Greenfield Investment versus Acquisition: Alternative Modes of Foreign Expansion

Abstract

Foreign direct investment is in reality a heterogeneous flow of funds, composed of both greenfield-FDI (greenfield investment) and acquisition-FDI (cross-border mergers and acquisitions). We analyse the choice of FDI mode in an international oligopoly where process R&D decisions are made endogenously and potential entry into the industry is allowed for. Relative to greenfield-FDI, acquisition-FDI is a soft response to the entry threat: in intermediate-sized markets, entry deterrence via greenfield-FDI can make acquisition-FDI unprofitable. The effect of trade liberalisation on acquisition-FDI flows is shown to depend crucially on the R&D technology. Normative analysis shows that equilibria associated with acquisition-FDI generally exhibit higher industry profits but lower consumer surplus than those associated with greenfield-FDI. However, Pareto dominant acquisition-FDI arises in small markets when acquisition prompts R&D investment that would not otherwise occur.