value psychologists have long argued that people are much more averse to a loss than attracted to an equivalent gain this behavior termed loss aversion has been formalized by kahneman and tversky 1979 in their reformulation of expected utility theory prospect theory in prospect theory the utility function is replaced by a value function that evaluates changes in income from the current level increases in income are weighted by a relatively small marginal utility decreases in income are weighted by a much larger marginal utility in effect the value function implies that a kink in the relationship between utility and income occurs at the initial income or reference point and that the slope of the utility function for losses in income is steeper than it is for gains in a recent paper knetsch and sinden 1984 report a series of experiments that demonstrate the existence of a large disparity between willingness to accept wta and willingness to pay wtp measures of value they argue that the psychological theory of loss aversion explains this difference economic theory would suggest that individuals who exhibit a large disparity between wta and wtp are perhaps underperceiving the value of gains or overperceiving the value of losses are behaving in an irrational manner and will consequently achieve a lower level of well being than if they behaved in a true utility maximizing manner this would in contrast to loss aversion usually imply near equal values for wta and wtp see willig 1976 further documentation of a larger than expected disparity between wta and wtp has been obtained in surveys asking for the value of a variety of public goods for example cummings brookshire and schulze 1986 document six

risk averters that love risk marginal risk aversion in comparison to a reference gamble we propose an analytical distinction between standard risk aversion based on the valuation of a single gamble and marginal risk aversion based on the change in valuation between two gambles we measure marginal risk aversion in two dimensions mean and variance data from a field experiment is used to study marginal risk aversion our results suggest that individuals rely on a reference gamble when assessing marginal risk individual responses to marginal changes in mean and variance are nearly identical in direction and magnitude suggesting that information on both standard and marginal risk aversion is needed to accurately model behavior copyright 2008 oxford university press

experiential knowledge and cost in the internationalization process using a behavioral approach this study identifies and delineates components of experiential knowledge in the internationalization process three hypotheses are developed and tested they center ar

hegemony imperialism and the profitability of foreign investments socialists at the turn of the century explained modern imperialism as an attempt to escape the crisis of monopoly capitalism super profits that could be secured in the periphery according to lenin were necessary to offset declining rates of return in the advanced economies today radical theorists stress the role of the multinational corporations in accounting for neocolonialism if great national power does produce material benefits for foreign investors this should be apparent in two cases the experience of british capitalists in the high age of imperialism 1870 1913 and the operations of u s multinational corporations abroad after world war ii but rates of return on foreign investments have not been significantly different in the developed and less developed regions of the world a finding that is relevant not only for theories of imperialism but also for understanding development and modernization the operation of the multinational corporation and international capital markets

the political roots of corporate social responsibility this article argues that whether and how a firm chooses to adopt corporate social responsibility csr initiatives is conditional in part upon the domestic political institutional structures present in its home market it demonstrates that economic globalization has increased the pressure applied to companies to develop csr policies that might help overcome specific governance gaps associated with the globalization phenomenon drawing upon an examination of domestic institutions and overall political structure it argues that the political conditions and expectations present in a company s home market will condition whether a firm might pursue csr activity for home markets it is posited that perceived electoral salience will be filtered through government type and ideology and state societal structures will influence if and how firms will use csr specific arguments are developed from these categorizations the article concludes with a discussion of how researchers might further explore links between csr domestic political structures and corporate political activity

an analytical model of farmers demand for replacement seed the purchase of new seed of a variety that a farmer is already growing varietal replacement in general and varietal choice during periods of rapid technological change are examples of seed replacement choices a seed replacement choice differs from decisions about other inputs such as fertilizer or labor in that seeds can be repro duced for the next crop season benefits from the purchase of new seed can continue for sev eral years and purchased seed is a self sustain ing input although it is subject to depreciation replacement seed is therefore in some ways analogous to a capital item rather than a variable input agricultural economists in general have considered only the analysis of varietal choice with rapid technological change theoretical nowshirvani and empirical herath har daker and anderson gafsi and roe studies of varietal choice tend to model the farmer s de cision as a single period portfolio allocation of land between modern and traditional varieties thus the attributes of interest are yield mo ments of the yield distribution and occasionally other varietal characteristics other approaches to analyzing farmers choice of seed technology emphasize how a related input fertilizer tube wells affects the level and riskiness of return feder 1980 1982 prices risk the lumpiness of the associated inputs and possible credit con straints determine the portfolio choice over time in these models in none of these approaches is the more general case of demand for replace ment seed explicitly recognized this paper proposes an analytical model of the demand for replacement seed the model describes the factors that induce a farmer to re place seed and the optimal frequency of new seed purchase given myopic and infinite time hori zons the model is applied to wheat seed de mand in pakistan conclusions limitations and possible extensions of the model are also con sidered

empirical research in international marketing 1976 1982 this paper reviews empirical research in international marketing published during the period 1976 82 the review focuses on what has been researched and how the research has been conducted this research is evaluated a cooperative multidisciplinary empirical research program in international marketing is then proposed

from hybrids to hierarchies shareholder wealth effects of joint venture partner buyouts this study examines the parent firm performance implications of joint venture jv partner buyouts which involve the conversion of a hybrid governance structure to an internal unit within the firm s hierarchy transaction cost theory as developed and applied in the international literature and market entry research is extended to the post entry investment setting to isolate sources of value creation or dissipation from the governance changes effected by jv partner buyouts the evidence complements recent research on jv longevity and its determinants copyright 2001 john wiley sons ltd

a ranked voting system using a dea ar exclusion model a note abstract this paper addresses ranked voting systems to determine an ordering of candidates in terms of the aggregate vote by rank for each candidate it is shown that specifying nothing arbitrary we can obtain a total ordering of candidates by using a dea ar data envelopment analysis assurance region exclusion model explaining the evaluation criterion used to rank candidates it is concluded that we may consider the system proposed at least as an alternative to determine an ordering of candidates

foreign direct investment theories entry barriers and reverse investments in u s manufacturing industries this paper investigates empirically whether industrial organization oriented fdi theories explain the recent phenomenon of reverse foreign direct investment in the u s based on the distribution of fdi in two digit sic manufacturing industries we find that capital and advertising intensities act as entry barriers to foreign investments in the u s we also observe that foreign multinationals are attracted by the u s market size and that they invest heavily in industries with intensive r d combined with marketing efforts

risk schooling and the choice of seed technology in developing countries a meta profit function approach the determinants of rice seed variety choice are studied in a framework in which cultivator s variety specific profit risk preferences uncertainty and schooling affect variety choice the econometric model takes the form of a simultaneous equation switching regimes model with random profit functions the meta profit function adoption of high yielding varieties in indonesia is found to be positively associated with profitability likelihood of flooding quality of irrigation conditional on relative profit and availability of credit and negatively associated with likelihood of drought and land wealth schooling significantly affects variety specific profit and input demand but not variety choice the spread of high yielding rice varieties hyv s has ushered in an era of agricultural transformation in asia in indonesia the adoption of these new seed varieties contributed importantly to a spectacular increase in indonesia s rice production over the last decades rice output grew at an annual rate of 4 percent during the 1970 s and almost 6 percent in the 1980 s while experimental plots have demonstrated that under optimal conditions the mean yield of hyv rice far exceeds that of traditional varieties tv s many asian cultivators do not plant hyv s in indonesia the hyv revolution has been particularly slow to spread to many areas outside of java and partly as a consequence the distribution of the gains derived from hyv s has been uneven accounting for differences in adoption rates is therefore of some interest differences in prices and fixed factors of production are one explanation for inter farm differences in seed variety adoption if cultivator s seed technology choices are the result of profit maximizing behavior then varietal choice will depend on the determinants of profit variable factor prices the prices of varietyspecific output and the level of fixed factors including the agro climatic environment different profit functions exist for each variety reflecting the differences in their biological technology if seed variety choice is itself part of the cultivators profit maximization problem then there exists a single profit function the metaprofit function which treats variety choice as a variable input and from which all

contract farming and smallholder incentives to produce high quality experimental evidence from the vietnamese dairy sector in emerging markets for high value food products in developing countries processing companies search for efficient ways to source raw material of high quality one widely embraced approach is contract farming but relatively little is known about the appropriate design of financial incentives in a small farm context we use the example of the vietnamese dairy sector to analyze the effectiveness of existing contracts between a processor and smallholder farmers in terms of incentivizing the production of high quality milk a framed field experiment is conducted to evaluate the impact of two incentive instruments a price penalty for low quality and a bonus for consistent high quality milk on farmers investment in quality improving inputs statistical analysis suggests that the penalty drives farmers into higher input use resulting in better output quality the bonus payment generates even higher quality milk we also find that input choice levels depend on farmers socio economic characteristics such as wealth while individual risk preferences seem to be less important implications for the design of contracts with smallholders are discussed

the voting analytic hierarchy process method for selecting supplier abstract supplier selection has received extensive attention in supply chain management yahya et al j oper res soc 50 1999 916 930 integrate a collaborative purchasing programme where one of the aims is to select suppliers they illustrate a new approach based on the use of saaty s analytic hierarchy process ahp method that was developed to assist in multi criteria decision making problems in order to decide the total ranking of the suppliers we compare the weighted sum of the selection number of rank vote after determining the weights in a selected rank this investigation presents a novel weighting procedure in place of ahp s paired comparison for selecting suppliers it provides a simpler method than ahp that is called voting analytic hierarchy process but which does not lose the systematic approach of deriving the weights to be used and for scoring the performance of suppliers

the transition from decentralized to network based mnc structures an evolutionary perspective this paper investigates and models the transition process within established multinational corporations mncs in moving from decentralized toward network based structures whereas there has been substantial research on various mnc models there has been little longitudinal research on the movement toward projected network based models this paper develops an evolutionary perspective of this transition distinguishing adjustments altering how the mnc defines its global strategy where it locates key resources and how it structures and manages operations it argues that rather then being a planned process each phase represents a viable strategic response to then existing challenges and opportunities the paper also argues that the focus of the process shifts over time initially focusing on building organizational linkages and adjusting the quantity and nature of resources within dispersed units and later shifting toward reallocating resources and roles across units

a synthesis of foreign direct investment theories and theories of the multinational firm this paper first presents a taxonomy of the foreign direct investment theories following the market imperfections paradigm it then focuses on recent developments pertaining to the theory of the multinational firm specifically the appropriability internalization and diversification theories subsequently the multinational phenomenon is seen as the result of an international differentiation of activities and an intrafirm integration across national borders all this within a markets and hierarchies approach last the paper points to areas for future research

indian farmers valuation of yield distributions will poor farmers value pro poor seeds abstract potential poverty traps among the rural poor suggest a need to reduce poor farmers vulnerability by stabilizing crop yields and limiting yield losses advances in biotechnology will help address this need directly with crops that tolerate climate fluctuation or resist biotic stresses evaluating ex ante how farmers will value these pro poor seeds is important for delivery design but also challenging this paper describes an experimental economic approach to understanding farmers valuation of such seeds using data from a survey and experiment i assess indian farmers valuation of changes in the mean variance and skewness of payoff distributions these farmers value increases in expected value but seem indifferent about higher moment changes in payoff distributions farmer traits such as wealth and risk exposure affect their valuation of these changes only mildly while various limitations to the experimental approach must qualify practical implications of these findings the experiment demonstrates the viability of conducting valuation experiments with open ended questions in developing countries

adoption of agricultural innovations in developing countries a survey this paper reviews various studies which have provided a description and possible explanation to patterns of innovation adoption in the agricultural sector the survey points out that the tendency of many studies to consider innovation adoption in dichotomous terms adoption nonadoption may not be appropriate in many cases where the actual decisions are defined over a more continuous range more attention needs to be given to the socio cultural and institutional environment in area studies so that their interrelation with economic factors affecting adoption can be inferred the presence of several interrelated innovations is another aspect that needs to be considered more carefully in future research since a number of simultaneous decisions may be involved furthermore the possibility of regular sequential patterns in adopting components of a new technological package should be specifically addressed in future studies finally the impact of differential adoption rates on land holding distribution merits attention in future research

the corporation competition and the invisible hand few would disagree that adam smith s invisible hand theorem is the heart of the economist s weltanschauung ask whether trade barriers should be lowered the spread of multinational corporations restrained oil prices deregulated cartels dissolved or more fundamentally whether a market based capitalist system is economically superior to a state run socialist system and economists almost certainly will begin to answer the question by trying to apply the theorem every student knows that the theorem depends on the assumption of atomistic competition which in turn assumes that the system is decentralized and that no competitor is large relatively to others there is another crucial assumption however that is often ignored and usually underemphasized namely that all competition is price competition in reality one of the most distinctive features of capitalism one that is most often raised in lay discussions of its merits and demerits is the prevalence of other forms of competition such as competition in research development and advertising competition to obtain and hold monopoly and competition for corporate growth these various forms of non price competition we shall aim to show are not clearly analogous with the theory of price competition more non price competition rather than less is not necessarily pareto optimal self evidently the production side of a market economy is decentralized only to a limited degree i e to the level of a decision making unit composed of more than one human such a unit playing neuron to the invisible hand is typically called a firm it is in fact a team rather than remaining small firms are in practice composed of any number of individuals from a handful on to half a million some

partner selection and venturing success the case of joint ventures with firms in the people s republic of china it has been hypothesized in the international joint venture ijv literature that partner selection affects interpartner fit which in turn influences a synergistic effect on ijv performance this study investigates the relationship between ijv success and the strategic and organizational traits of local partners we address this issue in the context of an emerging economy p r china newly emerging economies have in recent years become major hosts of direct investment by multinational corporations mncs because these rapidly expanding economies characterized by an exploding demand previously stifled by ideologically based government intervention provide tremendous opportunities which mncs can preempt mncs in such economies however face the challenges of structural reform weak market structure poorly specified property rights and institutional uncertainty right local partners can help mncs boost market expansion obtain insightful information mitigate operational risks and provide country specific knowledge the analysis of the data obtained from china suggests that both strategic and organizational traits of local partners are significantly associated with some individual dimensions of ijv performance among strategic traits absorptive capacity product relatedness and market power are favorable to ijvs market and financial outcomes market power and experience significantly reduce ijvs operational uncertainties of organizational traits international experience and organizational collaboration are important for ijvs not only profitability and stability but also local market expansion and export growth organizational form and size influence ijvs local market performance the findings provided by this study can help mncs determine what criteria they should use in opting for local partners and what criteria are vital to their goal accomplishment those investors seeking local market expansion should select those local partners that have rich market experience superior market position high absorptive capacity and related product diversification with the ijvs those seeking profitability and stability should select local firms that have superior international experience longer organizational collaboration and greater market power while mncs should use appropriate strategic and organizational criteria to select local partners the host government or local firms can try to make these traits available to attract more stable and profitable foreign direct investment

measuring food insecurity the frequency and severity of coping strategies abstract defining and interpreting food security and measuring it in reliable valid and cost effective ways have proven to be stubborn problems facing researchers and programs intended to monitor food security risks this paper briefly reviews the conceptual and methodological literature on food insecurity measurment describes a particular method for distinguishing and measuring short term food insecurity at the household level and discusses ways of generalizing the method the method developed enumerates the frequency and severity of strategies relied on by urban households when faced with a short term insufficiency of food this method goes beyond more commonly used measures of caloric consumption to incorporate vulnerability elements of food insecurity as well as the deliberate actions of household decision makers when faced with food insufficiency

foreign direct investment in the united states an analysis by country of origin given the large size and rapid growth of foreign direct investment in the united states this subject is a central concern of u s firms and u s government policymakers this study explores the factors that contribute to the explanation of fdi in the united states by country of origin of investment evidence from the past twelve years shows that the main significant positive influences are home country s exports to the united states and home country market size significant negative influences include the home country s imports from the united states the cultural and geographic distances of the home country from the united states and the exchange rate fx

control modes in international service operations the propensity to franchise what determines a service firm s organizational choice between equity based control and franchising this question which has elicited some theoretical answers and a few empirical tests in a domestic setting has never been addressed in an international context before this study explains the mode of control chosen in terms of a theoretical framework which borrows from agency theory and transaction cost analysis the propensity to franchise internationally was found to be directly related to i monitoring costs associated with geographical and cultural distance between the principal franchisor and its foreign agents franchisees ii the principal s international experience and iii the degree of host countries contextual uncertainty but inversely related to the service firm level of brand name asset specificity

global strategy and multinationals entry mode choice this paper makes a case directed towards establishing the importance of global strategic considerations in choosing multinationals entry mode specifically it is our contention that beyond the environmental and transaction specific factors well established in the literature to affect the entry mode decision we should also consider the strategic relationship a multinational envisages between its operations across borders in reaching this decision after incorporating various global strategic variables into an eclectic framework of the factors influencing the entry mode choice this paper tests both the validity of the overall framework and the importance of each entry mode determinant in differ entiating among entry modes this is done based on ninety six multinational managers responses to a survey questionnaire concerning their entry mode decision experiences the results suggest that an express incorporation of global strategic variables into an analysis of the entry mode decision is warranted

learning by doing and learning from others human capital and technical change in agriculture household level panel data from a nationally representative sample of rural indian households describing the adoption and profitability of high yielding seed varieties hyvs associated with the green revolution are used to test the implications of a model incorporating learning by doing and learning spillovers the estimates indicate that i imperfect knowledge about the management of the new seeds was a significant barrier to adoption ii this barrier diminished as farmer experience with the new technologies increased iii own experience and neighbors experience with hyvs significantly increased hyv profitability and iv farmers do not fully incorporate the village returns to learning in making adoption decisions

the integration of subsidiary political activities in multinational corporations just as the competitive activities of mnc subsidiaries exhibit differentiation as well as integration so might mnc political activities this paper combines the literatures on international business government interactions and on multinational corporations with resource dependence theory as a foundation we develop and test hypotheses on factors that might influence the degree to which subsidiary political activities are integrated with affiliated organizations we find that subsidiary strategic integration and the economic integration of the host country significantly influence integration of subsidiary political activities

the role of foreign direct investment in the development of regional industrial systems current knowledge and suggestions for a future american research agenda o huallachain b 1985 the role of foreign direct investment in the development of regional industrial systems current knowledge and suggestions for a future american research agenda reg studies 20 151 162 the role of foreign direct investment in american regional industrial systems differs from the experiences found in other countries foreign investment in the us is increasing rapidly outside of the traditional industrial heartland it is highly integrated with the domestic economy and it does not seem to be developing the same truncated character found in other countries american research should concentrate on the impact increasing foreign investment is having on the technological makeup and total linkage structure of regional economies understanding these impacts will require a variety of research approaches ranging from sectoral studies to analysis of individual corporations this paper attempts to identify research priorities using the knowledge of foreign direct investment generated abroad

agroindustrialization through institutional innovation transaction costs cooperatives and milk market development in the east african highlands abstract some small holders are able to generate reliable and substantial income flows through small scale dairy production for the local market for others a set of unique transaction costs hinders participation cooperative selling institutions are potential catalysts for mitigating these costs stimulating entry into the market and promoting growth in rural communities trends in cooperative organization in east african dairy are evaluated empirical work focuses on alternative techniques for effecting participation among a representative sample of peri urban milk producers in the ethiopian highlands the variables considered are a modern production practice cross bred cow use a traditional production practice indigenous cow use three intellectual capital forming variables experience education and extension and the provision of infrastructure as measured by time to transport milk to market a tobit analysis of marketable surplus generates precise estimates of non participants distances to market and their reservation levels of the covariates measures of the inputs necessary to sustain and enhance the market policy implications focus on the availability of cross bred stock and the level of market infrastructure both of which have marked effects on participation the velocity of transactions in the local community and inevitably the social returns to agroindustrialization

is risk aversion really correlated with wealth how estimated probabilities introduce spurious correlation economists frequently focus on correlations between wealth and risk preferences but rarely observe the probabilities needed to test this relationship empirically these unobserved probabilities are typically estimated via profit or production functions conditioned on wealth correlates which may leave statistical fingerprints on subsequently estimated risk aversion coefficients and confound correlations between wealth and risk preferences using data from an experiment with observable probabilities we compare risk aversion coefficients based on true probabilities with those based on probabilities estimated using standard approaches and show how estimated probabilities can change risk aversion coefficients substantially and introduce spurious correlation between risk aversion and wealth

the impact of journals and authors on international business research a citational analysis of jibs articles in this paper we use citational analysis to examine the influence of individuals and disciplines on international business research we collected citational data over the ten year period 1984 to 1993 from every issue of the journal of international business studies we found that management economics marketing and finance disciplines have had significant influence on international business research and identified researchers such as dunning porter vernon casson rugman and hofstede as having made significant contributions to international business research

an alternative approach to monetary aggregation in dea this paper proposes a set of alternative dea based money indices that are proved to be both theoretically and empirically competing monetary aggregates since they perform as good as the divisia aggregates based on all the results concerning causality forecasting and money demand we conclude that dea money aggregates prove to be at least competing alternatives to the divisia aggregates and hence suggest that these new aggregates may be considered along with the existing weighted monetary aggregates like the divisia ones given the inherent benefit of the doubt weighting mechanism underlying the dea models where the optimal weight assigned by dea to each monetary asset reflects the ongoing financial innovation and the reserve bank of india s policy priority in the distribution of total liquidity we feel that the dea money indices can truly capture the liquidity better with ongoing financial innovations in the economy

the aggregate impact of firms fdi strategies on the trade balances of host countries in this paper we suggest that the dominant motives for firms investing in advanced industrial nations or developing countries ains or dcs tend to be different these dissimilar principal motives manifest themselves in aggregate impacts on national trade balances using market imperfections theory and borrowing from root 1977 we suggest that firms generally tend to use fdi in ains for market access and penetration increasing host country import levels firms tend to use fdi in dcs in order to gain resource advantages that can be exploited in export markets leading to increased exports and hence trade surpluses a contingency framework which outlines the conditions under which fdi inflows will be related to national trade surpluses and or deficits based on the dominant strategic motives of the investing firms is presented and tested our findings suggest that the relationship between fdi inflow and trade balance is moderated by whether a country is an advanced industrial nation or a developing country in the limitations and future research sections of the paper readers are cautioned to view the findings as research opening rather than as definitive recommendations for future research are also discussed

asset smoothing consumption smoothing and the reproduction of inequality under risk and subsistence constraints abstract a growing literature asks whether low wealth agents can accumulate assets over time or whether they are trapped in poverty this paper develops a stochastic dynamic programming model with endogenous asset price risk to explore savings and portfolio decisions in a resource poor environment characterized by risk and subsistence constraints optimal portfolio strategies are found to bifurcate despite divisible assets and fully rational agents wealthier agents acquire a higher yielding portfolio and pursue conventional consumption smoothing poorer agents acquire a less remunerative portfolio and pursue asset smoothing rather than consumption smoothing asset based risk coping thus results in positive correlation between initial wealth and portfolio rate of return

economic exposure and integrated risk management most corporate risk management research focuses on particular risk exposures to the exclusion of other interrelated exposures by contrast this study models corporate risk exposures using a multivariate approach integrating the distinct exposures of interest to finance international business and strategy researchers the paper addresses the implications of multivariate modeling for corporate risk management some key methodological issues arising in empirical estimation of corporate economic exposures and directions for research on integrated risk management 1998 john wiley sons ltd

motives of non american firms investing in the united states non american firms have recently begun investing larger sums of money in the u s such increased activity has created a great deal of interest and concern the growth in foreign direct investment and findings of a mailed questionnaire will be reviewed in this article factor analysis was utilized to help isolate the salient motives for these investment activities although the size of the u s market and the attractiveness of a new market or the desire to preserve the existing u s market were the most frequently cited reasons for new investment in the u s factor analysis reveals that these reasons merely reinforce the primary motive namely the desire to benefit from a higher level of u s technology and innovation

ethical perspectives on the foreign direct investment decision this paper examines the foreign direct investment decision from an ethical perspective and considers the moral agency involved in such decisions with emphasis upon the corporate decision maker historical capital allocation models once regarded as both financially and ethically normative are shown to be deficient in today s environment work of modern western philososphical and theological ethicists is included in analyses of the applicability of selected ethical approaches or metaphors to multinational foreign direct investment decisions and the corporate manager s role and responsibility as corporate decision maker and moral agent the ethical perspectives reviewed can serve as an aid to the individual manager s determination of what constitutes a responsible exercise of decision making power

on designing contracts to guarantee enforceability theory and evidence from east west trade this article suggests how the literature on east west trade and the choice of contracts can be integrated into recent work on the theory of the multinational corporation and contract enforceability by using the properties of foreign direct investment as a benchmark it explains why one type of contract tends to prevail over another the explanation rests on the premise that because of the prohibition on fdi contracts are used which most closely replicate the benefits of intra firm trade while providing managerial and risk shifting services to the eastern partner

the role of acquisitions in foreign direct investment evidence from the u s stock market this paper examines foreign direct investment by studying shareholder wealth gains for 1273 u s firms acquired during the period 1970 1987 three findings stand out first cross border takeovers are more frequent in research and development intensive industries than are domestic acquisitions furthermore in three fourths of cross border transactions the buyer and seller are in related industries these industry patterns suggest that costs and imperfections in product markets play an important role in foreign direct investment second targets of foreign buyers have significantly higher wealth gains than do targets of u s firms this cross border effect is comparable in size to the wealth effects of all cash and multiple bids two effects receiving substantial attention in the finance literature and is robust to inclusion of these two variables third while the cross border effect on wealth gains is not well explained by industry and tax variables it is positively related to the weakness of the u s dollar indicating a significant role for exchange rate movements in foreign direct investment

a mean variance model of mnf location strategy the purpose of this paper is to show that a portfolio theoretic model which directly incorporates the effect of interdependence among national markets can be useful in the analysis of an mnf s explicit location decisions a numerical mean variance portfolio model is developed and applied to the case of geographical expansion of the mnf while international diversification may not be considered a necessary and sufficient cause for fdi its effect on firm earnings should not be ignored in the mnf s location decisions

separable but not equal the location determinants of discrete services offshoring activities in this paper we explore the question of why firms offshore particular services to specific geographic locations we draw on research related to the unique characteristics of services in trade and commerce and more recent analyses of the transnational unbundling and spatial dispersion of business processes we move beyond a simple assessment of the cost sensitivity or relative sophistication of offshoring services and develop a typology emphasizing the degree to which offshoring services activities are interactive repetitive or innovative we suggest that the location of offshoring projects will depend on the particular mix of these attributes and test this assertion using a data set of 595 export oriented offshore services projects initiated from 2002 to 2005 by us and uk company parents in 45 developed and developing countries we find that offshore location choices greatly depend on these services characteristics and in sometimes surprising ways and draw implications from our findings for international business theory policy and practice

mode of international entry an isomorphism perspective the determination of entry modes is examined using an institutional theory framework two sources of isomorphic pressures affect a strategic business unit s sbu entry mode choice 1 host country institutional environment and 2 internal institutional environment the parent organization sbus were hypothesized to adopt similar organizational forms structures policies and practices thus becoming isomorphic based on felt pressures to conform to behavioral norms within the environments the results indicated that sbus using wholly owned entry modes demonstrated high levels of internal parent isomorphism those using exporting joint ventures or licensing agreements demonstrated external isomorphism and those using multiple or mixed entry mode demonstrated low levels of isomorphic pressures

the effects of international operations on the market value of the firm theory and evidence this paper investigates the existence of monopoly rents associated with international operations in a market value theoretic framework the benefits of international operations evolve from such factors as 1 imperfections in the product and factor markets 2 differential international taxation and 3 imperfections in the financial markets in this paper these factors are subject to an equilibrium analysis in the context of recent advances in financial theory in particular imperfections in the financial sector arising from corporate international diversification are examined in a framework which allows a supply adjustments by multinational firms and b the interaction of barriers to international capital flows faced by both firms and investors taking the u s capital market and investors as a base we then specify the conditions under which the foregoing imperfections get priced out in an equilibrium these pricing effects cannot be detected empirically through the methodologies employed by the existing studies which examine the effects of corporate international diversification indeed it was an attempt to rescue the limitations of these studies which initially motivated our paper the existing empirical inquiries into this area rely on traditional risk adjusted performance measures e g 7 or international analogs of return generating processes e g 1 8 instead at the empirical level we employ a value based method which is in the same vein of the thomadakis 17 approach developed to identify the monopoly benefits of industrial market structure we conduct the tests over subperiods characterized by differential government controls in an attempt a to separate the pure financial motives for multinationality from other motives and b to detect if the benefits of international operations carry through recent periods

the effects of real wages and labor productivity on foreign direct investment the volume of foreign direct investment fdi both into and out of the united states has grown rapidly in the past several decades theoretically labor costs in both source and host countries could be important determinants of these flows but thus far no consistently significant effects have been reported for fdi flows between the u s and other industrialized countries in this paper i estimate equations for u s fdi flows to and from five other industrialized countries the explanatory variables include both source and host country real wages and labor productivity but to put my work in perspective i shall first in section ii discuss recent literature in the area then section iii briefly discusses a theoretical model to highlight the possible effects of the labor variables the empirical procedure and results are presented in section iv and a summary in section v

home country political risk and foreign direct investment in the united states this study investigates the proposition that home country political risk factors influence outward foreign direct investment investment data from the u s department of commerce is used to model investment activity in the united states from various industrialized source countries foreign direct investment is regressed on home country domestic and international economic and political risk measures for the western industrial countries results indicate that investment activity from the ics in the u s is dependent on home country economic and political conditions

wealth risk and activity choice cattle in western tanzania abstract imperfect credit markets force households to use their savings for investment profitable activities often require lumpy investments limiting entry by poorer households resulting in increasing welfare differences in tanzania cattle are a profitable but lumpy investment and a liquid asset for consumption smoothing richer households own substantial cattle herds while poorer households specialize in low return low risk activities a dynamic programming model and simulations are presented to analyze entry into asset accumulation under income risk the evidence suggests that households with lower endowments are less likely to own cattle and returns to their endowments are lower

import sourcing dynamics an integrative perspective the character of import sourcing for manufacturing has changed beyond the reach of current explanatory schemes this study knits several evolving trends in the area of import sourcing into a theoretical framework in order to facilitate research in this under researched topic and expose to practitioners the increasing strategic value of import sourcing

foreign direct investment in the united states the state of knowledge in research this article categorizes and summarizes the major writings published during the 1970s concerning foreign direct investment in the united states it is based on the authors analysis of more than 100 works published in the english language in addition to analyzing what has been published the article also suggests directions for future research

market based conservation and local benefits the case of argan oil in morocco abstract market based approaches to biodiversity conservation gained popularity in the 1990s the success of these strategies hinges on first the successful creation or expansion of target markets and second the beneficial involvement of local stakeholders in these markets so that improved incentives induce conservation this paper evaluates these two key elements in the case of argan oil commercialization in southwestern morocco the principal finding is that even when locals appear well positioned to reap ex post benefits one can reject the hypothesis that successful resource commercialization necessarily stimulates local development and reduces poverty most locals participate only superficially in the new and expanded markets for argan oil and the benefits that do trickle down to local households appear to be regressively distributed both regionally and between households the key lies in understanding how opening or expanding markets may induce endogenous product differentiation that easily excludes locals especially the poor and how ex ante market access a variable commonly correlated with wealth conditions households capacity to participate in market induced producer windfalls

fixed cost and resource allocation based on dea cross efficiency abstract in many managerial applications situations frequently occur when a fixed cost is used in constructing the common platform of an organization and needs to be shared by all related entities or decision making units dmus it is of vital importance to allocate such a cost across dmus where there is competition for resources data envelopment analysis dea has been successfully used in cost and resource allocation problems whether it is a cost or resource allocation issue one needs to consider both the competitive and cooperative situation existing among dmus in addition to maintaining or improving efficiency the current paper uses the cross efficiency concept in dea to approach cost and resource allocation problems because dea cross efficiency uses the concept of peer appraisal it is a very reasonable and appropriate mechanism for allocating a shared resource cost it is shown that our proposed iterative approach is always feasible and ensures that all dmus become efficient after the fixed cost is allocated as an additional input measure the cross efficiency dea based iterative method is further extended into a resource allocation setting to achieve maximization in the aggregated output change by distributing available resources such allocations for fixed costs and resources are more acceptable to the players involved because the allocation results are jointly determined by all dmus rather than a specific one the proposed approaches are demonstrated using an existing data set that has been applied in similar studies

equity joint ventures and the theory of the multinational enterprise this paper extends the internalization approach to the theory of the multinational enterprise mne to include an expanded role for equity joint ventures using the transaction cost paradigm of williamson this paper explains why joint ventures may sometimes be preferred over wholly owned subsidiaries also presented is empirical work on joint venture performance in developing countries which demonstrates that under certain conditions joint ventures can be the optimal mode of foreign direct investment

poverty livelihood and class in rural south africa abstract using data from a national living standards survey undertaken in late 1993 this paper disaggregates and explores the economics of livelihood generation and class in rural south africa in an effort to contribute to the ongoing and vociferous debate in south africa about poverty and its alleviation pursuant to the suggestion of participants in a recent participatory poverty assessment this paper analyzes what might be termed the class structure of poverty after exploring the range of claiming systems and livelihood tactics available in rural south africa the paper offers a first look at who the poor are by disaggregating the rural population into discrete livelihood strategy classes non parametric regression methods are used to then estimate and graphically explore the nature of the livelihood mapping between endowments and real incomes in addition to identifying those endowment combinations that map to consumption levels below the poverty line the asset basis of poverty the topography of the estimated livelihood mapping helps identify the constraints that limit household s ability to effectively utilize their assets and endowments these results suggest that poverty is a matter of not only having few assets but also of constraints which limit the effectiveness with which those assets are used and poverty and livelihood policy needs to be designed accordingly

the relationship of industry evolution to patterns of technological linkages joint ventures and direct investment between u s and japan although economic activity between the u s and japan has skyrocketed in the last decade there are few large sample cross industry studies analyzing multiple forms of investment by the japanese in the u s this study analyzes the key characteristics of each stage of industry evolution and the costs and benefits of each form of resource investment to predict the patterns of technological linkages joint ventures and direct investment of japanese companies in the u s the results find support for a model predicting a predominance of technological linkages in emerging industries joint ventures in growing industries and direct investment in maturing industries technological linkages are most attractive in emerging industries as firms struggle to acquire technology information and expertise and share cost and risk yet retain flexibility joint ventures proliferate in growing industries because they offer a means of acquiring and expanding customer bases yet reducing vulnerability in maturing industries where firms key competencies are more developed direct investment allows the company to generate demand in new markets without the disadvantage of joint governance

how firms grow clustering as a dynamic model of internationalization this paper provides a methodology for identifying the dynamics of international firm expansion demonstrating systematic evidence of both toe in the water and concentrated bursts of internationalization by us multinational enterprises we use the methodology of statistical process control to analyze initial investments in host countries and develop a numerical measure of temporal clustering or bunching using this measure we identify two distinct patterns of growth whereas some firms cluster their investments over time others do not cluster their investments for firms that cluster three types of clustering strategy are identified concentrating hibernating and hybrid arguments based on internal firm architecture experience and learning are advanced to explain these findings

a data envelopment model for aggregating preference rankings this paper presents a general model for aggregating votes from a preferential ballot the thrust of the model is to accord each candidate a fair assessment in terms of his overall standing vis a vis first place second place kth place votes the form of the model is a combined index j 1kwjvij where vij is the number of the jth place votes received by the ith candidate the weights wj are assumed to form a monotonically decreasing sequence with wj wj 1 dj e these constraints correspond to the assurance region ar side constraints in the dea framework the properties of the model are examined in terms of this discrimination intensity function d and in the special case that dj e e our model is shown to be equivalent to the consensus models of borda and kendall

can gm technologies help the poor the impact of bt cotton in makhathini flats kwazulu natal abstract the results of a two year survey of smallholders in makhathini flats kwazulu natal show that farmers who adopted bt cotton in 1999 2000 benefited according to all the measures used higher yields and lower chemical costs outweighed higher seed costs giving higher gross margins these measures showed negative benefits in 1998 99 which conflicts with continued adoption but stochastic efficiency frontier estimation which takes account of the labor saved showed that adopters averaged 88 efficiency as compared with 66 for the nonadopters in 1999 2000 when late rains lowered yields the gap widened to 74 for adopters and 48 for nonadopters

trends in multinational business and global environments a perspective this article reviews and synthesizes the emergence and growth of u s western european and japanese mncs in the postwar environment the growing role of state enterprises and the recent emergence of third world mncs while u s foreign direct investments have expanded and continue to be highly significant some important recent developments are the more rapid growth of western european and japanese mncs the increased role of the u s as a host country for investments the emergence of multibusiness by mncs the more numerous actors involved in global business and the dramatic more rapid changes in the world environment this article explores developments in host and home country policies some of the other major actors in international business newer forms of international participation along with some hypotheses and concludes by analyzing a few major changes in global environments and multinational management

heterogeneous demand for drought tolerant rice evidence from bihar india summary efforts to develop rice cultivars with drought tolerance dt traits have resulted in several varieties that demonstrate significant resilience to drought stresses we employ discrete choice experiments to examine farmers preferences for dt traits and explore heterogeneity in these preferences using primary data from bihar india results suggest that farmers value reductions in yield variability offered by dt paddy but are willing to pay even more for seeds that offer yield advantages under normal conditions we demonstrate that risk aversion and loss aversion not only significantly influence choice probabilities but also affect the way farmers value different seed attributes

why franchise companies expand overseas abstract business format franchising is becoming an increasingly international activity from 1971 to 1985 u s franchisors added foreign outlets at a rate of 17 per year almost twice as fast as they added domestic outlets aydin and kacker 1990 as a result by 1990 more than 350 u s companies had more than 32 000 franchised outlets overseas by 2000 60 of all franchisors in the united states are expected to have outlets overseas hoffman and preble 1993 this study examines the 815 largest u s franchisors to understand what capabilities encourage them to expand overseas it finds that the key capability that predicts the intent to expand overseas is superior capability to reduce franchisee opportunism franchisors who seek foreign franchisees have developed a greater capability to bond against and monitor potential franchisee opportunism the data show that these differences are consistent across all industries in which franchising takes place the results of this study indicate that foreign entrepreneurs can identify the american franchisors most likely to expand overseas by looking at their pricing structure and their monitoring capabilities the easy identification of characteristics from which to find american franchisors will help to reduce the search costs of potential foreign franchisees this reduction in search costs will make the establishment of international franchise relationships less expensive this study also provides guidance to franchisors interested in expanding overseas the results show how franchisors can structure their franchise relationships to reduce potential franchisee opportunism this ability to reduce franchisee opportunism will make it easier for franchisors to enter high growth foreign markets using the franchising business mode this study also has implications for researchers it suggests that international business research examine further the mechanisms by which firms make contractual modes of international business work whereas many firms may internalize international market transactions under conditions likely to lead to market failure the large number of franchisors who use franchising as an international expansion mode despite conditions of market failure suggests that more attention be paid to mechanisms that companies can use to reduce the probability of failure of international contractual transactions by helping to explain how franchisors monitor foreign franchisees or bond them against opportunistic behavior this study suggests that the international business literature develop a more complex understanding of the workings of international business transactions than the simple choice of internalization or contractual entry modes

can biotechnology reach the poor the adequacy of information and seed delivery abstract the paper examines the expectation that biotechnology can provide significant benefits for smallholder farmers it uses evidence from current seed systems and variety choice in developing countries in particular it examines the adequacy of information flow and the performance of seed markets many of the biotechnology innovations proposed for use by smallholders feature qualities that may not be immediately obvious to farmers implications are drawn for the potential demand for these transgenic varieties the adequacy of seed systems is also examined including the characteristics of local seed diffusion and the experience of commercial seed enterprises the paper concludes that investments in public biotechnology must be accompanied by policies that encourage commercial seed system development and that empower farmers to be able to take full advantage of new technology

comparative business failures of foreign controlled firms in the united states we explore the comparative business failures of foreign owned or controlled firms and domestically owned firms original data are collected regarding foreign controlled firms in the u s that filed for bankruptcy protection were involuntarily liquidated or ceased operations mainly due to poor financial performance during the 1978 1988 period our results show that foreign controlled firms fail less often than domestically owned firms the patterns of foreign controlled business failures and the impacts of entry modes ownership types and national culture on the failures of foreign controlled firms are also examined

multinational enterprises and public policy the interaction between governments and multinational enterprises is analyzed using a new conceptual framework this captures the key aspects of richard caves normative and behavioral approaches to the literature but also develops a more contemporary strategic approach our framework uses insights from the resource based theory of the firm to analyze managerial aspects of multinational enterprises and public policy neglected by caves in particular we incorporate strategies of national responsiveness

stochastic wealth dynamics and risk management among a poor population we use herd history data collected among pastoralists in southern ethiopia to study stochastic wealth dynamics among a poor population although covariate rainfall shocks plainly matter household specific factors including own herd size account for most observed variability in wealth dynamics we find no support for the tragedy of the commons hypothesis past studies may have conflated costly self insurance with stocking rate externalities biophysical shocks move households between multiple dynamic wealth equilibria the lowest suggesting a poverty trap according to nonconvex path dynamics these findings have broad implications for development and relief strategies among a poor population vulnerable to climatic shocks a vast economic literature on risk management rests explicitly or implicitly on the classic friedmanite permanent income hypothesis studies of portfolio management consumption smoothing social insurance and the like all depend on the canonical assumption that stochastic income realisations are drawn from a stationary income distribution leading to consumption smoothing off a stable asset base the possibility of asset accumulation connects this literature to the immense literature on the theory and empirics of economic growth

the importance of learning in the adoption of high yielding variety seeds to date due to the lack of panel data most micro level empirical studies of technology adoption have used cross sectional data these studies cannot examine the dynamic processes of adoption such as learning this article uses panel data to study the adoption of a new high yielding variety seed first it establishes that learning is an important variable in the adoption process second it establishes that cross sectional estimates of a dynamic process are biased but that the extent of this bias may be small third it illustrates the econometric methods needed to estimate a dynamic model when controlling for unobserved household heterogeneity

strategic and financial performance implications of global sourcing strategy a contingency analysis using a contingency model of global sourcing strategy this study investigated the moderating effects of sourcing related factors on the relationship between sourcing strategy and a product s strategic and financial performance the results lent some support to the contingency model of global sourcing strategy in that product innovation process innovation and asset specificity were significant moderator variables for financial but not strategic performance however the results provided no support for bargaining power of suppliers and transaction frequency as moderator variables in other words in achieving high financial performance for a product whether a particular sourcing strategy should be used for a particular product depended on the levels of product innovation process innovation and asset specificity

foreign subsidiary and parents roles during strategic investment and divestment decisions empirical research is scarce to answer the concerns of governments unions and public opinion at large concerning how multinationals make decisions to restructure their international strategic portfolio or close plants overseas to ensure long run competitiveness based on three in depth analyses of different types of restructing decisions the author concludes that the foreign subsidiaries seem to carry most of the decisionmaking effort for their own plant closures while for strategic portfolio readjustments during which they change owners they are not consulted

modes of foreign entry a transaction cost analysis and propositions a frontier issue in international marketing is the appropriate choice of entry mode in foreign markets the objective of this paper is to offer a transaction cost framework for investigating the entry mode decision this framework provides 1 a theoretical basis for systematically interrelating the literature into propositions 2 propositions about interactions which resolve the apparently contradictory arguments advanced to date specifically the paper illustrates the feasibility of clustering 17 entry modes into the degree of control the mode provides the entrant proposes that the most appropriate i e most efficient entry mode is a function of the tradeoff between control and the cost of resource commitment advances testable propositions delimiting the circumstances under which each mode maximizes long term efficiency

farmers perceptions and adoption of new agricultural technology evidence from analysis in burkina faso and guinea west africa economists investigating consumer demand have accumulated considerable evidence showing that consumers generally have subjective preferences for characteristics of products and that their demand for products is significantly affected by their perceptions of the product s attributes however the role of farmers preferences in adoption decisions have received very limited attention in adoption studies conducted by economists this paper tests the hypothesis that farmers perceptions of technology characteristics significantly affect their adoption decisions the analysis conducted with tobit models of modern sorghum and rice varietal technologies in burkina faso and guinea respectively strongly supports this hypothesis our results provide a strong case for future adoption studies to expand the range of variables used away from the broad socio economic demographic and institutional factors to include farmers subjective perceptions of the characteristics of new agricultural technologies

income diversification poverty traps and policy shocks in cote d ivoire and kenya abstract this paper presents evidence on the effects of two different sorts of policy shocks on observed income diversification patterns in rural africa in cote d ivoire households with poor endowments were less able to respond to attractive emerging on farm and non farm opportunities due to entry barriers to superior livelihood strategies the benefits of exchange rate reform accrued disproportionately to households that were richer prior to devaluation by contrast food for work transfers to households in kenya significantly reduced liquidity constraints enabling project participants to pursue more lucrative livelihood strategies in non farm activities and higher return agricultural production patterns jointly these two shocks underscore the importance of liquidity market access and skill constraints to skilled non farm income sources to dynamic poverty traps in rural africa

payoff dominance vs cognitive transparency in decision making i introduction there is a general question about how well laboratory markets work in eliciting true preferences given the low opportunity costs of making errors as in harrison 1989 vernon smith 1982 set out a series of conditions that must be adhered to if a laboratory market investigation is to provide insight into economic behavior in naturally occurring markets the opportunity cost question posed above is covered under smith s payoff dominance and reward saliency precepts for laboratory market experiments if the experimental setting is to elicit true preferences from the subjects the monetary payoffs in the experiment must be salient and dominate potential extraneous influences on subject behavior this paper reports on three series of experiments which employ the becker degroot marshak bdm mechanism to investigate the interaction between payoff dominance reward saliency and cognitive effort in the decision task the bdm mechanism is well suited to this task because it involves only individual choice is theoretically incentive compatible and offers a high degree of experimenter control over payoffs initial information and feedback on the results of decisions becker degroot and marschak 1964 introduced the following preference elicitation mechanism individuals state the most they would be willing to pay wtp 1 for a good then a random price is drawn from a distribution known to the individuals if the stated value is greater than or equal to the random price the individual buys the good at the randomly determined price otherwise the individual does not buy the good the bdm bidding mechanism can be shown to be incentive compatible the intuition is straightforward it is not in the individual s interest to understate true wtp if the random buying price falls between the stated wtp and the true wtp the individual has foregone a beneficial trade it is also not in an individual s interest to overstate true wtp if the random buying price is greater than the true value but less than the stated value the individual will be required to buy the good at a price greater than true wtp a more formal proof is easy to construct 2 let v the true value of one unit of the auction good b the bid submitted to purchase one unit of the good r the price randomly determined to be paid if the good is purchased p r probability that price r is randomly selected y sup o initial income u y utility a function of money income and the value of the good and e initial monetary balance provided in an experiment in the wtp version of the bdm auction the good is purchased if b greater than or equal to r with the subject paying only r and not purchased if b less than r in experiments using the bdm the subject cannot bid more than the experimental balance e so it must be that v less than e if the experiment is to be demand revealing assuming that subjects maximize expected utility they will submit bid b that maximizes eu integral of p r u y sup o e v r dr between limits b and 0 integral of p r u y sup o e dr between limits e and b the first integral describes the expected payoff for random prices r below the bid b and the second integral describes the expected payoff for random prices between the bid b and the maximum possible bid as limited by the balance e the maximum over b occurs when the derivative of eu with respect to b is zero in other words when deu db p b u y e v b u y e 0 so long as p b greater than 0 i e there is some probability the offered bid will be the price the above implies that the maximum occurs when b v in other words it is individually optimal to submit a bid b equal to one s true value v for the commodity although the bdm is incentive compatible in theory it is an empirical question whether it has this property in practice