Investment liberalization — Why a restrictive cross-border merger policy can be counterproductive

Abstract

Investment liberalizing countries are often concerned that cross-border mergers & acquisitions, in contrast to green…eld investments, might have an adverse e¤ect on domestic …rms and consumers. However, given that domestic assets are su¢ ciently scarce, we identify a preemption e¤ect and an asset complementarity e¤ect, which imply that the acquisition price is signi…cantly higher than the domestic seller's pro…ts. Moreover, we show that for the acquisition to take place, the MNE must be su¢ ciently e¢ cient when using the domestic assets, otherwise rivals will expand their business, thereby making the acquisition unpro…table. Consequently, restricting cross-border M&As may also hurt consumers.

Cross‐border Mergers and Greenfield Foreign Direct Investment

“…This is equation (28) in the main text. I substitute for L It and C t = in (21) in order to solve for C t…”

“…The purpose of this paper is to model FDI not only as green…eld investments but also M&A. In the literature on FDI composition and trade, mergers are modeled in an oligopolistic setting as in Neary (2009), where the incentive to merge is based on strategic motives (merging …rms reduce competition), exploiting complementarities among merging parties (…rm headquarters with a speci…c entrepreneurial ability and a production facility with a separate productivity) in a monopolistically competitive market as in Nocke and Yeaple (2007) and (2008) or in an oligopolistic market as in Norbäck and Persson (2007) and (2008). The current model suggests a di¤erent incentive for …rms to merge: transfer of technology and managerial expertise from the more productive …rm to the less productive one.…”

Multinationals, skills, and wage elasticities

“…Firms exploiting complementarities by combining their firm-specific assets through cross-border mergers and acquisitions could also create temporary turbulence (Blonigen 1997;Yeaple 2004, 2007). Complementarities create rents (Norbäck and Persson 2007), and the relationship between wages and employment may change temporarily when rents are shared by owners and employees.…”

The impact of cross-border mergers and acquisitions on the acquirers' R&D — Firm-level evidence

“…Existing empirical evidence on the effects of cross-border M&As is mostly limited to target firms, while little is known about the effects on the acquiring firms. heterogeneity and different motives that determine the choice of foreign market entry modes (Nocke and Yeaple, 2007;Norbäck and Persson, 2007). These models argue that international M&As are mainly driven by the desire to acquire complementary assets and technology while greenfield investments (new firms or production units founded by foreign investors) do not provide direct access to foreign knowledge and are rather undertaken to exploit existing firm-specific assets of the acquiring firm or factor price differences across countries.…”

“…Theoretical trade models with heterogeneous firms that differentiate between the modes of foreign market entry usually argue that greenfield investments are chosen for FDI motivated by production cost differences Yeaple, 2007, 2008). In contrast, these models argue that cross-border M&As are aimed to achieve access to complementary firm-specific assets of acquisition targets (Nocke and Yeaple, 2008), country-specific assets (Norbäck and Persson, 2007), export networks (Blonigen et al, 2012), or capabilities that are non-mobile across countries (Nocke and Yeaple, 2007). 9 If the exploitation of complementary assets entails innovation activities this might increase the returns to these activities and thus spur R&D expenditures.…”