Working Paper: CEPR ID: DP7567
Authors: James R. Markusen; Frank Stähler
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.
Keywords: cross-border acquisitions; endogenous market structures; foreign direct investment; multinational firms
JEL Codes: F12; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Foreign firm entry (greenfield) (F23) | Local firm exit (L26) |
| Foreign firm entry (acquisition) (F23) | Local firm entry (L26) |
| Foreign firm entry (any mode) (F23) | Number of local firms (entry or exit) (L26) |
| Foreign firm entry (greenfield) (F23) | Market structure adjustment (D49) |
| Foreign firm entry (acquisition) (F23) | Market structure adjustment (D49) |
| Market structure adjustment (D49) | Local firm exit (L26) |
| Market structure adjustment (D49) | Local firm entry (L26) |