Greenfield Foreign Direct Investment and Mergers and Acquisitions: Feedback and Macroeconomic Effects

31 Pages Posted: 20 Apr 2016

See all articles by Norman Loayza

Norman Loayza

World Bank - Research Department

César A. Calderón

Central Bank of Chile

Luis Servén

World Bank - Development Research Group (DECRG)

Date Written: January 2004

Abstract

Foreign direct investment (FDI) flows to developing countries surged in the 1990s to become their leading source of external financing. This rise in FDI volume was accompanied by a marked change in its composition: investment taking the form of acquisition of existing assets (mergers and acquisitions) grew much more rapidly than investment in new assets ("greenfield" FDI), particularly in countries undertaking extensive privatization of public enterprises. This raises two issues. First, is the mergers and acquisitions boom a one-time effect of privatization, or is it likely to be followed by a rise in greenfield investment? Second, do these two types of FDI have different macroeconomic causes and consequences in relation to aggregate investment and growth? Calderon, Loayza, and Serven focus on establishing the stylized facts in terms of time precedence between both types of FDI, investment, and growth, using annual data for the period 1987-2001 and a large sample of industrial and developing countries. The authors find that in all samples higher mergers and acquisitions is typically followed by higher greenfield investment, while the reverse is true only for developing countries. In industrial and developing countries alike, both types of FDI lead domestic investment, but not the reverse. Finally, neither type of FDI appears to precede economic growth in developing or industrial countries, but FDI does respond positively to increases in the growth rate.

This paper - a product of Macroeconomics and Growth, Development Research Group - is part of a larger effort in the group to understand international capital flows.

Suggested Citation

Loayza, Norman and Calderon, Cesar A. and Servén, Luis, Greenfield Foreign Direct Investment and Mergers and Acquisitions: Feedback and Macroeconomic Effects (January 2004). World Bank Policy Research Working Paper No. 3192. Available at SSRN: https://ssrn.com/abstract=636612

Norman Loayza (Contact Author)

World Bank - Research Department ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Cesar A. Calderon

Central Bank of Chile ( email )

Agustinas 1180
Santiago
Chile

Luis Servén

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

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