An Assignment Theory of Foreign Direct Investment

32 Pages Posted: 10 Jan 2005

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)

Multiple version iconThere are 2 versions of this paper

Date Written: December 7, 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.

Keywords: Foreign direct investment, mergers, greenfield, firm heterogeneity

JEL Classification: F12, F14, F23, L11

Suggested Citation

Nocke, Volker and Yeaple, Stephen R., An Assignment Theory of Foreign Direct Investment (December 7, 2004). PIER Working Paper No. 05-003. Available at SSRN: https://ssrn.com/abstract=645882 or http://dx.doi.org/10.2139/ssrn.645882

Volker Nocke (Contact Author)

University of Mannheim ( email )

Stephen R. Yeaple

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

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University Park, PA 16802-3306
United States
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National Bureau of Economic Research (NBER)

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