Global digital platforms, technology transfer and foreign direct investment policies in two‐sided markets

Abstract

AbstractThis paper examines the preferences of a foreign firm and a host country government over two modes of FDI in two‐sided markets: de novo entry (through the establishment of a new platform) and acquisition of the domestic incumbent platform. Technology transfer, cross‐side network externalities and platform service differentiation determine the ranking of the host country welfare gains and the entrant's profits under the two entry modes. In the case where the foreign entrant and the host government disagree over the entry modes ranking, asymmetric foreign equity restrictions can induce the welfare‐optimal choice of the entry mode by the foreign firm.