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Investment Liberalization and Cross‐Border Acquisitions: The Effect of Partial Foreign Ownership
Author(s) -
Fatica Serena
Publication year - 2010
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.2010.00866.x
Subject(s) - multinational corporation , profitability index , foreign direct investment , investment (military) , incentive , liberalization , greenfield project , business , economics , international economics , monetary economics , market economy , industrial organization , international trade , finance , macroeconomics , politics , political science , law
This paper investigates the optimal strategy for a multinational to conduct FDI. We find that the incentives to use acquisition rather than greenfield investment change significantly if the multinational is allowed to have already an ownership interest in the target local firm before the market is fully liberalized. Interestingly, when investment costs are sufficiently high, the multinational prefers not entering the market at all with partial ownership in place, whereas a cross‐border takeover would be the optimal entry mode otherwise. For intermediate levels of entry costs, holding a stake in the local producer reverses positively the profitability of a full acquisition compared to greenfield investment.