Cross-border M&A vs. greenfield FDI: Economic integration and its welfare impact

This paper examines the impacts of regional economic integration on the FDI entry mode of multinational firm and the welfare implications focusing on two entry modes, greenfield investment and cross-border M&A. Based on a oligopoly model where each representative firm competing in Cournot fashion, we demonstrate that the preferential trade arrangement increases the multinational firms’ incentives to shift its entry mode from greenfield investment to cross-border M&A. Moreover, greenfield investment is a welfare dominant FDI entry mode for the host country while cross-border M&A might be preferred by multinational firms when the strategic effects of M&A are considered in addition to the asymmetric technology transfer effects of two entry modes. Finally, it is shown that there exists a unique equilibrium policy intervention to induce the choice of greenfield investment when the multinational firm’s marginal cost is lower than the critical value.