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Entry mode choice and target firm selection: private and collective incentive analysis

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  • Kai Zhao

    (TEPP - Travail, Emploi et Politiques Publiques - CNRS : FR3435 - Université Paris-Est Marne-la-Vallée (UPEMLV), GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - Université du Maine)

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    Abstract

    The purpose of this paper is to formalize the choices of market entry strategy (Export Vs Greenfield investment Vs Cross border M&A) and the target selection (Acquisition of high-productivity firm or low-productivity one) for a foreign firm, and to delineate the relationship between foreign firm's incentive and host government's intention from an Industrial Organization (IO) perspective. It is found that cross border M&A is always the most profitable entry mode under both green- field investment and export credible threats. If greenfield FDI is viable, entering firm prefers acquiring the low-productivity firm, when the integration ability is strong and the technological gap is sufficiently small; otherwise it prefers highproductivity one. Moreover, there is always the ambiguity between the foreign firm's preference and the government's judgment. If export entry option is viable, the variation of trade cost will alter the choice of target firm by the influence of acquisition price. The higher the trade cost, the more likely foreign firm purchases low-technology firm. In addition, the unanimity of private and collective incentive appears under certain circumstances.

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    Bibliographic Info

    Paper provided by HAL in its series Working Papers with number halshs-00856139.

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    Date of creation: May 2011
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    Handle: RePEc:hal:wpaper:halshs-00856139

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    Related research

    Keywords: Integration ability; Cross border M&A; Export; Foreign direct investment; Technological gap; Greenfield investment;

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    1. Facundo Albornoz, 2007. "Subsidy Competition and the Mode of FDI: Acquisition vs Greenfield," Discussion Papers 05-15R, Department of Economics, University of Birmingham.
    2. Ignat Stepanok, 2012. "Cross-Border Mergers and Greenfield Foreign Direct Investment," Kiel Working Papers 1805, Kiel Institute for the World Economy.
    3. Horn, Henrik & Persson, Lars, 1999. "The Equilibrium Ownership of an International Oligopoly," Working Paper Series 515, Research Institute of Industrial Economics.
    4. Neary, J. Peter, 2004. "Cross-Border Mergers as Instruments of Comparative Advantage," Center for European, Governance and Economic Development Research Discussion Papers 34, University of Goettingen, Department of Economics.
    5. Head, Keith & Ries, John, 2008. "FDI as an outcome of the market for corporate control: Theory and evidence," Journal of International Economics, Elsevier, vol. 74(1), pages 2-20, January.
    6. 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.
    7. Gao, Ting, 2005. "Foreign direct investment and growth under economic integration," Journal of International Economics, Elsevier, vol. 67(1), pages 157-174, September.
    8. 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.
    9. Albornoz, Facundo & Corcos, Gregory & Kendall, Toby, 2009. "Subsidy competition and the mode of FDI," Regional Science and Urban Economics, Elsevier, vol. 39(4), pages 489-501, July.
    10. Peter J Buckley & Mark C Casson, 1998. "Analyzing Foreign Market Entry Strategies: Extending the Internalization Approach," Journal of International Business Studies, Palgrave Macmillan, vol. 29(3), pages 539-561, September.
    11. 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.
    12. 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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