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An Assignment Theory of Foreign Direct Investment

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  • Stephen Yeaple
  • Volker Nocke

    ()
    (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 Society for Economic Dynamics in its series 2005 Meeting Papers with number 146.

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Date of creation: 2005
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Handle: RePEc:red:sed005:146

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

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References

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  1. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2003. "Plants and Productivity in International Trade," American Economic Review, American Economic Association, vol. 93(4), pages 1268-1290, September.
  2. Blonigen, Bruce A, 1997. "Firm-Specific Assets and the Link between Exchange Rates and Foreign Direct Investment," American Economic Review, American Economic Association, vol. 87(3), pages 447-65, June.
  3. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2004. "Dissecting trade: firms, industries, and export destinations," Staff Report 332, Federal Reserve Bank of Minneapolis.
  4. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
  5. Vojislav Maksimovic, 2001. "The Market for Corporate Assets: Who Engages in Mergers and Asset Sales and Are There Efficiency Gains?," Journal of Finance, American Finance Association, vol. 56(6), pages 2019-2065, December.
  6. Antras, Pol & Helpman, Elhanan, 2004. "Global Sourcing," Scholarly Articles 3196327, Harvard University Department of Economics.
  7. Gene M. Grossman & Elhanan Helpman, 2002. "Managerial Incentives and the International Organization of Production," Harvard Institute of Economic Research Working Papers 1987, Harvard - Institute of Economic Research.
  8. Antras, Pol, 2003. "Firms, Contracts, and Trade Structure," Scholarly Articles 3196328, Harvard University Department of Economics.
  9. Neary, J Peter, 2004. "Cross-Border Mergers as Instruments of Comparative Advantage," CEPR Discussion Papers 4325, C.E.P.R. Discussion Papers.
  10. 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.
  11. Yeaple, Stephen & Helpman, Elhanan & Melitz, Marc, 2004. "Export versus FDI with Heterogeneous Firms," Scholarly Articles 3229098, Harvard University Department of Economics.
  12. repec:rus:hseeco:121607 is not listed on IDEAS
  13. Grossmann, G.M. & Maggi, G., 1998. "Diversity and Trade," Papers 192, Princeton, Woodrow Wilson School - Public and International Affairs.
  14. Volker Nocke & Stephen Yeaple, 2004. "Mergers and the Composition of International Commerce," NBER Working Papers 10405, National Bureau of Economic Research, Inc.
  15. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Scholarly Articles 3445092, Harvard University Department of Economics.
  16. 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.
  17. repec:hrv:faseco:4784029 is not listed on IDEAS
  18. Stephen Yeaple & Volker Nocke, 2005. "An Assignment Theory of Foreign Direct Investment," 2005 Meeting Papers 146, Society for Economic Dynamics.
  19. repec:rus:hseeco:121605 is not listed on IDEAS
  20. repec:rus:hseeco:122439 is not listed on IDEAS
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