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An Assignment Theory of Foreign Direct Investment

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  • Volker Nocke

    ()
    (Department of Economics, University of Pennsylvania)

  • Stephen Yeaple

    ()
    (Department of Economics, University of Pennsylvania)

Abstract

We develop an assignment theory to analyze the volume and composition of foreign direct investment (FDI). Firms conduct FDI by either engaging in greenfield investment or in cross-border acquisitions. Cross-border acquisitions involve firms trading heterogeneous corporate assets to exploit complementarities, while greenfield FDI involves building a new plant in the foreign market. In equilibrium, greenfield FDI and cross-border acquisitions co-exist, but the composition of FDI between these modes varies with firm and country characteristics. Firms engaging in greenfield investment are systematically more efficient than those engaging in cross-border acquisitions. Furthermore, most FDI takes the form of cross-border acquisitions when factor price differences between countries are small, while greenfield investment plays a more important role for FDI from high-wage into low-wage countries. These results capture important features of the data.

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Bibliographic Info

Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 05-003.

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Length: 31 pages
Date of creation: 07 Dec 2004
Date of revision:
Handle: RePEc:pen:papers:05-003

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Keywords: Foreign Direct Investment; Mergers; Greenfield; Firm Heterogeneity;

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References

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  1. Stephen Yeaple & Volker Nocke, 2005. "An Assignment Theory of Foreign Direct Investment," 2005 Meeting Papers, Society for Economic Dynamics 146, Society for Economic Dynamics.
  2. Antràs, Pol & Helpman, Elhanan, 2004. "Global Sourcing," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4170, C.E.P.R. Discussion Papers.
  3. Antras, Pol, 2003. "Firms, Contracts, and Trade Structure," Scholarly Articles 3196328, Harvard University Department of Economics.
  4. Melitz, Marc J, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3381, C.E.P.R. Discussion Papers.
  5. Grossman, Gene & Helpman, Elhanan, 2003. "Managerial Incentives and the International Organization of Production," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3737, C.E.P.R. Discussion Papers.
  6. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2004. "Dissecting trade: firms, industries, and export destinations," Staff Report, Federal Reserve Bank of Minneapolis 332, Federal Reserve Bank of Minneapolis.
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  8. Giovanni Maggi & Gene M. Grossman, 2000. "Diversity and Trade," American Economic Review, American Economic Association, American Economic Association, vol. 90(5), pages 1255-1275, December.
  9. Volker Nocke & Stephen Yeaple, 2004. "Mergers and the Composition of International Commerce," NBER Working Papers 10405, National Bureau of Economic Research, Inc.
  10. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2000. "Plants and Productivity in International Trade," Boston University - Institute for Economic Development, Boston University, Institute for Economic Development 105, Boston University, Institute for Economic Development.
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  12. Gordon M Phillips & Vojislav Maksimovic, 1999. "The Market for Corporate Assets: Who Engages in Mergers and Asset Sales and are there Efficiency Gains?," Working Papers 99-12, Center for Economic Studies, U.S. Census Bureau.
  13. Yeaple, Stephen & Helpman, Elhanan & Melitz, Marc, 2004. "Export versus FDI with Heterogeneous Firms," Scholarly Articles 3229098, Harvard University Department of Economics.
  14. repec:rus:hseeco:121605 is not listed on IDEAS
  15. J Peter Neary, 2004. "Cross-Border Mergers as Instruments of Comparative Advantage," Working Papers, School Of Economics, University College Dublin 200404, School Of Economics, University College Dublin.
  16. Blonigen, Bruce A, 1997. "Firm-Specific Assets and the Link between Exchange Rates and Foreign Direct Investment," American Economic Review, American Economic Association, American Economic Association, vol. 87(3), pages 447-65, June.
  17. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 92(3), pages 451-71, June.
  18. Gordon H. Hanson & Raymond J. Mataloni & Matthew J. Slaughter, 2005. "Vertical Production Networks in Multinational Firms," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 664-678, November.
  19. repec:hrv:faseco:4784029 is not listed on IDEAS
  20. Richard E. Caves, 1998. "Industrial Organization and New Findings on the Turnover and Mobility of Firms," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 1947-1982, December.
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