Working Paper: NBER ID: w24241
Authors: Ron Alquist; Nicolas Berman; Rahul Mukherjee; Linda Tesar
Abstract: This paper examines how external finance dependence, financial development, and institutions influence brownfield foreign direct investment (FDI). We develop a model of cross-border acquisitions in which the foreign acquirer's choice of ownership structure reflects a trade-off between easing target credit constraints and the costs of operating in an environment of low institutional quality. Using a dataset of cross-border acquisitions in emerging markets, we find evidence supporting the central predictions of the model that: (i) a foreign firm is more likely to fully acquire a target firm in sectors that are more reliant on external finance, or in countries with lower financial development/higher institutional quality; (ii) the level of foreign ownership in partially foreign-owned firms is insensitive to institutional factors and depends weakly on financial factors; (iii) the share of foreign acquisitions in all acquisition activity is also higher in external finance dependent sectors, or financially under-developed/high institutional quality countries; and (iv) sectoral external finance dependence accentuates the effect of country-level financial development and institutional quality. The theory and empirical evidence provide insight into the interaction between the financial, institutional and technological determinants of North-South brown field FDI.
Keywords: foreign direct investment; financial constraints; institutional quality; cross-border acquisitions
JEL Codes: F21; F23; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| External finance dependence (G32) | Likelihood of full foreign acquisitions (F23) |
| Institutional quality (I24) | Likelihood of full foreign acquisitions (F23) |
| Financial development (O16) | Likelihood of full foreign acquisitions (F23) |
| Institutional quality (I24) | Level of foreign ownership in partially foreign-owned firms (F23) |
| Financial factors (G29) | Level of foreign ownership in partially foreign-owned firms (F23) |
| External finance dependence + Financial development (O16) | Share of foreign acquisitions (F23) |
| Financial development (O16) | Share of full acquisitions (G34) |