Modes of Foreign Entry Under Asymmetric Information About Potential Technology Spillovers

Abstract

This paper studies the effect of technology spillovers on the entry decision of a multinational enterprise into a foreign market. Two alternative entry modes for a foreign direct investment are considered: Greenfield investment versus acquisition. We find that with quantity competition a spillover makes acquisitions less attractive, while with price competition acquisitions become more attractive. Asymmetric information about potential spillovers always reduces the number of acquisitions independently of whether the host country or the entrant has private information. Interestingly, we find that asymmetric information always hurts the entrant, while it sometimes is in favor of the host country.

Keywords: Foreign direct investment, multinational enterprise, entry mode, technology spillovers, asymmetric information, transition economies

JEL Classification: D43, F21, F23, L13, P31