Extending Comparative Advantage Through Cross-Border Acquisitions

Abstract

We investigate the role of industry specialization in horizontal cross-border mergers and acquisitions. We find that acquirers from more specialized industries in a country are more likely to buy foreign targets in countries that are less specialized in these same industries. The role of industry specialization is more prevalent when contracting and trading costs limit arms' length relationships and exporting. Moreover, the economic gains in cross-border deals are larger when specialized acquirers purchase assets in less specialized industries. These results are consistent with an internalization motive for foreign acquisitions, through which localized industry know-how and management skills provide mobile advantages that acquirers can deploy on foreign assets.