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An Assignment Theory of Foreign Direct Investment

  • Volker Nocke
  • Stephen Yeaple

We develop an assignment theory to analyse 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 setting up a new production division in the foreign country. In equilibrium, greenfield FDI and cross-border acquisitions coexist within the same industry, 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 production-cost differences between countries are small, while greenfield investment plays a more important role for FDI from high-cost into low-cost countries. These results capture important features of the data. Copyright 2008, Wiley-Blackwell.

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File URL: http://hdl.handle.net/10.1111/j.1467-937X.2008.00480.x
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Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 75 (2008)
Issue (Month): 2 ()
Pages: 529-557

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Handle: RePEc:oup:restud:v:75:y:2008:i:2:p:529-557
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  1. 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.
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  3. Volker Nocke & Stephen Yeaple, 2004. "An Assignment Theory of Foreign Direct Investment," NBER Working Papers 11003, National Bureau of Economic Research, Inc.
  4. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jenson & Samuel Kortum, 2000. "Plants and Productivity in International Trade," NBER Working Papers 7688, National Bureau of Economic Research, Inc.
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  12. J Peter Neary, 2004. "Cross-Border Mergers as Instruments of Comparative Advantage," Working Papers 200404, School Of Economics, University College Dublin.
  13. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
  14. Grossmann, G.M. & Maggi, G., 1998. "Diversity and Trade," Papers 192, Princeton, Woodrow Wilson School - Public and International Affairs.
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  17. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2004. "Dissecting trade: firms, industries, and export destinations," Staff Report 332, Federal Reserve Bank of Minneapolis.
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  19. Volker Nocke & Stephen Yeaple, 2004. "Mergers and the Composition of International Commerce," NBER Working Papers 10405, National Bureau of Economic Research, Inc.
  20. 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.
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