Financial Constraints, Institutions, and Foreign Ownership

73 Pages Posted: 29 Jan 2018

See all articles by Ron Alquist

Ron Alquist

AQR Capital Management LLC

Nicolas Berman

Graduate Institute of International and Development Studies (IHEID)

Rahul Mukherjee

Graduate Institute of International and Development Studies (IHEID) - Department of Economics

Linda L. Tesar

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2018

Abstract

This paper examines how external finance dependence, financial development, and institutions influence brownfield foreign direct investment (FDI). We develop a model of cross-border acquisitions in which the foreign acquirer's choice of ownership structure reflects a key trade-off between easing target credit constraints and the costs of operating in an environment of low institutional quality. Using a dataset of cross-border acquisitions in emerging markets, we find evidence supporting the central predictions of the model that: (i) a foreign firm is more likely to fully acquire a target firm in sectors that are more reliant on external finance, or in countries with lower financial development/higher institutional quality; (ii) the level of foreign ownership in partially foreign-owned firms is insensitive to institutional factors and depends weakly on financial factors; (iii) the share of foreign acquisitions in all acquisition activity is also higher in external finance dependent sectors, or financially underdeveloped/high institutional quality countries; and (iv) sectoral external finance dependence accentuates the effect of country-level financial development and institutional quality. The theory and empirical evidence provide insight into the interaction between the financial, institutional and technological determinants of North-South brownfield FDI.

Keywords: Foreign direct investment; foreign ownership; cross-border mergers and acquisitions; financial development; external finance dependence; institutional quality; emerging markets.

JEL Classification: F21, F23, G34, L24, L60

Suggested Citation

Alquist, Ron and Berman, Nicolas and Mukherjee, Rahul and Tesar, Linda L., Financial Constraints, Institutions, and Foreign Ownership (January 2018). CEPR Discussion Paper No. DP12646. Available at SSRN: https://ssrn.com/abstract=3112270

Ron Alquist (Contact Author)

AQR Capital Management LLC ( email )

Greenwich Plaza
Greenwich, CT NY 06830
United States

Nicolas Berman

Graduate Institute of International and Development Studies (IHEID) ( email )

PO Box 136
Geneva, CH-1211
Switzerland

Rahul Mukherjee

Graduate Institute of International and Development Studies (IHEID) - Department of Economics ( email )

Geneva Avenue de la Paix 11A
Geneva, 1202
Switzerland

Linda L. Tesar

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-763-2254 (Phone)
734-764-2769 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
0
Abstract Views
120
PlumX Metrics