Cross-border Mergers &

Acquisitions
vs.
Greenfield Foreign Direct
Investment:
The Role of Firm Heterogeneity
By Volker Nocke and Stephen Yeaple
 1. What are the characteristics of firms
that choose between various modes of
foreign market access?
What’s the
problem?
2. What are the effects of these on the
international organization of
production?
 FIRM HETEROGENEITY
What are the
characteristics
of firms that
choose Mobile Non-Mobile
between Capabilities Capabilities
various modes travel well across travel less well
of foreign borders from one country
market access? to another
What are the Foreign Market
Entry Modes
characteristics
of firms that
choose Exporting
Foreign Direct
between Investment (FDI)

various modes
of foreign
Cross-border Merger
market access? & Acquisitions (M&A)
Greenfield FDI
What are the
effects of these
on the
international
organization of
production?
Source: UNCTAD World Investment Prospects Survey 2014-2016
 – Part 1: Develops a general equilibrium
model to mathematically predict the
relationships between firm heterogeneity,
foreign market entry mode, and firm
Method efficiency
– Part 2: Comparative statics on the effects
of changes in (1) transport costs (tariffs)
and (2) degree of mobility of non-mobile
capabilities
 – Determinant of international organization of
production → The source of firm heterogeneity
– Key performance indicator → Firm Efficiency

Findings: Mobile Industries

Part 1
Cross-border M&A > Greenfield FDI > Exporting

Non-Mobile Industries
Greenfield FDI > Exporting > Cross-border M&A
 Mobile Non-Mobile
△ in
Industries Industries

Findings:
Trade Costs ↑ ↓
Direct relationship with the
Trade Costs
number of firms engaging in FDI ↑ ↓
Part 2 (Tariffs)
FDI
Exporting ↓ ↑

Degree of Mobility ↑ ↓
mobility of Change in composition of
Greenfield FDI ↑ ↓
non-mobile FDI
capability Cross-border
↓ ↑
M&A
 Firm level: Decide on the best way to
serve foreign markets
Why is it
important? Policy level: Create well-informed
trade and investment policies specific
to FDI types
 – There is heterogeneity in firms’ capabilities, and these
capabilities differ in their degree of international mobility
– Mobile firms participate in cross-border M&A market to
exploit complementary capabilities that arise between a
Key local firm’s country-specific capabilities.

Takeaways – Non-mobile firms participate in greenfield FDIs, but can

only bring mobile capabilities abroad.
– Exporting is most favorable for countries with low trade
barriers/costs.
 Nocke, Volker, and Stephen Yeaple. “Cross-Border Mergers
and Acquisitions vs. Greenfield Foreign Direct Investment: The
Role of Firm Heterogeneity.” Journal of International
Economics, vol. 72, no. 2, 2007, pp. 336–365.,
doi:10.1016/j.jinteco.2006.09.003.

References United States, Congress, “World Investment Prospects Survey

2014-2016.” World Investment Prospects Survey 2014-2016,
UNCTAD, 2016.
United States, Congress, “World Investment Report 2018:
Investment and New Industrial Policies.” World Investment
Report 2018: Investment and New Industrial Policies, United
Nations, 2018.
 What do you think is the most common
Question mode of foreign market entry into the
Philippines?
Answer