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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 731:
Cross-Border Mergers and Greenfield Foreign Direct Investment

Ignat Stepanok ()

Abstract: I present a model of international trade and foreign direct investment (FDI), where FDI is comprised of greenfield FDI and mergers and acquisitions (M&A). Working in a monopolistically competitive environment, merging firms do not reduce competition. Mergers are motivated by efficiency gains and transfer of technology and expertise. Following empirical evidence, I model greenfield investors as the more productive group relative to M&A firms. The model has two symmetric countries and generates two-way flows of both M&A and greenfield FDI. Greater proximity to a market makes more firms choose greenfield FDI over M&A when investing there. Empirical evidence supports this result.

Keywords: Foreign direct investment; Mergers; Greenfield; Firm heterogeneity; (follow links to similar papers)

JEL-Codes: F12; F23; O41; (follow links to similar papers)

43 pages, November 22, 2010, Revised October 16, 2013

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