Privatization and Foreign Competition

43 Pages Posted: 13 Apr 2001

See all articles by Pehr-Johan Norbäck

Pehr-Johan Norbäck

Research Institute of Industrial Economics (IFN)

Lars Persson

Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR)

Date Written: March 2001

Abstract

This Paper determines the equilibrium market structure in a mixed international oligopoly, where the state enterprise's assets are sold at an auction. The model suggests that low greenfield costs and low trade costs induce foreign acquisitions. The intuition is that domestic firms can then not prevent foreign firms from becoming strong competitors and thus, their willingness to pay for the state assets is low. We also find that profit shifting from domestic to foreign firms generated by National Treatments clauses is partly paid for by the foreign investor in the bidding competition over the state assets. The reason is that the foreign firm pays a price for the state assets equal to the domestic firm's valuation of the assets. But the domestic firm's valuation of the assets is the negative impact on this firm through the decline in profits created by the foreign acquisition.

Keywords: Acquisitions, failing firms, FDI, national treatment, privatization

JEL Classification: F23, L13, L33

Suggested Citation

Norbäck, Pehr-Johan and Persson, Lars, Privatization and Foreign Competition (March 2001). Available at SSRN: https://ssrn.com/abstract=266728

Pehr-Johan Norbäck (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Lars Persson

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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