Foreign market entry and merger policies with economies of scale

This paper investigates the equilibrium entry mode of a foreign firm into a domestic market that can export, do a greenfield investment or acquire one or two domestic firms. We also scrutinize the optimal merger policy of the host country and whether it can induce the most preferred entry mode. We find that acquisitions are more likely with sufficiently large economies of scale, and this is also the endogenous outcome of optimal merger policies. Furthermore, the host government can induce the most preferred market structure if and only if the foreign firm always wants to acquire at least one domestic firm. Our findings suggest that a strict merger policy is more likely to be optimal as the greenfield investment cost rises. Finally, the national merger policy can be excessive as monopolization may raise aggregate world welfare if the benefits from economies of scale are substantial.