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An Assignment Theory of Foreign Direct Investment

  • Volker Nocke
  • Stephen Yeaple

We develop an assignment theory to analyze the volume and composition of foreign direct investment (FDI). Firms conduct FDI by either engaging in greenfield investment or in cross-border acquisitions. Cross-border acquisitions involve firms trading heterogeneous corporate assets to exploit complementarities, while greenfield FDI involves building a new plant in the foreign market. In equilibrium, greenfield FDI and cross-border acquisitions co-exist, but the composition of FDI between these modes varies with firm and country characteristics. Firms engaging in greenfield investment are systematically more efficient than those engaging in cross-border acquisitions. Furthermore, most FDI takes the form of cross-border acquisitions when factor price differences between countries are small, while greenfield investment plays a more important role for FDI from high-wage into low-wage countries. These results capture important features of the data.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11003.

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Date of creation: Dec 2004
Date of revision:
Publication status: published as Volker Nocke & Stephen Yeaple, 2008. "An Assignment Theory of Foreign Direct Investment," Review of Economic Studies, Blackwell Publishing, vol. 75(2), pages 529-557, 04.
Handle: RePEc:nbr:nberwo:11003
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