Gains from multinational competition for cross-border firm acquisition
Economics : the Open-Access, Open-Assessment e-Journal
This study shows that when there is multinational competition for foreign acquisition, the strategic use of a consumer welfare argument in regulating foreign market entry leads to a preemptive foreign acquisition. Even under fierce competition, foreign acquisition will emerge as part of a non-cooperative equilibrium (although multinationals would have gained more had they been able to credibly commit to a cooperative equilibrium of independent foreign sales, either via greenfield investment or
... ield investment or trade under complete liberalization) which increases local welfare by more than both the case without foreign market entry and the case with foreign market entry via independent foreign sales. (Published in Special Issue FDI and multinational corporations) JEL F23 1 In particular, low trade costs warrant even a lower fixed investment cost threshold below which FDI will be more profitable than trade. Alternatively, in a trade model with monopolistic competition and firm heterogeneity, Helpman et al. (2004) show that there is sorting by productivity thresholds determining firms' foreign market entry modes. By the same token, in a simple linear Cournot model with constant marginal production costs and firm heterogeneity, it is straightforward to show that (e.g., see Koska et al. 2018a) , unless there is prohibitively large fixed investment cost, denoted F, (so FDI is not profitable for any firm), or unless there is negligibly small F (so FDI is more profitable than trade for all firms), for any F, there is a corresponding threshold cost type, denoted λ (F), such that firms with marginal cost c * < λ (F) will prefer FDI over trade, and those with c * > λ (F) will prefer trade over FDI. 2 A consumer welfare argument that can be considered the common practice in most countries as documented by Breinlich et al. (2017) challenges mergers and acquisitions on the basis whether they lessen competition and adversely affect consumers.