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FDI Policy, Greenfield Investment and Cross‐Border Mergers

16 Pages Posted: 18 Oct 2011  

Larry D. Qiu

The University of Hong Kong - Faculty of Business and Economics; Hong Kong University of Science & Technology (HKUST) - Department of Economics

Shengzu Wang

International Monetary Fund (IMF) - Asia and Pacific Department

Date Written: November 2011

Abstract

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.

Suggested Citation

Qiu, Larry D. and Wang, Shengzu, FDI Policy, Greenfield Investment and Cross‐Border Mergers (November 2011). Review of International Economics, Vol. 19, Issue 5, pp. 836-851, 2011. Available at SSRN: https://ssrn.com/abstract=1945584 or http://dx.doi.org/10.1111/j.1467-9396.2011.00984.x

Larry Dongxiao Qiu (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

School of Economics and Finance
University of Hong Kong
Pokfulam
Hong Kong

HOME PAGE: http://www.bm.ust.hk/~larryqiu/

Shengzu Wang

International Monetary Fund (IMF) - Asia and Pacific Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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