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Diplomatic relations and cross-border investments in the European Union

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Abstract

This study investigates the extent to which diplomatic relations affected merger and acquisition (M&A) activities in the EU during the years 2001-2019. Implementing a gravity model, we find a U-inverted relationship between diplomatic distance and M&A activities: (i) a worsening in diplomatic relations fosters M&As, but beyond a certain level (ii) an increase in diplomatic distance slows down M&A flows. While (ii) is in line with the dominant view found in the political relations literature, (i) suggests that cross-border acquisitions, in line with the internalisation theory, are a way for the investing firm to mitigate weak diplomatic relations' related issues, such as access to host markets' information and technology. These findings are confirmed especially when foreign investors target technology-intensive firms, as well as in the most recent years.

Suggested Citation

  • Damioli, Giacomo & Gregori, Wildmer Daniel, 2021. "Diplomatic relations and cross-border investments in the European Union," Working Papers 2021-02, Joint Research Centre, European Commission.
  • Handle: RePEc:jrs:wpaper:202102
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    1. Gregori, Wildmer Daniel & Martinez Cillero, Maria & Nardo, Michela, 2021. "The effects of cross-border acquisitions on firms' productivity in the EU," Working Papers 2021-06, Joint Research Centre, European Commission.

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    More about this item

    Keywords

    Diplomatic relations; Cross-border M&A; EU; Foreign location choices; Gravity model;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F52 - International Economics - - International Relations, National Security, and International Political Economy - - - National Security; Economic Nationalism
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

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