Serving Abroad: Export, M&A, and Greenfield Investment

Francesco Conteduca and Ekaterina Kazakova

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: This paper studies foreign-market entry patterns in the professional services industry. We build a structural model of horizontal foreign direct investment (FDI) with firms that are heterogeneous in terms of service quality. Firms can choose to serve foreign markets via exporting, cross-border mergers (M&A), or greenfield investment. Greenfield investment and exporting are subject to the standard proximity-concentration tradeoff and, in addition, associated with uncertainty about foreign quality perception, while M&A resolves this uncertainty by letting multinationals access the demand of the acquired firm. Reproduction of high quality abroad potentially requires larger fixed entry costs, inducing high-quality service firms to export. The model is sufficiently flexible to accommodate different orderings of entry types in terms of firm’s service quality. We then structurally estimate the fundamental market-specific parameters of the model using firm-level FDI and trade data for a sample of German firms. We find that entry patterns are reversed compared to the standard sorting in manufacturing: only the firms providing the highest service quality export, while lower-quality firms conduct FDI. The relative sorting of M&A vs. greenfield FDI in terms of firm quality is market-specific and depends on the relative importance of uncertainty about quality perception, the structure of entry costs, and size of synergies associated with M&A. Finally, we calibrate the model equilibrium to the data on multinational and trade flows between the EU, the US, and the rest of the world. Simulation of the service-trade liberalization between the EU and the US, as planned for TTIP (Transatlantic Trade and Investment Partnership), shows that the reduction of non-tariff trade barriers and introduction of quality standards reallocate quality across entry alternatives, as well as make FDI a more prominent entry type

Keywords: Multinational Firms; Foreign Direct Investment; Mergers; Greenfield Investment; Services (search for similar items in EconPapers)
JEL-codes: F14 F23 (search for similar items in EconPapers)
Pages: 52
Date: 2018-01
New Economics Papers: this item is included in nep-int, nep-ore and nep-sbm
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Working Paper: Serving Abroad: Export, M&A, and Greenfield Investment (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:bon:boncrc:crctr224_2018_008

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