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Core competencies, matching and the structure of foreign direct investment

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  • Federico J. Díez
  • Alan C. Spearot

Abstract

We develop a matching model of foreign direct investment to study how multinational firms choose between greenfield investment, acquisitions and joint ownership. Firms must invest in a continuum of tasks to bring a product to market. Each firm possesses a core competency in the task space, but the firms are otherwise identical. For acquisitions and joint ownership, a multinational enterprise (MNE) must match with a local partner that may provide complementary expertise within the task space. However, under joint ownership, investment in tasks is shared by multiple owners and, hence, is subject to a holdup problem that varies with contract intensity. In equilibrium, ex ante identical multinationals enter the local matching market, and, ex post, three different types of heterogeneous firms arise. Specifically, the worst matches are forgone and the MNEs invest greenfield; the middle matches operate under joint ownership; and the best matches integrate via full acquisition. We link the firmlevel model to crosscountry and industry predictions and find that a greater share of full acquisitions occur between more proximate markets, in hosts with greater revenue potential and within contractintensive industries. Using data on partial and full acquisitions across industries and countries, we find robust support for these predictions.

Suggested Citation

  • Federico J. Díez & Alan C. Spearot, 2014. "Core competencies, matching and the structure of foreign direct investment," Canadian Journal of Economics, Canadian Economics Association, vol. 47(3), pages 813-855, August.
    • Handle: RePEc:cje:issued:v:47:y:2014:i:3:p:813-855
    DOI: 10.1111/caje.12097
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    Cited by:

    1. Haruka Takayama, 2021. "Greenfield or Brownfield? FDI Entry Mode and Intangible Capital," Discussion Paper Series DP2021-24, Research Institute for Economics & Business Administration, Kobe University.
    2. Arijit Mukherjee & Umut Erksan Senalp, 2021. "Firm‐productivity and cross border merger," Review of International Economics, Wiley Blackwell, vol. 29(4), pages 838-859, September.
    3. Fredrik Heyman & Pehr‐Johan Norbäck & Rickard Hammarberg, 2019. "Foreign Direct Investment, Source Country Heterogeneity and Management Practices," Economica, London School of Economics and Political Science, vol. 86(342), pages 362-395, April.
    4. Charlie Joyez, 2018. "Interaction between firm-level and host-country characteristics and multinationals' integration choices," Working Papers DT/2018/03, DIAL (Développement, Institutions et Mondialisation).

    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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