Abstract
A host of external (global and regional) and internal (country-specific) factors affect Multinational Enterprises’ Foreign Direct Investment (FDI) decisions. Differentiating the two entry modes of FDI (mergers and acquisitions [M&A] and Greenfield investment), this paper aims to empirically assess whether or not being a part of global emerging market economies or any specific emerging regions affects investors’ decisions of FDI flows to an emerging country in addition to various country-specific factors. For this purpose, this paper employs a system generalized method of moments estimator for the panel data consisting of 40 emerging countries for the period 1990–2009. The results suggest that there exist a strong and significant global and regional influence in both types of FDI flows to an emerging country. M&A appears to be more sensitive to external factors, both global and regional effects are about twice stronger for M&A than for Greenfield FDI. The results also suggest that country specific factors matter a lot for FDI flows both in the form of M&A and Greenfield FDI, pointing to the importance of government roles in helping stabilize FDI flows to emerging countries. This paper also offers empirical evidence which is consistent with the phenomenon of a fire-sale FDI during the period of financial crisis. Additional evidence using extensive and intensive margins of M&A sales suggest that the fire-sale does not necessarily imply an increase in the number of deals, but it may reflect the sales of big firms during the crisis.
Highlights
The multinational enterprises (MNEs) and foreign direct investment (FDI) play a pivotal role in spurring economic growth and jobs—through integrating the economy to the world market, transferring new technology and innovation, and developing human resources
This is a natural extension of the investment theory, predicting that FDI would flow from capital rich countries to capital scarce countries
Very few studies in economic literature have distinguished between the two entry modes of FDI in understanding the determinants of FDI and, there has been no concrete answers to why MNEs choose one entry mode versus another
Summary
The multinational enterprises (MNEs) and foreign direct investment (FDI) play a pivotal role in spurring economic growth and jobs—through integrating the economy to the world market, transferring new technology and innovation, and developing human resources. Earlier studies on FDI have focused on capital movements, driven by different rates of return on capital across borders. This is a natural extension of the investment theory, predicting that FDI would flow from capital rich countries (where its return was low) to capital scarce countries (where its return was high). Such simplistic view of FDI did not necessarily match the reality that a large share of FDI originated from and directed to developed, rather than developing countries, in early decades. Hymer (1976) and Dunning (1977, 1979, 2000) incorporate the behaviors and activities of MNEs in the framework of FDI analysis by treating FDI as relocations of firms rather than simple movements of capital
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