An Assignment Theory of Foreign Direct Investment

41 Pages Posted: 20 Jan 2005 Last revised: 27 Jul 2010

See all articles by Volker Nocke

Volker Nocke

University of Mannheim

Stephen R. Yeaple

Pennsylvania State University - College of the Liberal Arts - Department of Economic; National Bureau of Economic Research (NBER)

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Date Written: December 2004

Abstract

We develop an assignment theory to analyze the volume and composition of foreign direct investment (FDI). Firms conduct FDI by either engaging in greenfield investment or in cross-border acquisitions. Cross-border acquisitions involve firms trading heterogeneous corporate assets to exploit complementarities, while greenfield FDI involves building a new plant in the foreign market. In equilibrium, greenfield FDI and cross-border acquisitions co-exist, but the composition of FDI between these modes varies with firm and country characteristics. Firms engaging in greenfield investment are systematically more efficient than those engaging in cross-border acquisitions. Furthermore, most FDI takes the form of cross-border acquisitions when factor price differences between countries are small, while greenfield investment plays a more important role for FDI from high-wage into low-wage countries. These results capture important features of the data.

Suggested Citation

Nocke, Volker and Yeaple, Stephen R., An Assignment Theory of Foreign Direct Investment (December 2004). NBER Working Paper No. w11003. Available at SSRN: https://ssrn.com/abstract=637500

Volker Nocke

University of Mannheim ( email )

Stephen R. Yeaple (Contact Author)

Pennsylvania State University - College of the Liberal Arts - Department of Economic ( email )

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