Cross-Border Acquisition Activities and Greenfield FDI: Substitutes or Complements?

Abstract

Foreign direct investment (FDI) typically occurs through two dominant modes: cross-border mergers and acquisitions (M&As) and Greenfield investment. This study examines the relationship between cross-border M&As and Greenfield FDI by using antitrust enforcement to capture the “price” paid by foreign investors. Based upon the cross-elasticity approach, if M&A activity and Greenfield FDI are complements, then as the price of engaging in cross-border M&A activity is increased, both M&As and Greenfield FDI activities will decrease. However, if M&A activity and Greenfield FDI are substitutes, then as the price of engaging in cross-border M&A activity is increased, M&A activity will decrease, but Greenfield FDI activities will increase. We consider the impact of U.S. merger-policy enforcement on foreign firm participation in the U.S. sectoral markets for investment via two different modes. We empirically test our theoretical priors on firm-level data covering 1,763 firms and 58 industries over the 2003-2017 period. Our panel-data empirical results indicate that merger-policy investigations deter cross-border horizontal M&As and attract Greenfield FDI. These results indicate that foreign firms actually substitute Greenfield FDI for cross-border acquisitions in the U.S. host-country context.