Papers Received in
2003
Intra- and Inter-Firm Technology Transfer in an International Oligopoly
B. Ferrett, University of Nottingham
Abstract: Foreign-owned firms possess widely-documented 'productivity advantages' over domestic firms. To analyse their sources theoretically, we model the relationships between foreign direct investment (FDI) inflows and outflows and national 'productivity distributions' across firms (plants) in an international oligopoly. Industrial structure is determined endogenously, and both greenfield- and acquisition-FDI flows are allowed for. Two characteristics of the national 'productivity distributions' (across plants) in the industry considered are endogenously determined in our model: plant-level (labour) productivity, and the number of rival plants. There are three ways in which firms' FDI decisions interact with a national 'productivity distribution': via intra- and inter-firm (spillovers) technology transfer, and via their effects on entry incentives. Three principal conclusions emerge. First, relationships between industry greenfield- and acquisition-FDI flows, and structural parameters can be non-monotonic. Second, equilibrium greenfield-FDI flows and trade costs are positively associated. Third, rises in the technological lead of an incumbent firm make that firm 'less likely' to undertake greenfield-FDI in equilibrium, but they make foreign technological laggards 'more likely' to undertake ('technology-sourcing') greenfield-FDI in the leader's home country. We also briefly compare our model's predictions on the sources of MNEs' 'productivity advantages' to those of Dunning's popular OLI (ownership-location-internalisation) paradigm.
Keywords: acquisition-FDI; greenfield-FDI; technology transfer; spillovers; foreign-owned firms' 'productivity advantages'
Download paper; Contact address: ben.ferrett@nottingham.ac.uk
Greenfield Investment versus Acquisition: Positive Analysis
B. Ferrett, University of Nottingham
Abstract: The analysis is motivated by the observation that foreign direct investment (FDI) is in reality a heterogeneous flow of funds, composed of both greenfield-FDI ('greenfield investment') and acquisition-FDI (cross-border mergers and acquisitions), although previous game-theoretic analyses have concentrated exclusively on one form of FDI. We aim to isolate the determinants of the equilibrium form of FDI. We model the equilibrium industrial structures of a concentrated (two-incumbent) global industry that spans two (perfectly segmented) national product markets (i.e. an 'international oligopoly'). Firms' FDI decisions (i.e. whether to produce abroad and what form of FDI to choose) and process R&D decisions are made endogenously, and potential entry into the industry is allowed for. Key findings are that acquisition-FDI arises in medium-sized markets (where entry does not occur) and that necessary conditions for greenfield-FDI are a large market and a small sunk cost of additional plants. In future work the welfare properties of equilibria associated with the alternative forms of FDI will be compared.
Keywords: greenfield-FDI; acquisition-FDI; international oligopoly; equilibrium industrial structure; endogenous R&D
Download paper; Contact address: ben.ferrett@nottingham.ac.uk
Endogenous R&D and Entry in an International Oligopoly
B. Ferrett, University of Nottingham
Abstract: We present two models of the greenfield-FDI, R&D and entry decisions of rival firms in an international oligopoly. Specifically, we develop a blockaded-entry (BE) two-stage game as a benchmark: in the first stage, the two incumbents choose whether to undertake greenfield-FDI or R&D (or both); in the second stage, the firms compete a la Bertrand in two host countries. The potential-entry (PE) game includes the entry decision of a third firm immediately before the market stage. The games are solved backwards so that industrial structure becomes endogenous. Four principal conclusions emerge. First, relationships between industry greenfield-FDI flows and R&D spending, and structural parameters can be non-monotonic. Second, two-way relationships exist between firms' greenfield-FDI and R&D decisions. Third, equilibria in the PE game differ from those under BE because of equilibrium entry-deterrence and -accommodation. Fourth, the incumbents' equilibrium strategies towards entry under PE depend on the sunk costs of greenfield-FDI and R&D.
Keywords: greenfield-FDI; international oligopoly; equilibrium industrial structure; endogenous R&D; entry
Download paper; Contact address: ben.ferrett@nottingham.ac.uk
Effects of economic integration on G.I. and cross-border M&A location pattern: theoretical strategic analysis and simulation
O. Bertrand, TEAM, University of Paris1 Panthéon Sorbonne and CNRS
Abstract: This paper investigates the linkages between economic integration and horizontal FDI location. In a three countries partial equilibrium model with differentiated Cournot and Bertrand competition, we incorporate the two main FDI modes: Greenfield Investment (G.I.) and cross-border Merger and Acquisition (M&A). We also authorize regionally-based firms to invest outside the regional area. Economic integration characterized by internal and external transaction costs may affect entry modes (G.I. vs. M&A) and its location (intra - extra regional flows). Our result suggests the existence of complex linkages depending simultaneously on set-up fixed costs, the competitive mode of market interaction and the product differentiation.
Keywords: FDI, integration, location, entry mode, mergers and acquisitions
Download paper; Contact address: olivier.bertrand@malix.univ-paris1.fr