Working Paper: NBER ID: w22546
Authors: Bruce A. Blonigen; Donghyun Lee
Abstract: While there has been significant research to explore the determinants (and frictions) of foreign direct investment (FDI), past literature primarily focuses on country-wide FDI patterns with little examination of sectoral heterogeneity in FDI. Anecdotally, there is substantial sectoral heterogeneity in FDI patterns. For example, a substantial share of FDI (around 40-50%) is in the manufacturing sector, yet manufacturing accounts for a relatively small share of production activity in the developed economies responsible for most cross-border M&A. In this paper, we extend the Head and Ries (2008) model of cross-border M&A to account for sectoral heterogeneity and estimate the varying effects of FDI frictions across sectors using cross-border M&A data spanning 1985 through 2013. We find that non-manufacturing sectors generally have greater sensitivity to cross-border M&A frictions than is true for manufacturing, including such frictions as physical distance, cultural distance, and common language. Tradeability is positively associated with greater cross-border M&A, and is an additional friction for the many non-manufacturing sectors because they consist of mainly non-tradeable goods.
Keywords: Cross-border Mergers and Acquisitions; Foreign Direct Investment; Sectoral Heterogeneity; Frictional Costs
JEL Codes: D22; F21; F23; G34; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Physical distance (R12) | Cross-border M&A activity (F23) |
| Cultural distance (Z10) | Cross-border M&A activity (F23) |
| Common language (F36) | Cross-border M&A activity (F23) |
| Tradeability (F14) | Cross-border M&A activity (F23) |
| FDI regulation (F23) | Cross-border M&A activity (F23) |
| Physical distance (R12) | Monitoring costs (E50) |
| Monitoring costs (E50) | Cross-border M&A activity (F23) |