Working Paper: CEPR ID: DP6102
Authors: Pehr-Johan Norbck; Lars Persson
Abstract: This paper studies how the surplus generated by the globalization process is divided between MNEs and owners of domestic assets. We construct an oligopoly model where the equilibrium acquisition pattern, the acquisition price and firms' greenfield investments are endogenously determined. Acquisition entry is shown to be more likely when the complementarity between domestic and foreign assets is high. However, we show that such acquisitions might have a low profitability, since the bidding competition over the domestic assets is then so fierce that the firms involved would be better off not starting a bidding war. Risks associated with different entry modes are also examined.
Keywords: FDI; greenfield investments; investment liberalization; mergers and acquisitions
JEL Codes: F23; G34; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high complementarity between domestic and foreign assets (G15) | likelihood of acquisition entry (L26) |
| high complementarity between domestic and foreign assets (G15) | expected profitability of acquisitions (G31) |
| intense bidding competition (D44) | acquisition price exceeds acquirer's expected product market profit (G34) |
| complementarity increases (D10) | expected product market profit for the acquirer (G34) |
| acquisition entry (M41) | market risk compared to greenfield entry (F23) |
| acquisition entry (M41) | competition and lower post-acquisition profits (L49) |