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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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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2014/wp-cesifo-2014-02/cesifo1_wp4623.pdf
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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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  1. Jean Gabszewicz & Didier Laussel & Ornella Tarola, 2010. "To acquire, or to compete? An entry dilemma," Working Papers 4/10, Sapienza University of Rome, DISS.
  2. Bonnet, Céline & Dubois, Pierre, 2008. "Inference on Vertical Contracts between Manufacturers and Retailers Allowing for Non Linear Pricing and Resale Price Maintenance," IDEI Working Papers 519, Institut d'Économie Industrielle (IDEI), Toulouse, revised Dec 2008.
  3. James R. Markusen & Anthony J. Venables, 1997. "Foreign Direct Investment as a Catalyst for Industrial Development," NBER Working Papers 6241, National Bureau of Economic Research, Inc.
  4. Anil Arya & Brian Mittendorf, 2011. "Disclosure standards for vertical contracts," RAND Journal of Economics, RAND Corporation, vol. 42(3), pages 595-617, 09.
  5. J Peter Neary, 2004. "Cross-Border Mergers as Instruments of Comparative Advantage," Working Papers 200404, School of Economics, University College Dublin.
  6. Barrios, Salvador & Görg, Holger & Strobl, Eric, 2009. "Spillovers through backward linkages from multinationals: Measurement matters!," CEPR Discussion Papers 7491, C.E.P.R. Discussion Papers.
  7. Jordaan, Jacob A., 2011. "FDI, Local Sourcing, and Supportive Linkages with Domestic Suppliers: The Case of Monterrey, Mexico," World Development, Elsevier, vol. 39(4), pages 620-632, April.
  8. Giroud, Axèle, 2007. "MNEs vertical linkages: The experience of Vietnam after Malaysia," International Business Review, Elsevier, vol. 16(2), pages 159-176, April.
  9. Stéphane Caprice, 2006. "Multilateral Vertical Contracting with an Alternative Supply: The Welfare Effects of a Ban on Price Discrimination," Review of Industrial Organization, Springer, vol. 28(1), pages 63-80, 02.
  10. Sofia Berto Villas-Boas, 2007. "Vertical Relationships between Manufacturers and Retailers: Inference with Limited Data," Review of Economic Studies, Oxford University Press, vol. 74(2), pages 625-652.
  11. Pack, Howard & Saggi, Kamal, 2001. "Vertical technology transfer via international outsourcing," Journal of Development Economics, Elsevier, vol. 65(2), pages 389-415, August.
  12. Thomas Müller, 2007. "Analyzing Modes of Foreign Entry: Greenfield Investment versus Acquisition," Review of International Economics, Wiley Blackwell, vol. 15(1), pages 93-111, 02.
  13. Horn, H. & Wolinsky, A., 1988. "Bilateral Monopolies And Incentives For Merger," Papers 410, Stockholm - International Economic Studies.
  14. Lin, Ping & Saggi, Kamal, 2007. "Multinational firms, exclusivity, and backward linkages," Journal of International Economics, Elsevier, vol. 71(1), pages 206-220, March.
  15. Carluccio, Juan & Fally, Thibault, 2010. "Foreign Entry and Spillovers with Technological Incompatibilities in the Supply Chain," CEPR Discussion Papers 7866, C.E.P.R. Discussion Papers.
  16. Horn, Henrik & Persson, Lars, 1999. "The Equilibrium Ownership of an International Oligopoly," Working Paper Series 515, Research Institute of Industrial Economics.
  17. Salvatore Piccolo & Jeanine Miklós-Thal, 2012. "Colluding through suppliers," RAND Journal of Economics, RAND Corporation, vol. 43(3), pages 492-513, 09.
  18. Chrysovalantou Milliou, 2014. "Location for Foreign Direct Investment in Vertically Related Markets," Review of International Economics, Wiley Blackwell, vol. 22(2), pages 326-341, 05.
  19. Howard Smith & John Thanassoulis, 2008. "Bargaining Between Retailers and their Suppliers," Economics Series Working Papers 388, University of Oxford, Department of Economics.
  20. 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.
  21. Eicher, Theo & Kang, Jong Woo, 2005. "Trade, foreign direct investment or acquisition: Optimal entry modes for multinationals," Journal of Development Economics, Elsevier, vol. 77(1), pages 207-228, June.
  22. Bjorvatn, Kjetil, 2004. "Economic integration and the profitability of cross-border mergers and acquisitions," European Economic Review, Elsevier, vol. 48(6), pages 1211-1226, December.
  23. Chrysovalantou Milliou, 2013. "Location of Foreign Direct Investment in Vertically Related Markets," CESifo Working Paper Series 4117, CESifo Group Munich.
  24. Qiu, Larry D. & Tao, Zhigang, 2001. "Export, foreign direct investment, and local content requirement," Journal of Development Economics, Elsevier, vol. 66(1), pages 101-125, October.
  25. 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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