FDI as an Outcome of the Market for Corporate Control: Theory and Evidence

Much foreign direct investment (FDI) takes the form of mergers and acquisitions (M&A). It is commonplace in finance to view acquisitions as manifestations of the market for corporate control. Following on that insight we propose a model of FDI in which headquarters bid to control overseas assets. We derive an equation for bilateral FDI stocks that resembles the recently developed fixed effects approach to modelling bilateral trade flows. We estimate the model and use its parameters to construct benchmarks for evaluating multilateral inward and outward FDI.

[1]  Jeffrey M. Woodbridge.  Econometric Analysis of Cross Section and Panel Data , 2002 .

[2]  Jonathan Eaton,et al.  Trade in Capital Goods , 2001 .

[3]  M. Rota.  Economic Geography and International Inequality : A Reappraisal The Role of Institutions , 2007 .

[4]  Volker Nocke,et al.  An Assignment Theory of Foreign Direct Investment , 2004 .

[5]  Stefano Rossi,et al.  Cross-Country Determinants of Mergers and Acquisitions , 2003 .

[6]  Richard S. Ruback,et al.  The Market for Corporate Control: The Scientific Evidence , 2002 .

[7]  John Ries,et al.  Judging Japan's FDI: The verdict from a dartboard model , 2005 .

[8]  R. Cooper,et al.  Multinational Firms in the World Economy , 2004 .

[9]  Jeffrey M. Wooldridge,et al.  Solutions Manual and Supplementary Materials for Econometric Analysis of Cross Section and Panel Data , 2003 .

[10]  P. Volpin,et al.  Cross – Country Determinants of Mergers and Acquisitions First draft : November 2001 , 2003 .

[11]  James E. Anderson,et al.  Gravity with Gravitas: A Solution to the Border Puzzle , 2001 .

[12]  J. Neary.  Cross-Border Mergers as Instruments of Comparative Advantage , 2004 .

[13]  Bruce A. Blonigen,et al.  Estimating the Knowledge-Capital Model of the Multinational Enterprise: Comment , 2002 .

[14]  John. Moore,et al.  FINANCIAL DEEPENING , 2005 .

[15]  J. Markusen,et al.  MULTINATIONALS, MULTI-PLANT ECONOMIES, AND THE GAINS FROM TRADE , 1984, World Scientific Studies in International Economics.

[16]  Julian di Giovanni.  What Drives Capital Flows? The Case of Cross-Border M&A Activity and Financial Deepening , 2002 .

[17]  Volker Nocke,et al.  Cross-border mergers and acquisitions vs. greenfield foreign direct investment: The role of firm heterogeneity , 2007 .

[18]  A. Mody,et al.  The Role of Information in Driving FDI Flows: Host-Country Tranparency and Source Country Specialization , 2003 .

[19]  J. Markusen.  Multinational Firms and the Theory of International Trade , 2002 .

[20]  Florencio López‐de‐Silanes,et al.  Law and Finance , 1996, Journal of Political Economy.

[21]  Jonathan Eaton,et al.  Bilateralism and Regionalism in Japanese and U.S. Trade and Direct Foreign Investment Patterns , 1995 .

[22]  Barry Eichengreen,et al.  Is China’s FDI Coming at the Expense of Other Countries? , 2007 .

[23]  H. Görg,et al.  Cross-Border Mergers & Acquisitions and the Role of Trade Costs , 2007 .

[24]  J. Bergstrand,et al.  A knowledge-and-physical-capital model of international trade flows, foreign direct investment, and multinational enterprises , 2007 .

[25]  W. Easterly,et al.  What Have We Learned from a Decade of Empirical Research on Growth? It's Not Factor Accumulation: Stylized Facts and Growth Models , 2001 .

[26]  Jean Tirole,et al.  Market Liquidity and Performance Monitoring , 1993, Journal of Political Economy.

[27]  An Information-Based Trade Off between Foreign Direct Investment and Foreign Portfolio Investment , 2005 .

[28]  Philippe Martin.  Financial Super-Markets: Size Matters for Asset Trade , 2000 .

[29]  Silvana Tenreyro,et al.  The Log of Gravity , 2004 .

[30]  A. Bovenberg,et al.  Why is Capital so Immobile Internationally?: Possible Explanations and Implications for Capital Income Taxation , 1994 .

[31]  Jonathan Eaton,et al.  Technology, Geography, and Trade , 2002 .

[32]  Masaaki Kotabe,et al.  Cross-border mergers and acquisitions: Global and regional perspectives , 1999 .

[33]  John H. Dunning,et al.  The multinational enterprise , 1973 .

[34]  P. Joskow,et al.  Estimated parameters as independent variables : with an application to the costs of electric generating units , 1986 .

[35]  A. Razin,et al.  A pecking order of capital inflows and international tax principles , 1998 .

[36]  Karl V. Bury,et al.  Statistical Distributions in Engineering: Statistics , 1999 .

[37]  Harry Grubert,et al.  Empirical asymmetries in foreign direct investment and taxation , 2004 .

[38]  S. Wei,et al.  How Taxing is Corruption on International Investors? , 1997, Review of Economics and Statistics.

[39]  J. Bergstrand,et al.  A Knowledge-and-Physical-Capital Model of International Trade, Foreign Direct Investment, and Outsourcing: Part I, Developed Countries , 2004 .

[40]  T. Mayer,et al.  Institutional Determinants of Foreign Direct Investment , 2007 .

[41]  André de Palma,et al.  Discrete Choice Theory of Product Differentiation , 1995 .

[42]  A. Mody,et al.  The Role of Information in Driving FDI Flows: Host-Country Transparency and Source-Country Specialization , 2003, SSRN Electronic Journal.

[43]  Jeffrey A. Hart,et al.  Multinational Firms in the World Economy , 2007 .

[44]  D. Mueller,et al.  The Effects of Mergers: An International Comparison , 2001 .

[45]  J. Eaton,et al.  Japanese and U.S. Exports and Investment as Conduits of Growth , 1996 .

[46]  Maurizio Naldi,et al.  Concentration indices and Zipf’s law , 2003 .

[47]  Elhanan Helpman,et al.  A Simple Theory of International Trade with Multinational Corporations , 1984, Journal of Political Economy.

[48]  Volker Nocke,et al.  Mergers and the Composition of International Commerce , 2004 .

[49]  An Information-Based Trade Off between Foreign Direct Investment and Foreign Portfolio Investment , 2006 .

[50]  The Determinants of Cross-Border Equity Flows , 2005 .

[51]  W. Easterly,et al.  It's Not Factor Accumulation: Stylized Facts and Growth Models , 2001 .

[52]  G. Grossman,et al.  Optimal Integration Strategies for the Multinational Firm , 2003 .

[53]  Michael C. Jensen,et al.  The market for corporate control , 1983 .

[54]  R. Axtell.  Zipf Distribution of U.S. Firm Sizes , 2001, Science.