Trade, Foreign Direct Investment or Acquisition: Optimal Entry Modes for Multinationals

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We examine multinationals' optimal entry modes into foreign markets as a function of market size, FDI fixed costs, tariffs and transport costs. Our results highlight why large countries are more likely to attract acquisition investment, while intermediate-sized countries may be served predominantly through trade, even in the presence of high tariffs. Small countries are most likely to experience either FDI or no entry. We also show how these results vary with the competition intensity in the host country. FDI fixed costs, tariffs and transport costs are crucial not only in determining whether to engage in FDI or trade, but they are also shown to influence the acquisition choice as trade and FDI threats influence the acquisition price. Finally we explore the welfare implications of tariff reductions for both the local firm and the multinational and investigate political motives to impose endogenous tariffs that influence not only the welfare of a local firm, but also the entry mode of the multinational. Terms of use: Documents inJEL classification: O0.

Foreign direct investment in vertically related markets

“…A justification for our assumption is that in our setting local production is necessary and the set‐up and operation of two production lines can be too costly. A similar assumption can be found in Eicher and Kang (), Müller () and Gabszewicz et al. ().…”

“…Our paper blends elements of the international economics literature on FDI with elements of the industrial organization literature on vertically related markets. A recent branch of the former literature seeks to understand how a number of market features such as market size (Eicher and Kang , Müller , Qiu and Wang ), FDI policy (Qiu and Wang ), differences in cost efficiency (Mattoo et al. , Eicher and Kang , Müller ) and product quality (Gabszewicz et al.…”

“… We implicitly assume that M commits to that it will not make an acquisition offer to . This modelling approach is common in the literature on cross‐border acquisitions (Eicher and Kang , Müller , Qiu and Wang ). It can be justified by the presence of fixed costs in each acquisition attempt that make it unprofitable for M to make more attempts.…”

Foreign Direct Investment Modes and Local Backward Linkages

“…Our paper blends elements of the international economics literature on FDI with elements of the industrial organization literature on vertically related markets. A recent branch of the former literature seeks to understand how a number of market features, such as market size (Eicher and Kang, 2005;Müller, 2007;Qiu and Wang, 2011), FDI policy (Qiu and Wang, 2011), and di¤erences in cost e¢ ciency (Mattoo et al, 2004;Eicher and Kang, 2005;Müller, 2007) as well as in product quality (Gabszewicz et al, 2011), shape the mode of FDI. 6 This literature has enriched our understanding of the determinants and the host country e¤ects of the di¤erent FDI modes, but it has nothing to say about the role of the characteristics of vertically related markets and of the presence of local backward linkages.…”

Profit taxation and the mode of foreign market entry

“…1 1 A handful of examples include Markusen and Venables (2000), Helpman, Melitz, and Yeaple (2004), Eicher and Kang (2005), and Bergstrand and Egger (2007). See Markusen (2002) for a more comprehensive review of this literature. …”