Working Paper: NBER ID: w11003
Authors: Volker Nocke; Stephen Yeaple
Abstract: We develop an assignment theory to analyze the volume and composition of foreign direct investment (FDI). Firms conduct FDI by either engaging in greenfield investment or in cross-border acquisitions. Cross-border acquisitions involve firms trading heterogeneous corporate assets to exploit complementarities, while greenfield FDI involves building a new plant in the foreign market. In equilibrium, greenfield FDI and cross-border acquisitions co-exist, but the composition of FDI between these modes varies with firm and country characteristics. Firms engaging in greenfield investment are systematically more efficient than those engaging in cross-border acquisitions. Furthermore, most FDI takes the form of cross-border acquisitions when factor price differences between countries are small, while greenfield investment plays a more important role for FDI from high-wage into low-wage countries. These results capture important features of the data.
Keywords: No keywords provided
JEL Codes: F12; F14; F23; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| greenfield FDI (F23) | firm efficiency (D22) |
| cross-border acquisitions (F23) | firm efficiency (D22) |
| high-cost countries (O57) | cross-border acquisitions (F23) |
| relative supply of corporate assets in low-wage countries (F66) | greenfield FDI (F23) |
| factor price differences (F16) | mode of FDI (F23) |
| vanishing factor price differences (F16) | cross-border acquisitions (F23) |