An Assignment Theory of Foreign Direct Investment

Volker Nocke and Stephen Yeaple

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: We develop an assignment theory to analyze 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 building a new plant in the foreign market. In equilibrium, greenfield FDI and cross-border acquisitions co-exist, 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 factor price differences between countries are small, while greenfield investment plays a more important role for FDI from high-wage into low-wage countries. These results capture important features of the data.

Keywords: Foreign Direct Investment; Mergers; Greenfield; Firm Heterogeneity (search for similar items in EconPapers)
JEL-codes: F12 F14 F23 L11 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2004-12-07
New Economics Papers: this item is included in nep-afr and nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (29)

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Related works:
Journal Article: An Assignment Theory of Foreign Direct Investment (2008)
Working Paper: An Assignment Theory of Foreign Direct Investment (2005)
Working Paper: An Assignment Theory of Foreign Direct Investment (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:05-003

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