Bertrand, Olivier (Graduate School of Management of St Petersburg State University and Toulouse School of Economics) Nilsson Hakkala, Katariina (Helsinki School of Economics and Government Institute for Economic Research (VATT)) Norbäck, Pehr-Johan () (Research Institute of Industrial Economics (IFN)) Persson, Lars () (Research Institute of Industrial Economics (IFN))
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We analyze how the entry mode of Foreign Direct Investments (FDI) affects affiliate R&D activities. Using unique affiliate level data for Swedish multinational firms, we first present empirical evidence that acquired affiliates have a higher level of R&D intensity than greenfield (start-up) affiliates. This gap persists over time and with the age of the affiliates, as well as for different firm types and industries. To explain this finding, we develop an acquisition-investment-oligopoly model where we show that for a foreign acquisition to take place in equilibrium, the acquiring MNE must invest sufficiently in sequential R&D in the affiliate. Otherwise, rivals will expand their business, thus making the acquisition unprofitable. Two additional predictions of the model – that foreign firms acquire high-quality domestic firms and that the gap in R&D between acquired and greenfield affiliates decreases in acquisition transaction costs – are consistent with the data.
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Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number
772.
Length: 48 pages Date of creation: 17 Oct 2008 Date of revision: Handle: RePEc:hhs:iuiwop:0772
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Find related papers by JEL classification: F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General O30 - Economic Development, Technological Change, and Growth - - Technological Change - - - General
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