Ignat Stepanok: Kiel Institute for the World Economy, Postal: Hindenburgufer 66, D-24105 Kiel, Germany
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.
43 pages, First version: November 22, 2010. Revised: October 16, 2013. Earlier revisions: November 29, 2010, November 14, 2012.
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