FDI policy, greenfield investment, and cross-border mergers

Larry D. QIU, Shengzu WANG*

*Corresponding author for this work

Research output: Journal PublicationsJournal Article (refereed)

23 Citations (Scopus)

Abstract

This paper examines a multinational's choice between greenfield investment and cross‐border merger when it enters another country via foreign direct investment (FDI) and faces the host country's FDI policy. Greenfield investment incurs a fixed plant setup cost, whereas the foreign firm obtains only a share of the joint profit from a cross‐border merger under the restriction of the FDI policy. This trade‐off is affected by market demand, cost differential, and market competition, among other things. The host country's government chooses its FDI policy to affect (or alter) the multinational's entry mode to achieve the maximum social welfare for the domestic country. We characterize the conditions shaping the optimal FDI policy and offer intuitions on FDI patterns in developing and developed countries.
Original languageEnglish
Pages (from-to)836-851
Number of pages16
JournalReview of International Economics
Volume19
Issue number5
Early online date17 Oct 2011
DOIs
Publication statusPublished - Nov 2011
Externally publishedYes

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