FDI Policy, Greenfield Investment and Cross‐Border Mergers
Larry D. Qiu
The University of Hong Kong - Faculty of Business and Economics; Hong Kong University of Science & Technology (HKUST) - Department of Economics
International Monetary Fund (IMF) - Asia and Pacific Department
Review of International Economics, Vol. 19, Issue 5, pp. 836-851, 2011
This paper examines a multinational's choice between greenfield investment and cross‐border merger when it enters another country via foreign direct investment (FDI) and faces the host country's FDI policy. Greenfield investment incurs a fixed plant setup cost, whereas the foreign firm obtains only a share of the joint profit from a cross‐border merger under the restriction of the FDI policy. This trade‐off is affected by market demand, cost differential, and market competition, among other things. The host country's government chooses its FDI policy to affect (or alter) the multinational's entry mode to achieve the maximum social welfare for the domestic country. We characterize the conditions shaping the optimal FDI policy and offer intuitions on FDI patterns in developing and developed countries.
Number of Pages in PDF File: 16
Date posted: October 18, 2011