Embed Size (px)
Citation preview
Foreign Direct Investment Modes and Local Backward Linkages
Chrysovalantou Milliou Apostolis Pavlou
CESIFO WORKING PAPER NO. 4623 CATEGORY 11: INDUSTRIAL ORGANISATION
FEBRUARY 2014
An electronic version of the paper may be downloaded from the SSRN website: www.SSRN.com
from the RePEc website: www.RePEc.org from the CESifo website: Twww.CESifo-group.org/wp T
CESifo Working Paper No. 4623
Foreign Direct Investment Modes and Local Backward Linkages
Abstract We study a multinational enterprise’s (MNE) choice of foreign direct investment (FDI) mode in a vertically related market with local input sourcing. We show that the vertical structure of the market and its features play a crucial role for the MNE.s decision: backward linkages, enhanced upstream bargaining power, use of non-linear contracts, and interim unobservability of contract terms favor cross-border acquisition relative to greenfield investment. We also show that while a cross-border acquisition reduces welfare, greenfield investment can be welfare-improving. These results suggest that policy should distinguish among FDI modes as well as among markets with more or less dependence on backward linkages.
JEL-Code: L130, F120, F230.
Keywords: foreign direct investment, greenfield investment, acquisition, vertical relations, two-part tariffs.
Chrysovalantou Milliou Department of International &
European Economic Studies Athens University of Economics and
Business Greece – Athens 10434
Apostolis Pavlou Department of Economics
Athens University of Economics and Business
Greece – Athens 10434 [email protected]
January 2014 We would like to thank Maria Alipranti, Stephane Caprice, Jean Gabszewicz, Emmanuel Petrakis, Joel Sandonis, and the conference participants at GAEL 2013 at Grenoble and at EARIE 2013 at Evora for their useful comments. This research has been co-financed by the European Union (European Social Fund - ESF) and Greek national funds through the Operational Program “Education and Lifelong Learning” of the National Strategic Reference Framework (NSRF) - Research Funding Program: Thalis - Athens University of Economics and Business – “New Methods in the Analysis of Market Competition: Oligopoly, Networks and Regulation”. Full responsibility for all shortcomings is ours.
