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Good and bad FDI: The growth effects of greenfield investment and mergers and acquisitions in developing countries

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  • Philipp Harms
  • Pierre-Guillaume Méon

Abstract

We explore the effect of foreign direct investment on economic growth in developing countries, distinguishing between mergers and acquisitions (“M&As”) and “greenfield” investment. A simple model underlines that, unlike greenfield investment, M&As partly represent a rent accruing to previous owners, and do not necessarily contribute to expanding the host country’s capital stock. Greenfield FDI should therefore have a stronger impact on growth than M&A sales. This hypothesis is supported by our empirical results, which show that greenfield FDI enhances growth, while M&As have no effect, at best, in a panel of up to 78 developing and emerging countries over 1987-2005.

Suggested Citation

  • Philipp Harms & Pierre-Guillaume Méon, 2014. "Good and bad FDI: The growth effects of greenfield investment and mergers and acquisitions in developing countries," Working Papers CEB 14-021, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:sol:wpaper:2013/174783
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    3. Burger, Martijn J. & Ianchovichina, Elena I., 2014. "Surges and stops in FDI flows to developing countries : does the mode of entry make a difference ?," Policy Research Working Paper Series 6771, The World Bank.
    4. Bougharriou, Nouha & Benayed, Walid & Gabsi, Foued Badr, 2019. "The democracy and economic growth nexus: Do FDI and government spending matter? Evidence from the Arab world," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 13, pages 1-29.
    5. Cristina JUDE & Grégory LEVIEUGE, 2013. "Growth Effect of FDI in Developing Economies: the Role of Institutional Quality," LEO Working Papers / DR LEO 2251, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    6. Ronald B. Davies & Rodolphe Desbordes & Anna Ray, 2018. "Greenfield versus merger and acquisition FDI: Same wine, different bottles?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 51(4), pages 1151-1190, November.
    7. Shima'a Hanafy & Marcus Marktanner, 2015. "Sectoral FDI, Absorptive Capacity and Economic Growth — Empirical Evidence from Egyptian Governorates," MAGKS Papers on Economics 201537, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    8. Asian Development Bank Institute, 2017. "Asian Economic Integration Report 2016," Working Papers id:11730, eSocialSciences.
    9. Shima’a Hanafy & Marcus Marktanner, 2019. "Sectoral FDI, absorptive capacity and economic growth – empirical evidence from Egyptian governorates," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 28(1), pages 57-81, January.
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    More about this item

    Keywords

    Growth; foreign direct investmen; mergers and acquisitions; greenfield investment;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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