IDEAS home Printed from https://ideas.repec.org/a/bla/reviec/v26y2018i1p37-59.html
   My bibliography  Save this article

Good and useless FDI: The growth effects of greenfield investment and mergers and acquisitions

Author

Listed:
  • Philipp Harms
  • Pierre†Guillaume Méon

Abstract

We explore the effect of foreign direct investment (FDI) on economic growth, distinguishing between mergers and acquisitions (M&As) and “greenfield†investment. A simple model underlines that, unlike greenfield investment, M&As partly represent a rent accruing to previous owners, and do not necessarily contribute to expanding the host country's capital stock. Greenfield FDI should therefore have a stronger impact on growth than M&A sales. This hypothesis is supported by our empirical results that are based on a panel of up to 127 industrialized, emerging, and developing countries over 1990 to 2010.

Suggested Citation

  • Philipp Harms & Pierre†Guillaume Méon, 2018. "Good and useless FDI: The growth effects of greenfield investment and mergers and acquisitions," Review of International Economics, Wiley Blackwell, vol. 26(1), pages 37-59, February.
    • Handle: RePEc:bla:reviec:v:26:y:2018:i:1:p:37-59
    DOI: 10.1111/roie.12302
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/roie.12302
    Download Restriction: no
    File URL: https://libkey.io/10.1111/roie.12302?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Joshua Aizenman & Yothin Jinjarak & Donghyun Park, 2013. "Capital Flows and Economic Growth in the Era of Financial Integration and Crisis, 1990–2010," Open Economies Review, Springer, vol. 24(3), pages 371-396, July.
    2. Harrison, Ann & Rodríguez-Clare, Andrés, 2010. "Trade, Foreign Investment, and Industrial Policy for Developing Countries," Handbook of Development Economics, in: Dani Rodrik & Mark Rosenzweig (ed.), Handbook of Development Economics, edition 1, volume 5, chapter 0, pages 4039-4214, Elsevier.
    3. Robert C. Feenstra & Robert Inklaar & Marcel P. Timmer, 2015. "The Next Generation of the Penn World Table," American Economic Review, American Economic Association, vol. 105(10), pages 3150-3182, October.
    4. Volker Nocke & Stephen Yeaple, 2008. "An Assignment Theory of Foreign Direct Investment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(2), pages 529-557.
    5. Dani Rodrik & Arvind Subramanian, 2009. "Why Did Financial Globalization Disappoint?," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 112-138, April.
    6. Wolfgang Keller & Stephen R. Yeaple, 2009. "Multinational Enterprises, International Trade, and Productivity Growth: Firm-Level Evidence from the United States," The Review of Economics and Statistics, MIT Press, vol. 91(4), pages 821-831, November.
    7. Isabel Faeth, 2009. "Determinants Of Foreign Direct Investment – A Tale Of Nine Theoretical Models," Journal of Economic Surveys, Wiley Blackwell, vol. 23(1), pages 165-196, February.
    8. Eswar S. Prasad & Raghuram G. Rajan & Arvind Subramanian, 2007. "Foreign Capital and Economic Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(1), pages 153-230.
    9. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    10. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(2), pages 407-443.
    11. Hui Tong & Shang-Jin Wei, 2011. "The Composition Matters: Capital Inflows and Liquidity Crunch During a Global Economic Crisis," The Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 2023-2052.
    12. Brian J. Aitken & Ann E. Harrison, 2022. "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela," World Scientific Book Chapters, in: Globalization, Firms, and Workers, chapter 6, pages 139-152, World Scientific Publishing Co. Pte. Ltd..
    13. Rachel Griffith, 1999. "Using the ARD establishment level data to look at foreign ownership and productivity in the UK," IFS Working Papers W99/06, Institute for Fiscal Studies.
    14. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 1-48.
    15. Matthias Arnold, Jens & Javorcik, Beata S., 2009. "Gifted kids or pushy parents? Foreign direct investment and plant productivity in Indonesia," Journal of International Economics, Elsevier, vol. 79(1), pages 42-53, September.
    16. Kose, M. Ayhan & Prasad, Eswar & Rogoff, Kenneth & Wei, Shang-Jin, 2010. "Financial Globalization and Economic Policies," Handbook of Development Economics, in: Dani Rodrik & Mark Rosenzweig (ed.), Handbook of Development Economics, edition 1, volume 5, chapter 0, pages 4283-4359, Elsevier.
    17. Alla Lileeva, 2010. "The benefits to domestically owned plants from inward direct investment: the role of vertical linkages," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 43(2), pages 574-603, May.
    18. Ronald B. Davies & Rodolphe Desbordes & Anna Ray, 2015. "Greenfield versus Merger & Acquisition FDI: Same Wine, Different Bottles?," Working Papers 201503, School of Economics, University College Dublin.
    19. Iamsiraroj, Sasi & Ulubaşoğlu, Mehmet Ali, 2015. "Foreign direct investment and economic growth: A real relationship or wishful thinking?," Economic Modelling, Elsevier, vol. 51(C), pages 200-213.
    20. Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment affect economic growth?1," Journal of International Economics, Elsevier, vol. 45(1), pages 115-135, June.
    21. Thomas Müller, 2007. "Analyzing Modes of Foreign Entry: Greenfield Investment versus Acquisition," Review of International Economics, Wiley Blackwell, vol. 15(1), pages 93-111, February.
    22. Alfaro, Laura & Chanda, Areendam & Kalemli-Ozcan, Sebnem & Sayek, Selin, 2004. "FDI and economic growth: the role of local financial markets," Journal of International Economics, Elsevier, vol. 64(1), pages 89-112, October.
    23. Robert Lensink & Oliver Morrissey, 2006. "Foreign Direct Investment: Flows, Volatility, and the Impact on Growth," Review of International Economics, Wiley Blackwell, vol. 14(3), pages 478-493, August.
    24. Chen, Yanjing, 2009. "Agglomeration and location of foreign direct investment: The case of China," China Economic Review, Elsevier, vol. 20(3), pages 549-557, September.
    25. Dani Rodrik, 2008. "The Real Exchange Rate and Economic Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 365-439.
    26. Griffith, Rachel, 1999. "Using the ARD Establishment Level Data to Look at Foreign Ownership and Productivity in the United Kingdom," Economic Journal, Royal Economic Society, vol. 109(456), pages 416-442, June.
    27. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    28. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
    29. Calderon, Cesar & Loayza, Norman & Serven, Luis, 2004. "Greenfield foreign direct investment and mergers and acquisitions - feedback and macroeconomic effects," Policy Research Working Paper Series 3192, The World Bank.
    30. N. Gregory Mankiw & David Romer & David N. Weil, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(2), pages 407-437.
    31. James R. Hines & Eric M. Rice, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(1), pages 149-182.
    32. Marin, Anabel & Sasidharan, Subash, 2010. "Heterogeneous MNC subsidiaries and technological spillovers: Explaining positive and negative effects in India," Research Policy, Elsevier, vol. 39(9), pages 1227-1241, November.
    33. Caselli, Francesco & Esquivel, Gerardo & Lefort, Fernando, 1996. "Reopening the Convergence Debate: A New Look at Cross-Country Growth Empirics," Journal of Economic Growth, Springer, vol. 1(3), pages 363-389, September.
    34. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-1426, November.
    35. Benfratello, Luigi & Sembenelli, Alessandro, 2006. "Foreign ownership and productivity: Is the direction of causality so obvious?," International Journal of Industrial Organization, Elsevier, vol. 24(4), pages 733-751, July.
    36. Dharmapala, Dhammika & Hines Jr., James R., 2009. "Which countries become tax havens?," Journal of Public Economics, Elsevier, vol. 93(9-10), pages 1058-1068, October.
    37. Marcelo J. Moreira, 2003. "A Conditional Likelihood Ratio Test for Structural Models," Econometrica, Econometric Society, vol. 71(4), pages 1027-1048, July.
    38. Alla Lileeva, 2010. "The benefits to domestically owned plants from inward direct investment: the role of vertical linkages," Canadian Journal of Economics, Canadian Economics Association, vol. 43(2), pages 574-603, May.
    39. Miao Wang & M. C. Sunny Wong, 2009. "What Drives Economic Growth? The Case of Cross‐Border M&A and Greenfield FDI Activities," Kyklos, Wiley Blackwell, vol. 62(2), pages 316-330, April.
    40. Beata Smarzynska Javorcik, 2004. "Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers Through Backward Linkages," American Economic Review, American Economic Association, vol. 94(3), pages 605-627, June.
    41. Sourafel Girma & Holger Görg & Mauro Pisu, 2016. "Exporting, linkages and productivity spillovers from foreign direct investment," World Scientific Book Chapters, in: MULTINATIONAL ENTERPRISES AND HOST COUNTRY DEVELOPMENT Volume 53: World Scientific Studies in International Economics, chapter 10, pages 191-211, World Scientific Publishing Co. Pte. Ltd..
    42. Jim Stewart, 2015. "The Corporate Tax Regime and Industrial Policy in Ireland," The Institute for International Integration Studies Discussion Paper Series iiisdp469, IIIS.
    43. Xavier X. Sala-i-Martin, 1997. "I Just Ran Four Million Regressions," NBER Working Papers 6252, National Bureau of Economic Research, Inc.
    44. Yanling Wang, 2010. "FDI and productivity growth: the role of inter-industry linkages," Canadian Journal of Economics, Canadian Economics Association, vol. 43(4), pages 1243-1272, November.
    45. Barro, Robert J. & Lee, Jong Wha, 2013. "A new data set of educational attainment in the world, 1950–2010," Journal of Development Economics, Elsevier, vol. 104(C), pages 184-198.
    46. Andrew Abbott & David O. Cushman & Glauco De Vita, 2012. "Exchange Rate Regimes and Foreign Direct Investment Flows to Developing Countries," Review of International Economics, Wiley Blackwell, vol. 20(1), pages 95-107, February.
    47. Jonathan E. Haskel & Sonia C. Pereira & Matthew J. Slaughter, 2007. "Does Inward Foreign Direct Investment Boost the Productivity of Domestic Firms?," The Review of Economics and Statistics, MIT Press, vol. 89(3), pages 482-496, August.
    48. Lipsey, Robert E. & Sjoholm, Fredrik, 2004. "Foreign direct investment, education and wages in Indonesian manufacturing," Journal of Development Economics, Elsevier, vol. 73(1), pages 415-422, February.
    49. Rachel Griffith & Stephen Redding & Helen Simpson, 2004. "Foreign Ownership and Productivity: New Evidence from the Service Sector and the R&D Lab," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 20(3), pages 440-456, Autumn.
    50. Ayesha Ashraf & Dierk Herzer & Peter Nunnenkamp, 2016. "The Effects of Greenfield FDI and Cross-border M&As on Total Factor Productivity," The World Economy, Wiley Blackwell, vol. 39(11), pages 1728-1755, November.
    51. Alfaro, Laura & Chanda, Areendam & Kalemli-Ozcan, Sebnem & Sayek, Selin, 2010. "Does foreign direct investment promote growth? Exploring the role of financial markets on linkages," Journal of Development Economics, Elsevier, vol. 91(2), pages 242-256, March.
    52. Caves, Richard E, 1974. "Multinational Firms, Competition, and Productivity in Host-Country Markets," Economica, London School of Economics and Political Science, vol. 41(162), pages 176-193, May.
    53. Anabel Marin & Martin Bell, 2006. "Technology spillovers from Foreign Direct Investment (FDI): the active role of MNC subsidiaries in Argentina in the 1990s," Journal of Development Studies, Taylor & Francis Journals, vol. 42(4), pages 678-697.
    54. Dirk Willem te Velde, 2003. "Do Workers in Africa Get a Wage Premium if Employed in Firms Owned by Foreigners?," Journal of African Economies, Centre for the Study of African Economies, vol. 12(1), pages 41-73, March.
    55. Barry Eichengreen, 2008. "The Real Exchange Rate and Economic Growth," World Bank Publications - Books, The World Bank Group, number 28013, December.
    56. Ignat Stepanok, 2015. "Cross-border Mergers and Greenfield Foreign Direct Investment," Review of International Economics, Wiley Blackwell, vol. 23(1), pages 111-136, February.
    57. Klein, Michael W. & Shambaugh, Jay C., 2008. "The dynamics of exchange rate regimes: Fixes, floats, and flips," Journal of International Economics, Elsevier, vol. 75(1), pages 70-92, May.
    58. Nocke, Volker & Yeaple, Stephen, 2007. "Cross-border mergers and acquisitions vs. greenfield foreign direct investment: The role of firm heterogeneity," Journal of International Economics, Elsevier, vol. 72(2), pages 336-365, July.
    59. Mr. Atish R. Ghosh & Mr. Jonathan David Ostry & Mr. Charalambos G Tsangarides, 2011. "Exchange Rate Regimes and the Stability of the International Monetary System," IMF Occasional Papers 2011/001, International Monetary Fund.
    60. Sala-i-Martin, Xavier, 1997. "I Just Ran Two Million Regressions," American Economic Review, American Economic Association, vol. 87(2), pages 178-183, May.
    61. Jože Mencinger, 2003. "Does Foreign Direct Investment Always Enhance Economic Growth?," Kyklos, Wiley Blackwell, vol. 56(4), pages 491-508, November.
    62. Nazrul Islam, 1995. "Growth Empirics: A Panel Data Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(4), pages 1127-1170.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Philipp Harms & Pierre-Guillaume Méon, 2014. "Good and bad FDI: The growth effects of greenfield investment and mergers and acquisitions in developing countries," Working Papers CEB 14-021, ULB -- Universite Libre de Bruxelles.
    2. Philipp Harms & Pierre-Guillaume Méon, 2013. "The Growth Effects of Greenfield Investment and Mergers and Acquisitions: Econometric Investigation and Implication for MENA Countries," Working Papers 794, Economic Research Forum, revised Nov 2013.
    3. Philipp Harms & Pierre-Guillaume Méon, 2011. "An FDI is an FDI is an FDI? The growth effects of greenfield investment and mergers and acquisitions in developing countries," Working Papers 11.10, Swiss National Bank, Study Center Gerzensee.
    4. Ayesha Ashraf & Dierk Herzer & Peter Nunnenkamp, 2016. "The Effects of Greenfield FDI and Cross-border M&As on Total Factor Productivity," The World Economy, Wiley Blackwell, vol. 39(11), pages 1728-1755, November.
    5. Sasidaran Gopalan & Alice Ouyang & Ramkishen S. Rajan, 2018. "Impact of Greenfield FDI versus M&A on growth and domestic investment in developing Asia," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 35(1), pages 41-70, April.
    6. Neil Foster-McGregor, 2012. "Innovation and Technology Transfer across Countries," wiiw Research Reports 380, The Vienna Institute for International Economic Studies, wiiw.
    7. Areendam Chanda & Laura Alfaro & Sebnem Kalemli-Ozcan & Selin Sayek, 2006. "How Does Foreign Direct Investment Promote Economic Growth? Exploring the Effects of Financial Markets on Linkages," Departmental Working Papers 2006-13, Department of Economics, Louisiana State University.
    8. Segundo Camino-Mogro & Natalia Bermúdez-Barrezueta & Mary Armijos, 2023. "Is FDI a potential tool for boosting firm’s performance? Firm level evidence from Ecuador," Journal of Evolutionary Economics, Springer, vol. 33(2), pages 341-391, April.
    9. Santos, Eleonora, 2017. "Externalities from FDI on domestic firms’ Productivity: A Literature Review for Developed Countries," MPRA Paper 88958, University Library of Munich, Germany.
    10. E. Tsanana & X. Chapsa & C. Katrakilidis, 2016. "Is growth corrupted or bureaucratic? Panel evidence from the enlarged EU," Applied Economics, Taylor & Francis Journals, vol. 48(33), pages 3131-3147, July.
    11. Eapen, Alex & Yeo, Jihye & Sasidharan, Subash, 2019. "Finance constraints and technology spillovers from foreign to domestic firms," Economic Modelling, Elsevier, vol. 76(C), pages 50-62.
    12. Maciej Stefański, 2020. "To What Extent does Convergence Explain the Slowdown in Potential Growth of the CEE Countries Following the Global Financial Crisis?," KAE Working Papers 2020-058, Warsaw School of Economics, Collegium of Economic Analysis.
    13. Görg Holger & Marchal Léa, 2019. "Die Effekte deutscher Direktinvestitionen im Empfängerland vor dem Hintergrund des Leistungsbilanzüberschusses: Empirische Evidenz mit Mikrodaten für Frankreich," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 20(1), pages 53-69, June.
    14. Argentino Pessoa, 2008. "Multinational Corporations, Foreign Investment, and Royalties and License Fees: Effects on Host-Country Total Factor Productivity," Notas Económicas, Faculty of Economics, University of Coimbra, issue 28, pages 6-31, December.
    15. Antonio Martuscelli & Michael Gasiorek, 2019. "Regional Integration And Poverty: A Review Of The Transmission Channels And The Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 33(2), pages 431-457, April.
    16. Tica Josip & Šikić Luka, 2019. "Endogenous Convergence and International Technological Diffusion Channels," South East European Journal of Economics and Business, Sciendo, vol. 14(2), pages 34-53, December.
    17. Rajneesh Narula & André Pineli, 2017. "Multinational Enterprises and Economic Development in Host Countries: What We Know and What We Don’t Know," Palgrave Studies in Impact Finance, in: Gianluigi Giorgioni (ed.), Development Finance, chapter 6, pages 147-188, Palgrave Macmillan.
    18. Marcin Humanicki & Krzysztof Olszewski, 2020. "The Heterogeneous Nature of FDI in Central and Eastern Europe. Impact of the Entry Mode on the Host Country’s Economic Growth," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 70(6), pages 541-565, December.
    19. Schiffbauer, Marc & Siedschlag, Iulia & Ruane, Frances, 2017. "Do foreign mergers and acquisitions boost firm productivity?," International Business Review, Elsevier, vol. 26(6), pages 1124-1140.
    20. Maria Borga & Perla Ibarlucea Flores & Monika Sztajerowska, 2020. "Drivers of divestment decisions of multinational enterprises - A cross-country firm-level perspective," OECD Working Papers on International Investment 2019/03, OECD Publishing.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:reviec:v:26:y:2018:i:1:p:37-59. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0965-7576 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.