Investment Liberalization and Cross-Border Acquisitions: The Effect of Partial Foreign Ownership

Abstract

This paper investigates the optimal strategy for a multinational to conduct FDI. We find that the incentives to use acquisition rather than greenfield investment change significantly if the multinational is allowed to have already an ownership interest in the target local firm before the market is fully liberalized. Interestingly, when investment costs are sufficiently high, the multinational prefers not entering the market at all with partial ownership in place, whereas a cross-border takeover would be the optimal entry mode otherwise. For intermediate levels of entry costs, holding a stake in the local producer reverses positively the profitability of a full acquisition compared to greenfield investment. Copyright � 2010 Blackwell Publishing Ltd.

Does Experience Matter for Patterns of Expansion by US Companies in Latin America and the Caribbean?

“…The seminal paper in this area is Brouthers (2002) and has been followed by numerous other studies. Many studies in the IB literature go beyond the traditional greenfield versus M&A distinction and include entry modes such as JVs and partial acquisitions, which provide a much more disaggregated way of looking at the participation of firms in foreign markets (Fatica 2010). In this paper, foreign market participation is disaggregated into five different categories: wholly owned subsidiaries, JVs, acquisitions, new plants and representative offices (Wooster, Blanco, and Charles Sawyer 2014).…”

Takeover deterrents and cross partial ownership: The case of golden shares

“…Results are that, contrary to mergers, vertical PO align both firms' interests and do not lead to a potentially anticompetitive foreclosure. Fatica () studies the effects of POs prior to foreign direct investments. It is shown that toeholds can facilitate full acquisition over a green field investment though the result depends on the value of investment costs.…”

“…Results are that, contrary to mergers, vertical PO align both firms' interests and do not lead to a potentially anticompetitive foreclosure. Fatica (2010) (Besen, Murdoch, OBrien, Salop, & Woodbury, 1999), "Keiretsu" in Japan (Brown & Fung, 2009), "Deutschland AG" in Germany (Lantenois, 2011),…”

Foreign direct investment, input prices, and host country welfare

“…In addition to the above‐mentioned papers, the choice between the two FDI strategies has been extensively investigated in various theoretical models. For example, Klimenko and Saggi () focus on products with network externalities, Nocke and Yeaple () emphasize the role of firm heterogeneity, Raff, Ryan, and Stähler () allow for joint venture to be a possible choice of entry mode, Kim () considers the impacts of regional economic integration, and Fatica () examines the choice by allowing the multinational firm to have partial ownership of the target firm in the host country. Karabay () and Qiu and Wang () both consider FDI restriction policies imposed by the government in the host country, Markusen and Stähler () look at the FDI policy in the context of an endogenous market structure, Norbäck and Persson () and Ray Chaudhuri () both focus on the profitability of cross‐border M&A, and Stepanok () analyzes the optimal entry mode in monopolistic competition industries, among many others.…”