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Foreign Direct Investment Modes and Local Backward Linkages

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  • Chrysovalantou Milliou
  • Apostolis Pavlou

Abstract

We study a multinational enterprise’s (MNE) choice of foreign direct investment (FDI) mode in a vertically related market with local input sourcing. We show that the vertical structure of the market and its features play a crucial role for the MNE.s decision: backward linkages, enhanced upstream bargaining power, use of non-linear contracts, and interim unobservability of contract terms favor cross-border acquisition relative to greenfield investment. We also show that while a cross-border acquisition reduces welfare, greenfield investment can be welfare-improving. These results suggest that policy should distinguish among FDI modes as well as among markets with more or less dependence on backward linkages.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2014/wp-cesifo-2014-02/cesifo1_wp4623.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4623.

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Date of creation: 2014
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Handle: RePEc:ces:ceswps:_4623

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Keywords: foreign direct investment; greenfield investment; acquisition; vertical relations; two-part tariffs;

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  1. Jean Gabszewicz & Didier Laussel & Ornella Tarola, 2010. "To acquire, or to compete? An entry dilemma," Working Papers, Sapienza University of Rome, DISS 4/10, Sapienza University of Rome, DISS.
  2. Jordaan, Jacob A., 2011. "FDI, Local Sourcing, and Supportive Linkages with Domestic Suppliers: The Case of Monterrey, Mexico," World Development, Elsevier, Elsevier, vol. 39(4), pages 620-632, April.
  3. Barrios, Salvador & Görg, Holger & Strobl, Eric, 2011. "Spillovers through backward linkages from multinationals: Measurement matters!," European Economic Review, Elsevier, Elsevier, vol. 55(6), pages 862-875, August.
  4. Neary, J Peter, 2004. "Cross-Border Mergers as Instruments of Comparative Advantage," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4325, C.E.P.R. Discussion Papers.
  5. 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.
  6. Sofia Berto Villas-Boas, 2007. "Vertical Relationships between Manufacturers and Retailers: Inference with Limited Data," Review of Economic Studies, Oxford University Press, vol. 74(2), pages 625-652.
  7. Horn, H. & Wolinsky, A., 1988. "Bilateral Monopolies And Incentives For Merger," Papers, Stockholm - International Economic Studies 410, Stockholm - International Economic Studies.
  8. Chrysovalantou Milliou, 2014. "Location for Foreign Direct Investment in Vertically Related Markets," Review of International Economics, Wiley Blackwell, vol. 22(2), pages 326-341, 05.
  9. Milliou, Chrysovalantou & Petrakis, Emmanuel, 2007. "Upstream horizontal mergers, vertical contracts, and bargaining," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 25(5), pages 963-987, October.
  10. Lin, Ping & Saggi, Kamal, 2007. "Multinational firms, exclusivity, and backward linkages," Journal of International Economics, Elsevier, Elsevier, vol. 71(1), pages 206-220, March.
  11. Anil Arya & Brian Mittendorf, 2011. "Disclosure standards for vertical contracts," RAND Journal of Economics, RAND Corporation, vol. 42(3), pages 595-617, 09.
  12. Stéphane Caprice, 2006. "Multilateral Vertical Contracting with an Alternative Supply: The Welfare Effects of a Ban on Price Discrimination," Review of Industrial Organization, Springer, Springer, vol. 28(1), pages 63-80, 02.
  13. Carluccio, Juan & Fally, Thibault, 2010. "Foreign Entry and Spillovers with Technological Incompatibilities in the Supply Chain," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7866, C.E.P.R. Discussion Papers.
  14. Bonnet, Céline & Dubois, Pierre, 2008. "Inference on Vertical Contracts between Manufacturers and Retailers Allowing for Non Linear Pricing and Resale Price Maintenance," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6918, C.E.P.R. Discussion Papers.
  15. Qiu, Larry D. & Tao, Zhigang, 2001. "Export, foreign direct investment, and local content requirement," Journal of Development Economics, Elsevier, Elsevier, vol. 66(1), pages 101-125, October.
  16. Eicher, Theo & Kang, Jong Woo, 2005. "Trade, foreign direct investment or acquisition: Optimal entry modes for multinationals," Journal of Development Economics, Elsevier, Elsevier, vol. 77(1), pages 207-228, June.
  17. Horn, Henrik & Persson, Lars, 2001. "The equilibrium ownership of an international oligopoly," Journal of International Economics, Elsevier, Elsevier, vol. 53(2), pages 307-333, April.
  18. Bjorvatn, Kjetil, 2004. "Economic integration and the profitability of cross-border mergers and acquisitions," European Economic Review, Elsevier, Elsevier, vol. 48(6), pages 1211-1226, December.
  19. Salvatore Piccolo, 2009. "Colluding through Suppliers," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 224, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 08 Apr 2010.
  20. Markusen, James R. & Venables, Anthony J., 1999. "Foreign direct investment as a catalyst for industrial development," European Economic Review, Elsevier, Elsevier, vol. 43(2), pages 335-356, February.
  21. Giroud, Axèle, 2007. "MNEs vertical linkages: The experience of Vietnam after Malaysia," International Business Review, Elsevier, Elsevier, vol. 16(2), pages 159-176, April.
  22. Howard Smith & John Thanassoulis, 2008. "Bargaining Between Retailers and their Suppliers," Economics Series Working Papers 388, University of Oxford, Department of Economics.
  23. Pack, Howard & Saggi, Kamal, 2001. "Vertical technology transfer via international outsourcing," Journal of Development Economics, Elsevier, Elsevier, vol. 65(2), pages 389-415, August.
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