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Cross-Border Mergers and Greenfield Foreign Direct Investment

  • Stepanok, Ignat

    ()

    (Kiel Institute for the World Economy)

I present a model of international trade and foreign direct investment (FDI), where FDI is comprised of greenfield FDI and mergers and acquisitions (M&A). Working in a monopolistically competitive environment, merging firms do not reduce competition. Mergers are motivated by efficiency gains and transfer of technology and expertise. Following empirical evidence, I model greenfield investors as the more productive group relative to M&A firms. The model has two symmetric countries and generates two-way flows of both M&A and greenfield FDI. Greater proximity to a market makes more firms choose greenfield FDI over M&A when investing there. Empirical evidence supports this result.

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Paper provided by Stockholm School of Economics in its series SSE/EFI Working Paper Series in Economics and Finance with number 0731.

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Length: 43 pages
Date of creation: 22 Nov 2010
Date of revision: 29 Nov 2010
Handle: RePEc:hhs:hastef:0731
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