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Unlocking the Value of Cross-Border Mergers and Acquisitions

  • Steven Brakman
  • Gus Garita
  • Harry Garretsen
  • Charles van Marrewijk

Most FDI takes place between the developed countries, which suggests that the market-seeking motive is important for understanding FDI. However, given the stylized fact that trade barriers (e.g. transportation costs and financial barriers) have declined over the past 20 years, models that aim to explain market-seeking FDI tend to predict a decline in FDI. Neary (2008) offers two explanations for this puzzle: (1) the export platform motive (where firms gain access to an integrated market by investing in one of the “integrated” countries); (2) Neary’s (2007) GOLE model, which explains cross-border mergers and acquisitions (this model is of interest since most FDI comes in the form of M&As). By using a gravity framework, where we also deal with the “zero gravity problem”, we confirm the predictions of the GOLE model.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2294.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2294
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  1. Reinhart, Carmen & Calvo, Guillermo & Fernandez Arias, Eduardo & Talvi, Ernesto, 2001. "The Growth-Interest Rate Cycle in the United States and its Consequences for Emerging Markets," MPRA Paper 9075, University Library of Munich, Germany.
  2. Froot, Kenneth A & Stein, Jeremy C, 1991. "Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1191-217, November.
  3. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Boston College Working Papers in Economics 593, Boston College Department of Economics.
  4. Montiel, Peter & Reinhart, Carmen M., 1999. "Do capital controls and macroeconomic policies influence the volume and composition of capital flows? Evidence from the 1990s," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 619-635, August.
  5. Chinn,M.D. & Ito,H., 2005. "What matters for financial development? : capital controls, institutions, and interactions," Working papers 4, Wisconsin Madison - Social Systems.
  6. J. Peter Neary, 2007. "Cross-Border Mergers as Instruments of Comparative Advantage," Review of Economic Studies, Oxford University Press, vol. 74(4), pages 1229-1257.
  7. Menzie D. Chinn & Hiro Ito, 2002. "Capital Account Liberalization, Institutions and Financial Development: Cross Country Evidence," NBER Working Papers 8967, National Bureau of Economic Research, Inc.
  8. Steven Brakman & Harry Garretsen & Charles van Marrewijk, 2006. "Cross-Border Mergers & Acquisitions: The Facts as a Guide for International Economics," CESifo Working Paper Series 1823, CESifo Group Munich.
  9. Steven Brakman & Harry Garretsen (ed.), 2008. "Foreign Direct Investment and the Multinational Enterprise," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262026457, June.
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