Foreign market entry and merger policies with economies of scale

Jaeyeon Kim (), Frank Stahler () and Halis Yildiz ()
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Jaeyeon Kim: Department of Legal, Economics, Accounting and Finance, Shannon School of Business at Cape Breton University, Sydney, Nova Scotia
Frank Stahler: School of Business and Economics, University of Tubingen, Tubingen, Germany
Halis Yildiz: Department of Economics, Toronto Metropolitan University, Toronto, Canada

No 99, Working Papers from Toronto Metropolitan University, Department of Economics

Abstract: This paper investigates the equilibrium entry mode of a foreign firm into a domestic market that can export, do a greenfield investment or acquire one or two domestic firms. We also scrutinize the optimal merger policy of the host country and whether it can induce the most preferred entry mode. We find that acquisitions are more likely with sufficiently large economies of scale, and this is also the endogenous outcome of optimal merger policies. Furthermore, the host government can induce the most preferred market structure if and only if the foreign firm always wants to acquire at least one domestic firm. Our findings suggest that a strict merger policy is more likely to be optimal as the greenfield investment cost rises. Finally, the national merger policy can be excessive as monopolization may raise aggregate world welfare if the benefits from economies of scale are substantial.

Keywords: Foreign direct investment; market entry; oligopoly; merger policy; economies of scale (search for similar items in EconPapers)
Pages: 28 pages
Date: 2026-01
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