TY - JOUR
T1 - An assignment theory of foreign direct investment
AU - Nocke, Volker
AU - Yeaple, Stephen
N1 - Funding Information:
Acknowledgements. The authors gratefully acknowledge financial support by the National Science Foundation (grant SES-0422778) and the University of Pennsylvania Research Foundation. We would like to thank the Managing Editor (Andrea Prat), three anonymous referees, and seminar audiences at the University of Pennsylvania, Princeton University, Stanford University, University of Wisconsin, Michigan State University, University of Michigan, University of Texas-Austin, Pennsylvania State University, the European Central Bank, the 2004 Winter Meeting of the NBER ITI program (Stanford), the 2005 Meeting of the NBER ITO working group (Cambridge), the 2005 Society of Economic Dynamics conference (Budapest), the 2006 Annual Meeting of the American Economic Association (Boston), the 2006 RIIE conference on Globalization and Corporate Restructuring (Stockholm), and the 2004 International Economics Conference at UC Santa Cruz. The statistical analysis of firm-level data on U.S. Multinational Corporations reported in this study was conducted at the International Investment Division, U.S. Bureau of Economic Analysis, under arrangement that maintained legal confidentiality requirements. Views expressed are those of the authors and do not necessarily reflect those of the Bureau of Economic Analysis.
PY - 2008/4
Y1 - 2008/4
N2 - We develop an assignment theory to analyse 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 setting up a new production division in the foreign country. In equilibrium, greenfield FDI and cross-border acquisitions coexist within the same industry, 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 production-cost differences between countries are small, while greenfield investment plays a more important role for FDI from high-cost into low-cost countries. These results capture important features of the data.
AB - We develop an assignment theory to analyse 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 setting up a new production division in the foreign country. In equilibrium, greenfield FDI and cross-border acquisitions coexist within the same industry, 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 production-cost differences between countries are small, while greenfield investment plays a more important role for FDI from high-cost into low-cost countries. These results capture important features of the data.
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U2 - 10.1111/j.1467-937X.2008.00480.x
DO - 10.1111/j.1467-937X.2008.00480.x
M3 - Article
AN - SCOPUS:40449107939
SN - 0034-6527
VL - 75
SP - 529
EP - 557
JO - Review of Economic Studies
JF - Review of Economic Studies
IS - 2
ER -
