Journal Article

An Assignment Theory of Foreign Direct Investment

Volker Nocke and Stephen Yeaple

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 75, issue 2, pages 529-557
Published in print April 2008 | ISSN: 0034-6527
Published online April 2008 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2008.00480.x
An Assignment Theory of Foreign Direct Investment

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  • Mergers and Acquisitions
  • International Factor Movements and International Business

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We develop an assignment theory to analyse the volume and composition of foreign direct investment (FDI). Firms conduct FDI by either engaging in greenfield investment or in cross-border acquisitions. Cross-border acquisitions involve firms trading heterogeneous corporate assets to exploit complementarities, while greenfield FDI involves setting up a new production division in the foreign country. In equilibrium, greenfield FDI and cross-border acquisitions coexist within the same industry, but the composition of FDI between these modes varies with firm and country characteristics. Firms engaging in greenfield investment are systematically more efficient than those engaging in cross-border acquisitions. Furthermore, most FDI takes the form of cross-border acquisitions when production-cost differences between countries are small, while greenfield investment plays a more important role for FDI from high-cost into low-cost countries. These results capture important features of the data.

Keywords: F23; G34

Journal Article.  12882 words.  Illustrated.

Subjects: Mergers and Acquisitions ; International Factor Movements and International Business

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