Greenfield or Brownfield? FDI Entry Mode and Intangible Capital

Haruka Takayama

No DP2021-24, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

Abstract: When a multinational firm invests abroad, it can either establish a new facility (greenfield investment, GF) or purchase a local firm (cross-border merger and acquisition, M&A). Using a novel US firm-level dataset, I provide the first evidence that multinationals with higher levels of intangible capital systematically invest through GF rather than through M&A. Motivated by this empirical result, I develop and quantify a general equilibrium search model of a multinational firm's choice between M&A and GF. The model implies that equilibrium FDI patterns can be suboptimal from the host country's perspective. In particular, since the gap between the productivities of multinationals and local firms is larger in less developed countries, policymakers there can increase welfare by incentivizing FDI through M&A. By allowing highly productive multinationals to use local intangible capital, this policy increases aggregate productivity more than the laissez-faire outcome.

Keywords: FDI; Cross-border M&A; Greenfield FDI; Intangible capital (search for similar items in EconPapers)
JEL-codes: F14 F21 F23 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2021-12
New Economics Papers: this item is included in nep-cwa, nep-fdg, nep-int, nep-knm and nep-sbm
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