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Core competencies, matching, and the structure of foreign direct investment: an update

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  • Federico J. Díez
  • Alan C. Spearot

Abstract

We develop a matching model of foreign direct investment to study how multinational firms choose between greenfield investment, acquisitions, and joint ownership. Firms must invest in a continuum of tasks to bring a product to market. Each firm possesses a core competency in the task space, but the firms are otherwise identical. For acquisitions and joint ownership, a multinational enterprise (MNE) must match with a local partner that may provide complementary expertise within the task space. However, under joint ownership, investment in tasks is shared by multiple owners and hence is subject to a holdup problem that varies with contract intensity. In equilibrium, ex ante identical multinationals enter the local matching market, and ex post, three different types of heterogeneous firms arise. Specifically, the worst matches are forgone and the MNEs invest greenfield; the middle matches operate under joint ownership; and the best matches integrate via full acquisition. We link the firm-level model to cross-country and industry predictions related to development and contract intensity, respectively, where greater contract intensity and a relatively more developed target market yield a higher share of full acquisitions. Using data on partial and full acquisitions across industries and countries, we find robust support for both predictions.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 12-8.

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Date of creation: 2012
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Handle: RePEc:fip:fedbwp:12-8

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Keywords: Investments; Foreign ; International business enterprises;

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References

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  1. Grossman, Gene & Helpman, Elhanan, 2002. "Outsourcing in a Global Economy," CEPR Discussion Papers 3165, C.E.P.R. Discussion Papers.
  2. 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.
  3. Kogut, Bruce, 1989. "The Stability of Joint Ventures: Reciprocity and Competitive Rivalry," Journal of Industrial Economics, Wiley Blackwell, vol. 38(2), pages 183-98, December.
  4. Holger Breinlich, 2006. "Trade Liberalization and Industrial Restructuring through Mergers and Acquisitions," CEP Discussion Papers dp0717, Centre for Economic Performance, LSE.
  5. Sinha, Uday Bhanu, 2001. "International joint venture, licensing and buy-out under asymmetric information," Journal of Development Economics, Elsevier, vol. 66(1), pages 127-151, October.
  6. Raff, Horst & Ryan, Michael & Stähler, Frank, 2009. "The choice of market entry mode: Greenfield investment, M&A and joint venture," International Review of Economics & Finance, Elsevier, vol. 18(1), pages 3-10, January.
  7. Alan C. Spearot, 2012. "Firm Heterogeneity, New Investment and Acquisitions," Journal of Industrial Economics, Wiley Blackwell, vol. 60(1), pages 1-45, 03.
  8. Bircan, Çağatay, 2011. "Optimal Degree of Foreign Ownership under Uncertainty," Working Papers 617, Research Seminar in International Economics, University of Michigan.
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Cited by:
  1. Marc-Andreas Muendler, 2013. "Export or Merge? Proximity vs. Concentration in Product Space," CESifo Working Paper Series 4558, CESifo Group Munich.

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