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An Assignment Theory of Foreign Direct Investment

  • Stephen Yeaple
  • Volker Nocke

    ()

    (Department of Economics University of Pennsylvania)

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 Society for Economic Dynamics in its series 2005 Meeting Papers with number 146.

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Date of creation: 2005
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Handle: RePEc:red:sed005:146
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  14. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2004. "Dissecting Trade: Firms, Industries, and Export Destinations," American Economic Review, American Economic Association, vol. 94(2), pages 150-154, May.
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  18. repec:hrv:faseco:4784029 is not listed on IDEAS
  19. repec:rus:hseeco:121605 is not listed on IDEAS
  20. repec:rus:hseeco:121607 is not listed on IDEAS
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