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Multinational enterprises, cross-border acquisitions, and government policy

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  • Gautam Bose

    ()
    (School of Economics, The University of New South Wales)

  • Sudipto Dasgupta

    ()
    (Department of Finance, Hong Kong University of Science and Technology)

  • Arghya Ghosh

    ()
    (School of Economics, The University of New South Wales)

Abstract

This paper analyzes the optimality of policy specifications used to regulate the acquisition and operation of local firms by multinational enterprises (MNE). We emphasize the consequence of such regulation on the price of the domestic firm in the market for corporate control. We show that it is optimal to impose ceilings on foreign ownership of domestic firms when the government's objective is to maximize domestic shareholder profits. While the optimal ceiling is high enough for the MNE to gain control of the domestic firm, it nevertheless influences the price that the MNE must pay for the domestic firm's shares to the advantage of the domestic shareholders. Restrictions on transfer pricing are either irrelevant or strictly suboptimal. The consequences of alternative specifications of the government's objective function are also analyzed.

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Bibliographic Info

Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2008-22.

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Length: 23 pages
Date of creation: Oct 2008
Date of revision:
Handle: RePEc:swe:wpaper:2008-22

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Keywords: Acquisition; Control; Multinational Enterprises; Transfer pricing;

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  1. Horn, H. & Levinsohn, J., 1998. "Merger Policies and Trade Liberalization," Working Papers 420, Research Seminar in International Economics, University of Michigan.
  2. Keith Head & John Ries, 1997. "International Mergers and Welfare under Decentralized Competition Policy," Canadian Journal of Economics, Canadian Economics Association, vol. 30(4), pages 1104-23, November.
  3. Kjell Erik Lommerud & Odd Rune Straume & Lars Sørgard, 2006. "National versus international mergers in unionized oligopoly," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 212-233, 03.
  4. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  5. Norbäck, Pehr-Johan & Persson, Lars, 2002. "Investment Liberalization - Who Benefits from Cross Border Mergers," CEPR Discussion Papers 3166, C.E.P.R. Discussion Papers.
  6. Horn, Henrik & Persson, Lars, 1999. "The Equilibrium Ownership of an International Oligopoly," Working Paper Series 515, Research Institute of Industrial Economics.
  7. Norbäck, Pehr-Johan & Persson, Lars, 2006. "Investment Lilberalization - Why a Restrictive Cross-Border Merger Policy can be Counterproductive," Working Paper Series 666, Research Institute of Industrial Economics.
  8. Ethier, Wilfred J, 1986. "The Multinational Firm," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 805-33, November.
  9. Mattoo, Aaditya & Olarreaga, Marcelo & Saggi, Kamal, 2001. "Mode of Foreign Entry, Technology Transfer, and FDI Policy," CEPR Discussion Papers 2870, C.E.P.R. Discussion Papers.
  10. Prusa, Thomas J., 1990. "An incentive compatible approach to the transfer pricing problem," Journal of International Economics, Elsevier, vol. 28(1-2), pages 155-172, February.
  11. Falvey, Rodney E. & Harold O. Fried, 1986. "National ownership requirements and transfer pricing," Journal of Development Economics, Elsevier, vol. 24(2), pages 249-254, December.
  12. Barros, Pedro P. & Cabral, Luis, 1994. "Merger policy in open economies," European Economic Review, Elsevier, vol. 38(5), pages 1041-1055, May.
  13. Sanford J. Grossman & Oliver D. Hart, 1980. "Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 42-64, Spring.
  14. Svejnar, Jan & Smith, Stephen C, 1984. "The Economics of Joint Ventures in Less Developed Countries," The Quarterly Journal of Economics, MIT Press, vol. 99(1), pages 149-67, February.
  15. Pehr-Johan Norbäck & Lars Persson, 2008. "Globalization and profitability of cross-border mergers and acquisitions," Economic Theory, Springer, vol. 35(2), pages 241-266, May.
  16. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-189, Spring.
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