Endogenous Market Structure and Foreign Market Entry

Abstract

Models dealing with cross-border acquisitions versus greenfield investment usually assume that the entry of a foreign firm into a market has effects on the outputs of all domestic firms in that market, but exit or entry of local firms is not considered. The purpose of this paper is to re-examine the acquisition versus greenfield versus exporting question under fixed versus free entry assumptions for local firms. Our finding is that greenfield entry and exporting options are more attractive relative to acquisition when the local market structure adjusts to foreign entry through local entry or exit than when it is fixed. The entering foreign firm may do better or worse under free entry versus a fixed market structure depending on its optimal choice under the latter assumption.

Surges and stops in greenfield and M&A FDI flows to developing countries: analysis by mode of entry

“…4 Importantly, whereas most global FDI waves have been associated with an increase in mergers and acquisitions (M&A) (Brakman et al 2006), the extent to which greenfield (GF) investments contribute to surges and stops in FDI in developing countries remains unclear. It is, however, important to explore this question in the context of developing countries because GF investments dominate FDI flows to the developing world (Markusen and Stähler 2011;UNCTAD 2012), especially in resource-rich countries where local companies often have privileged access to the resources and, hence, host country government policies encourage GF investments into joint ventures. It is also true in low-income countries where large labor cost differentials between the home and host countries and the absence of attractive corporate assets make GF FDI more likely as an entry mode.…”

Optimal Trade Policy under Endogenous Foreign Entry

“…St€ ahler and Upmann (2008) have investigated EMSs in a game between two governments that can regulate entry, but their emphasis is not on the optimal trade policy. Lahiri and Ono (1998a, b) and Kayalica and Lahiri (2007) provided the first analysis of optimal policy in markets with endogenous entry of foreign firms, and Markusen and St€ ahler (2011) have analysed the entry of multinationals in these markets. Etro (2011) has characterised the optimal and equilibrium export subsidies for a third market with EMSs.…”

“…First of all, notice that the result holds in case of asymmetries between domestic and international firms: this implies that transport costs and differences in the marginal cost of production between domestic and international firms do not affect the neutrality of the subsidies to domestic production. Lahiri and Ono (1998a, b), Kayalica and Lahiri (2007) and Markusen and St€ ahler (2011) have analysed the role of cost-efficient multinationals in markets with endogenous entry, mostly focusing on Cournot competition with linear demand. In this setting, the neutrality of policies on the domestic firms applies, but most of the results generalise to our more general microfoundations.…”

“…holds for the general class of models analysed here. Markusen and St€ ahler (2011) have analysed the impact of FDI by a low-cost multinational in an international market where entry is endogenous. The analysis can be generalised beyond the case of homogeneous goods and linear demand.…”

Productivity and the Internationalization of Firms – Cross-Border Acquisitions Versus Greenfield Investments

“…Different reasons arise for firms to choose either greenfield entry or cross-border acquisitions. Apart from strategic considerations -greenfield investments add a new firm to the foreign market, whereas an acquisition can be thought of as a change in ownership (Markusen & Stähler, 2009;Görg, 2000) -one important difference is the acquisition of complementary assets.…”