Working Paper: CEPR ID: DP2735
Authors: Pehr-Johan Norbck; Lars Persson
Abstract: This Paper determines the equilibrium market structure in a mixed international oligopoly, where the state enterprise's assets are sold at an auction. The model suggests that low greenfield costs and low trade costs induce foreign acquisitions. The intuition is that domestic firms can then not prevent foreign firms from becoming strong competitors and thus, their willingness to pay for the state assets is low. We also find that profit shifting from domestic to foreign firms generated by National Treatments clauses is partly paid for by the foreign investor in the bidding competition over the state assets. The reason is that the foreign firm pays a price for the state assets equal to the domestic firm's valuation of the assets. But the domestic firm's valuation of the assets is the negative impact on this firm through the decline in profits created by the foreign acquisition.
Keywords: acquisitions; failing firms; FDI; national treatment; privatization
JEL Codes: F23; L13; L33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low greenfield costs (Q52) | increase in foreign acquisitions of state assets (F23) |
| low trade costs (F19) | increase in foreign acquisitions of state assets (F23) |
| low greenfield costs and low trade costs (F12) | decrease in domestic firm's willingness to pay for state assets (H13) |
| foreign acquisitions (F23) | decrease in domestic firm's valuation of state assets (G32) |
| profit shifting from domestic to foreign firms (F23) | influence on bidding process (D44) |
| national treatment clauses (I18) | facilitate profit shifting from domestic to foreign firms (F23) |