Financial constraints, institutions, and foreign ownership

Nicolas Berman (), Ron Alquist, Rahul Mukherjee and Linda Tesar

No 12646, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper examines how external finance dependence, financial development, and institutions influence brownfield foreign direct investment (FDI). We develop a model of cross-border acquisitions in which the foreign acquirer's choice of ownership structure reflects a key trade-off between easing target credit constraints and the costs of operating in an environment of low institutional quality. Using a dataset of cross-border acquisitions in emerging markets, we find evidence supporting the central predictions of the model that: (i) a foreign firm is more likely to fully acquire a target firm in sectors that are more reliant on external finance, or in countries with lower financial development/higher institutional quality; (ii) the level of foreign ownership in partially foreign-owned firms is insensitive to institutional factors and depends weakly on financial factors; (iii) the share of foreign acquisitions in all acquisition activity is also higher in external finance dependent sectors, or financially underdeveloped/high institutional quality countries; and (iv) sectoral external finance dependence accentuates the effect of country-level financial development and institutional quality. The theory and empirical evidence provide insight into the interaction between the financial, institutional and technological determinants of North-South brownfield FDI.

Keywords: Foreign ownership; Cross-border mergers and acquisitions; External finance dependence; Foreign direct investment; Financial development (search for similar items in EconPapers)
JEL-codes: F21 F23 G34 L24 L60 (search for similar items in EconPapers)
Date: 2018-01
New Economics Papers: this item is included in nep-cfn and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Financial constraints, institutions, and foreign ownership (2019)
Working Paper: Financial constraints, institutions, and foreign ownership (2019)
Working Paper: Financial Constraints, Institutions, and Foreign Ownership (2018)
Working Paper: Financial Constraints, Institutions, and Foreign Ownership (2018)
Working Paper: Financial Constraints, Institutions, and Foreign Ownership (2018)
Working Paper: Financial Constraints, Institutions, and Foreign Ownership (2018)
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