Gains from multinational competition for cross-border firm acquisition

Onur A Koska

doi:10.5018/economics-ejournal.ja.2019-20

Abstract

Abstract This study shows that when there is multinational competition for foreign acquisition, the strategic use of a consumer welfare argument in regulating foreign market entry leads to a preemptive foreign acquisition. Even under fierce competition, foreign acquisition will emerge as part of a non-cooperative equilibrium (although multinationals would have gained more had they been able to credibly commit to a cooperative equilibrium of independent foreign sales, either via greenfield investment or trade under complete liberalization) which increases local welfare by more than both the case without foreign market entry and the case with foreign market entry via independent foreign sales.

Highlights

Multinational firms have been playing a crucial role for economic integration: acquisitions of existing foreign assets in host countries have surpassed investments in new assets, and multinational sales through foreign affiliates have outnumbered exports since the 1980s
In a simple oligopolistic market entry model, this study shows that cross-border firm acquisitions may emerge as the equilibrium foreign market entry mode even when they will have earned multinationals less profits compared to trade in the times of complete trade liberalization abolishing trade costs, and/or compared to greenfield investment
In a simple oligopolistic market entry model, this study has scrutinized the implications of multinational competition for cross-border firm acquisition on multinationals’ foreign market entry behavior and on local welfare

Summary

Introduction

Multinational firms have been playing a crucial role for economic integration: acquisitions of existing foreign assets in host countries have surpassed investments in new assets (greenfield investment), and multinational sales through foreign affiliates have outnumbered exports since the 1980s. The model focuses on multinational competition for potential cross-border firm acquisition, for which there is a minimum output requirement imposed by the host country as part of its foreign market entry regulation. The model focuses on two potential foreign entrants (with their headquarters outside the host country) competing for foreign acquisition of a local firm and scrutinizes the implications of imposing a minimum output requirement for cross-border firm acquisitions on foreign market entry behavior and welfare. We demonstrate that when there is multinational competition for potential cross-border firm acquisition, any foreign acquisition that fulfills the minimum output requirement leads to higher local welfare as compared to the case multinationals enter the host country by independent foreign sales (or compared to the initial case without foreign market entry).

The model

Multinational competition for foreign acquisition

Welfare implications

Findings

Concluding remarks