The Choice of Entry Mode in Foreign Direct Investment: Market Structure and Development Level

Abstract

In this chapter, it is analyzed how the entry mode choice of Swedish MNCs during the 1960-94 period is related to the market structure and development level of the host country. If the investing firm had previous affiliates in the host country, takeovers were preferred. The explanation is that greenfield would increase capacity and competition in the host country market which would lead to lower product prices and profits. Such an establishment would hurt the firm's already existing affiliates. Additional affiliates are therefore likely to be acquired through takeovers of existing firms. A high market growth was found to favor new ventures, since that facilitates an expansion of production capacity without detrimental effects on profitability.

Keywords: Entry mode, takeover, greenfield, foreign direct investment, market structure, development level

JEL Classification: F23