Greenfield Investment versus Acquisition: Positive Analysis

Abstract

The analysis is motivated by the observation that foreign direct investment (FDI) is in reality a heterogeneous flow of funds, composed of both greenfield-FDI ('greenfield investment') and acquisition-FDI (cross-border mergers and acquisitions), although previous game-theoretic analyses have concentrated exclusively on one form of FDI. We aim to isolate the determinants of the equilibrium form of FDI. We model the equilibrium industrial structures of a concentrated (two-incumbent) global industry that spans two (perfectly segmented) national product markets (i.e. an 'international oligopoly'). Firms' FDI decisions (i.e. whether to produce abroad and what form of FDI to choose) and process R&D decisions are made endogenously, and potential entry into the industry is allowed for. Key findings are that acquisition-FDI arises in medium-sized markets (where entry does not occur) and that necessary conditions for greenfield-FDI are a large market and a small sunk cost of additional plants. In future work the welfare properties of equilibria associated with the alternative forms of FDI will be compared.