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Foreign Direct Investment Modes and Local Backward Linkages

  • Chrysovalantou Milliou
  • Apostolis Pavlou

We study a multinational enterprise’s (MNE) choice of foreign direct investment (FDI) mode in a vertically related market with local input sourcing. We show that the vertical structure of the market and its features play a crucial role for the MNE.s decision: backward linkages, enhanced upstream bargaining power, use of non-linear contracts, and interim unobservability of contract terms favor cross-border acquisition relative to greenfield investment. We also show that while a cross-border acquisition reduces welfare, greenfield investment can be welfare-improving. These results suggest that policy should distinguish among FDI modes as well as among markets with more or less dependence on backward linkages.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4623.

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Date of creation: 2014
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Handle: RePEc:ces:ceswps:_4623
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  17. Milliou, Chrysovalantou & Petrakis, Emmanuel, 2007. "Upstream horizontal mergers, vertical contracts, and bargaining," International Journal of Industrial Organization, Elsevier, vol. 25(5), pages 963-987, October.
  18. Theo Eicher & Jong Woo Kang, 2004. "Trade, Foreign Direct Investment or Acquisition: Optimal Entry Modes for Multinationals," CESifo Working Paper Series 1174, CESifo Group Munich.
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