Diplomatic relations and cross-border investments in the European Union

Abstract

This study investigates the extent to which diplomatic relations are related to cross-border merger and acquisition (M&A) activities in the European Union during the years 2001–2019. Implementing a gravity model, we find a positive relationship between diplomatic distance and M&A activities, meaning that weaker diplomatic relations are linked to increases in inward M&As. This finding holds when foreign investors target high-tech firms, are private rather than state-owned enterprises, or buy larger shares of the target companies. This evidence suggests that cross-border acquisitions could be a way for the investing firm to mitigate issues related to weak diplomatic relations, such as access to host markets’ information and technological knowledge.