Greenfield FDI Research Articles

The short-run effects of knowledge intensive greenfield FDI on new domestic entry

Existing evidence on the impact of foreign direct investment on domestic economies remains ambiguous. Positive technology spillovers of foreign investment may be outweighed by negative crowding out effect due to increased competition. In this paper, we employ a unique country/sector-level data set to investigate the impact of what is considered the ‘best’ type of foreign investment—greenfield knowledge intensive FDI—on domestic entry. Our results suggest that, in the short run, this type of FDI is positively related to the entry rate in the host country, if the domestic sector is either dynamic, or highly R&D intensive. These sectors may be respectively characterized by lower entry costs, which encourage a ‘trial-and-error’ learning business approach, and by a higher level of absorptive capacity which increases the chance of technology transfer.

The Impact of Skill Endowments and Collective Bargaining on Knowledge-Intensive Greenfield FDI

This paper assesses the contribution of skilled employment and labour market conditions to the ability of attracting knowledge intensive and manufacturing greenfield FDI. We carry out our analysis by controlling for a wide range of labour market features, such as the collective bar- gaining coverage rate, the non-wage labour costs, and the occupational skills of employment. It departs from the existing literature in two respects. First, it deepens the analysis on the ef- fect of labour market regulations and skills endowments on greenfield FDI inflows. Second, it investigates the extent to which labour market characteristics matter for discriminating among 'resource-seeking' and 'efficiency/strategic asset-seeking' greenfield FDI activities (e.g. manufac- turing versus knowledge-intensive foreign investments, respectively). Our empirical analysis suggests that the quality of employment and the technological knowl- edge base have different impact on the location of knowledge-intensive and on low-cost labour- intensive manufacturing foreign investments. Further, associating the collective bargaining cov- erage of unions with the level of regulation in the labour market, our results can provide insights into the effectiveness of labour market policies that aim at attracting knowledge-intensive invest- ments.

The Effects of Greenfield FDI and Cross‐border M&As on Total Factor Productivity

AbstractWe examine the effects of greenfield FDI and cross‐border mergers and acquisitions (M&As) on total factor productivity (TFP) in developed and developing host countries of FDI. Using panel data for up to 123 countries over the period from 2003 to 2011, we find that greenfield FDI has no statistically significant effect on TFP, while M&As have a positive effect on TFP in the total sample. Greenfield FDI and M&As both appear to be ineffective in increasing TFP in the subsample of developing countries. In contrast, M&As have a strong and positive effect on TFP in the subsample of developed countries.

The competitive advantage of clusters: Cluster organisations and greenfield FDI in the European life sciences industry

This paper examines the effect of cluster organisations on the international competitive advantages of clusters in the European life sciences industry. Data on coordinated cluster organisations are used to assess whether cluster development policies enhance the attractiveness of clusters to multinational corporations (MNCs). We estimate mixed logit models using a sample of 481 greenfield investments by life sciences MNCs in West-European regions during the period 2010–2013. Contrary to the beliefs of policymakers, our results indicate that both the presence of cluster organisations and higher-order activities of cluster organisations have only a small effect in attracting greenfield investments. In addition, cluster organisations help attract economic activities with less specific location requirements, such as production plants and sales and marketing offices. This finding provides valuable insights for policymakers, as investing public funds in cluster organisations is not found to attract high value-added business activities, such as those that occur in headquarters and R&D facilities, which are often the target of such investments.

Entry mode and emerging market MNEs: An analysis of Chinese greenfield and acquisition FDI in the United States

A growing theoretical literature on emerging market MNEs argues they use aggressive acquisitions, often to psychically distant, developed host countries, to obtain strategic assets. The use of acquisitions as the dominant entry mode for strategic asset seeking, therefore, stands at heart of current EM MNE theorizing. To date, however, systematic empirical testing of the motivations for different entry modes by EM MNEs is limited. We address this gap by exploring the motivations for Chinese greenfield and acquisition investments in the United States. Our results are broadly supportive of the growing theoretical literature on EM MNEs, arguing acquisitions are the primary mode of strategic asset seeking in developed markets. We also find state ownership impacts strategic assets seeking and strategic asset seeking intensified in the post global financial crisis period.

Greenfield FDI and skill upgrading: A polarized issue

AbstractOutbound FDI is often accused of increasing income inequality in developed countries by shifting labour demand from low‐skilled towards high‐skilled workers (wage polarization). In response, we employ data on greenfield FDI that, in contrast to M&As, may be more clearly linked to skill upgrading. Our data also delineate greenfield FDI by sector, function and destination, allowing us to control for different motives and skill intensities for 17 developed countries for 2003–2005. We find that greenfield FDI in support services, e.g., back and front office services, induces polarized skill upgrading, benefitting high‐skilled workers at the expense of medium‐skilled workers, thereby polarizing wages.

Contextualizing the cost of financing FDI: The role of country specific risk and diversification

We extend international strategy and finance research by integrating country risk and country risk dynamics into a cost of debt framework using a dataset of 7,087 greenfield FDI from developed into developing markets. We show that the financial consequences of internationalization into risky countries depend on both home and host country risk characteristics. Furthermore, expectations of future risk development are shown to play a role in determining post entry financing costs. We test our hypotheses using hierarchical linear modelling and controlling for diversification effects and obtain evidence in support of our theoretic argumentation.

Functional and Sectoral Division of Labour within Central and Eastern European Countries: Evidence from Greenfield FDI

__Abstract__ In this paper, we analyse the sectoral and functional division of labour in Central and Eastern European (CEE) regions within the convergence debate. By analysing the investment decisions of multinational corporations in 49 NUTS-2 regions across 6 European CEE countries (Poland, Czech Republic, Slovakia, Hungary, Romania, and Bulgaria), we show that capital city regions not only receive more greenfield FDI but also attract a larger variety of investments in terms of sectors and functions. Capital cities are more likely to host higher-end sectors and functions, which provides an explanation for the existing regional disparities within CEE countries. These results highlight the importance of functional and sectoral divisions of labour in the view of regional profiling and contribute to the recent EU Cohesion Policy debate.

Functional and Sectoral Division of Labour within Central and Eastern European Countries: Evidence from Greenfield FDI

AbstractIn this paper, we analyse the sectoral and functional division of labour in Central and Eastern European (CEE) regions within the convergence debate. By analysing the investment decisions of multinational corporations in 49 NUTS 2 regions across six European CEE countries (Poland, Czech Republic, Slovakia, Hungary, Romania and Bulgaria), we show that capital city regions not only receive more greenfield FDI but also attract a larger variety of investments in terms of sectors and functions. Capital cities are more likely to host higher‐end sectors and functions, which provides an explanation for the existing regional disparities within CEE countries. These results highlight the importance of functional and sectoral divisions of labour in the view of regional profiling and contribute to the recent EU Cohesion Policy debate.

FDI in Greenfield Investment vs M&A : its Impact on GD : a Comprehensive Analysis of Developed, BRICS & East Asian Economies

Capital formation is an important determinant of economic growth. While domestic investments add to the capital stock in an economy, FDI plays a complementary role in overall capital formation and in filling the gap between domestic savings and investment. This paper attempts to examine the effect of two modes of FDI - Mergers &Acquisitions (M&As) and Greenfield FDI on GDP of a nation in different categories of countries - Developed Economies, BRICs and the 5 South East Asian (A5) nations. Using the VAR methodology, it was found that the GDP, cross border M&A and Greenfield FDI impact each other to some extent. There is a link between cross border M&A, Greenfield FDI and GDP. The extent varies according to the type of the country.

The effects of greenfield investment and M&As on domestic investment in developing countries

This article examines the effects of greenfield investment and M&As on domestic investment using panel data for 100 developing countries for the period 2003 to 2011. It is shown that while cross-border M&As do not have a significant effect on domestic investment, greenfield FDI has a large crowding-out effect.

United Arab Emirates FDI Outlook

FDI is important in building a sustainable and diversified knowledge-based UAE economy. The stock of FDI grew at an average annual growth rate of 45.3 percent over the past decade reaching US$ 95 billion or nearly 27 percent of GDP in 2012. FDI flows have not recovered from the global financial crises. Most FDI stock is concentrated in finance, construction, and real estate. Recent greenfield FDI is concentrated in construction, while more than half of top M&A deals took place in finance, transportation, communications and utilities. The list of top OECD home countries for FDI flows to the UAE include Italy, Germany, Chile, United Kingdom, Luxembourg, France, United States, and Belgium. Though UAE investment policy limits foreign investment and reduces competition, the Government has undertaken reforms and contracted investment treaties that have encouraged investment. Efforts are under way to speed up the ratification of a new foreign investment law, which removes several of the current legal barriers to FDI and offers foreign investors similar rights to those of UAE nationals. The UAE has high FDI potential with plenty of room for improving FDI performance and benefiting the economy.

Do domestic firms benefit from FDI?: evidence from Korean manufacturing industries

FDI is considered to be a meaningful component for the economic growth of a country. But, it has not been proven clear that the effect of FDI is really beneficial in a host country regardless of the state of the countries. This paper tries to provide an evidence of the effect of FDI in developing country. To do this, we relate industry level value-added to inward and outward FDI stocks in Korea in a production function framework. Especially we divide inward FDI into FDI on the Greenfield projects and FDI for M&A. The results show that the effect of inward FDI as a whole on productivity is not statistically significant, though we can presume that the direction is positive, whereas the effect of outward FDI is strongly negative, and is statistically significant. But the effects of inward FDI by the characteristics of FDI are not differentiated.

Do domestic firms benefit from FDI?: evidence from Korean manufacturing industries

FDI is considered to be a meaningful component for the economic growth of a country. But, it has not been proven clear that the effect of FDI is really beneficial in a host country regardless of the state of the countries. This paper tries to provide an evidence of the effect of FDI in developing country. To do this, we relate industry level value-added to inward and outward FDI stocks in Korea in a production function framework. Especially we divide inward FDI into FDI on the Greenfield projects and FDI for M&A. The results show that the effect of inward FDI as a whole on productivity is not statistically significant, though we can presume that the direction is positive, whereas the effect of outward FDI is strongly negative, and is statistically significant. But the effects of inward FDI by the characteristics of FDI are not differentiated.

Cross-border M&A vs. greenfield FDI: Economic integration and its welfare impact

This paper examines the impacts of regional economic integration on the FDI entry mode of multinational firm and the welfare implications focusing on two entry modes, greenfield investment and cross-border M&A. Based on a oligopoly model where each representative firm competing in Cournot fashion, we demonstrate that the preferential trade arrangement increases the multinational firms’ incentives to shift its entry mode from greenfield investment to cross-border M&A. Moreover, greenfield investment is a welfare dominant FDI entry mode for the host country while cross-border M&A might be preferred by multinational firms when the strategic effects of M&A are considered in addition to the asymmetric technology transfer effects of two entry modes. Finally, it is shown that there exists a unique equilibrium policy intervention to induce the choice of greenfield investment when the multinational firm’s marginal cost is lower than the critical value.

: (Foreign Direct Investment and Technology Transfer)

Korean Abstract: 외국인직접투자 유입의 확대는 경제 전반의 효율성을 개선시킬 것이라는 기대에 근거하여 우리나라를 포함한 다수의 소국개방경제에서는 해외직접투자 유치를 위한 경쟁적인 정책 노력을 전개하고 있다. 본 논문은 해외직접투자의 경제 효율성 개선효과에 대한 분석을 위해 기술력 격차와 시장규모 격차를 고려한 과점시장모형분석을 통하여 해외시장에 진출하는 다국적기업의 최적투자진출형태 및 사회후생효과를 분석하였다. 그 결과 투자대상국이 한계생산 비용구조 및 시장규모 측면에서 비교우위를 보일 경우, 수직적 그린필드형 직접투자(Vertical Greenfield Investment) 전략이 균형전략으로 확인되었다. 한편 투자대상국이 한계생산 비용구조 및 시장규모 측면에서 비교열위인 경우, 수평적 인수합병 전략이 지배전략으로 확인되었다. 이러한 해외투자 전략의 변화는 수출입구조에서 투자대상국이 상대적으로 한계생산 비용구조 및 시장규모 측면에서 비교우위를 보일 경우, 국제분업구조는 수직적 분업구조(fragmentation)로 재편될 개연성이 높음을 보여준다. English Abstract: This paper examines the welfare effects of foreign direct investment, focusing on the asymmetric technological transfers and innovation efforts among different entry modes of FDI, such as greenfield FDI and cross-border M&A. Traditionally, greenfield FDI has been preferred by developing host countries, while recent research shows that cross-border M&A also has strong welfare-improving effects. We demonstrate that country asymmetries in terms of technologies and market sizes among integrating countries explains why greenfield investments are preferred to cross-border acquisitions in most developing economies: mainly because of asymmetric technology transfer effects. More specifically, when the host country has comparative advantage in production factor cost and in market size, greenfield FDI is the optimal investment regime, while cross-border M&A might be the optimal policy in the adverse case, as widely observed in recent FDI features in developing economies.

Foreign Direct Investment and Technology Transfer

This paper examines the welfare effects of foreign direct investment, focusing on the asymmetric technological transfers and innovation efforts among different entry modes of FDI, such as greenfield FDI and cross-border M&A. Traditionally, greenfield FDI has been preferred by developing host countries, while recent research shows that cross-border M&A also has strong welfare-improving effects. We demonstrate that country asymmetries in terms of technologies and market sizes among integrating countries explains why greenfield investments are preferred to cross-border acquisitions in most developing economies: mainly because of asymmetric technology transfer effects. More specifically, when the host country has comparative advantage in production factor cost and in market size, greenfield FDI is the optimal investment regime, while cross-border M&A might be the optimal policy in the adverse case, as widely observed in recent FDI features in developing economies.

The impact of greenfield FDI and mergers and acquisitions on innovation in Chinese high-tech industries

Using panel data analysis, this paper investigates the impact of international technology spillovers on innovation in Chinese high-tech industries through greenfield foreign direct investment, cross-border mergers and acquisitions and trade. We report that foreign greenfield R&D activities by multinational corporations in a host country significantly affect the innovation performance of domestic firms and there exist both intra-industry and inter-industry spillovers from foreign greenfield R&D. There are only inter-industry M&A spillovers. We find that importing foreign technology and investing in domestic R&D have positive impacts on domestic innovation. The findings have important implications for theory, practitioners and policy-makers.

Cross-border mergers and acquisitions vs. greenfield foreign direct investment: The role of firm heterogeneity

We develop a general equilibrium model with heterogeneous firms to address two sets of questions: (1) what are the characteristics of firms that choose the various modes of foreign market access (exporting, greenfield FDI, and cross-border M&A), and (2) how does the international organization of production vary across industries and country-pairs? We show that the answers to these questions depend on the nature of firm heterogeneity. Depending on whether firms differ in their mobile or immobile capabilities, cross-border mergers involve the most or the least efficient active firms. The comparative statics on industry and country characteristics display a similar dichotomy.

The Market Disciplining Effects of FDI: Does the Mode of Entry Matter?

We investigate both theoretically and empirically the competitive discipline effect exerted by FDI on plant-level price-cost margins. Using plant level data for manufacturing industries in the United Kingdom we find robust evidence supporting our theoretical predictions: greenfield FDI has a discipline effect on margins, whilst acquisition FDI increases price-cost margins.