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Cross Border M&A: Who Buys Whom When Market Size and Technology Levels Differ?

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  • Leo A. Grunfeld

    ()
    (MENON Business Economics and Norwegian School of Management)

  • FRANCESCA SANNA-RANDACCIO

    ()
    (DIS University of Rome "Sapienza")

Abstract

Global FDI activities are dominated by cross border acquisitions, especially between industrialized countries. In small industrialized countries, there is a growing concern of losing leading technological firms to large foreign companies through acquisitions. In this paper, we identify under what conditions a technology leader from a small country acquires a laggard from a large country, and vice versa. We answer this question using a two-firm two-country Cournot model, where firms in both countries can enter the foreign market, either through greenfield FDI or acquisition. We consider the roles of technological and market size asymmetries, technology transfer costs and M&A transaction costs; like merger integration costs and fees charged by legal and financial advisors. To become the acquirer, a firm from a small country needs not only a strong technological lead but also the ability to exploit it on a global scale, which requires low international technology transfer costs. Moreover, we find that a multilateral liberalization of greenfield investments may actually increase the incentives for foreign acquisitions. The effect of such liberalization on the nationality of the acquirer depends largely on the extent of the technology gap.

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File URL: http://www.dis.uniroma1.it/~bibdis/RePEc/aeg/wpaper/2009-12.pdf
File Function: First version, 2009
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Bibliographic Info

Paper provided by Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza" in its series DIS Technical Reports with number 2009-12.

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Length: 35 pages
Date of creation: Aug 2009
Date of revision:
Handle: RePEc:aeg:wpaper:2009-12

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Related research

Keywords: Multinational firms; FDI; mergers and acquisitions (M&A); technology transfer.;

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References

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  1. Norback, Pehr-Johan & Persson, Lars, 2007. "Investment liberalization -- Why a restrictive cross-border merger policy can be counterproductive," Journal of International Economics, Elsevier, vol. 72(2), pages 366-380, July.
  2. Horn, Henrik & Persson, Lars, 1999. "The Equilibrium Ownership of an International Oligopoly," Working Paper Series 515, Research Institute of Industrial Economics.
  3. Volker Nocke & Stephen Yeaple, 2004. "An Assignment Theory of Foreign Direct Investment," PIER Working Paper Archive 05-003, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  4. Hunter, William C. & Jagtiani, Julapa, 2003. "An analysis of advisor choice, fees, and effort in mergers and acquisitions," Review of Financial Economics, Elsevier, vol. 12(1), pages 65-81.
  5. Norbäck, Pehr-Johan & Persson, Lars, 2002. "Investment Liberalization - Who Benefits from Cross Border Mergers," CEPR Discussion Papers 3166, C.E.P.R. Discussion Papers.
  6. Theo Eicher & Jong Woo Kang, 2004. "Trade, Foreign Direct Investment or Acquisition: Optimal Entry Modes for Multinationals," CESifo Working Paper Series 1174, CESifo Group Munich.
  7. Ignatius J. Horstmann & James R. Markusen, 1990. "Endogenous Market Structures in International Trade," NBER Working Papers 3283, National Bureau of Economic Research, Inc.
  8. Mugele, Christian & Schnitzer, Monika, 2008. "Organization of multinational activities and ownership structure," Munich Reprints in Economics 19200, University of Munich, Department of Economics.
  9. Mattoo, Aaditya & Olarreaga, Marcelo & Saggi, Kamal, 2004. "Mode of foreign entry, technology transfer, and FDI policy," Journal of Development Economics, Elsevier, vol. 75(1), pages 95-111, October.
  10. Bruce Kogut & Harbir Singh, 1988. "The Effect of National Culture on the Choice of Entry Mode," Journal of International Business Studies, Palgrave Macmillan, vol. 19(3), pages 411-432, September.
  11. Olivier Bertrand & Habib Zitouna, 2006. "Trade Liberalization and Industrial Restructuring: The Role of Cross-Border Mergers and Acquisitions," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(2), pages 479-515, 06.
  12. Leo A. Grünfeld, 2006. "Multinational Production, Absorptive Capacity, and Endogenous R&D Spillovers," Review of International Economics, Wiley Blackwell, vol. 14(5), pages 922-940, November.
  13. repec:bla:restud:v:75:y:2008:i:2:p:529-557 is not listed on IDEAS
  14. Bjorvatn, Kjetil, 2004. "Economic integration and the profitability of cross-border mergers and acquisitions," European Economic Review, Elsevier, vol. 48(6), pages 1211-1226, December.
  15. Thomas Müller, 2007. "Analyzing Modes of Foreign Entry: Greenfield Investment versus Acquisition," Review of International Economics, Wiley Blackwell, vol. 15(1), pages 93-111, 02.
  16. Holger Görg, 2000. "Analysing foreign market entry – The choice between greenfield investment and acquisitions," Journal of Economic Studies, Emerald Group Publishing, vol. 27(3), pages 165-181, September.
  17. Andersson, Thomas & Svensson, Roger, 1994. " Entry Modes for Direct Investment Determined by the Composition of Firm-Specific Skills," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(4), pages 551-60.
  18. Petit, Maria-Luisa & Sanna-Randaccio, Francesca, 2000. "Endogenous R&D and foreign direct investment in international oligopolies," International Journal of Industrial Organization, Elsevier, vol. 18(2), pages 339-367, February.
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