Impact of Greenfield FDI versus M&A on growth and domestic investment in developing Asia

Abstract

A large literature establishes the growth-enhancing benefits of foreign direct investment (FDI) flows into emerging market economies in general. Conventional wisdom holds that FDI is a preferable form of external financing compared to other types of capital flows because of its stabilizing properties. While this might hold true largely for FDI flows of the Greenfield variety, in reality, a greater share of FDI to emerging economies in general and Asian economies appears to be in the form of mergers and acquisitions (M&A). Do all types of FDI flows produce similar macroeconomic benefits? This paper empirically explores whether the type of FDI flow, i.e. Greenfield versus M&A, matters in the way it impacts economic growth and domestic investment for a large panel of developing Asian economies over 1990–2013. We find Greenfield FDI contributes positively to economic growth while FDI in the form of M&A appears to have no significant growth influence. We also find that the effects of Greenfield FDI on domestic capital formation are stronger and larger relative to M&A flows.