The Analysis Of The Choice Between Greenfield Investment And M&A

Foreign direct investment(FDI) can take place either through the Greenfield investment or the acquisition of existing domestic firms. In modern market, cross-border M&A is becoming the primary mode of FDI. The entry mode chosen by a multinational firm is determined by many factors such as the firm's experience in FDI, the host country's market situation, the industry character of the investment, and so on. this paper introduce some ideas from the"resource-based view of the firm". It supposes that in foreign entry, the firm transfer parts of its mobile capabilities to lower cost of foreign produce, and obtain non-mobile capabilities through searching them by itself or through M&A of existing domestic firms in host country's market. The industries differ in their proportion of mobile and non-mobile capabilities. This paper develops a Cournot model and finds that impacts on the entry mode of mobile capabilities transfer's cost and the number of existing domestic firms are on the restriction of each other. On industry level, the difference in proportion of mobile capabilities makes M&A more or less attractive to multinational firms. What's more, in an asymmetric market, the multinational firm will always choose to acquire more efficiency active firms but not firms with higher cost. As a result, the domestic firms in disadvantage are likely to be forced to quit the market, and then the whole or most market will be controlled by foreign investors, threatening the safety of host country's economy. In some conditions, there is a clash between the choice of a profit-maximizing MNE and the host country's preference, which provides a rationale for some FDI restrictions taken by host country's government. To promote the efficiency in the use of FDI, our country should make rational and various measures according to different situations on each kind of industry and market. The transfer of relatively advantage capabilities from FDI should be absorbed as much as possible and some laws about M&A should be improved.