An assignment theory of foreign direct investment

Volker Nocke, Stephen Yeaple

Research output: Contribution to journalArticle

86 Scopus citations

Abstract

We develop an assignment theory to analyse the volume and composition of foreign direct investment (FDI). Firms conduct FDI by either engaging in greenfield investment or in cross-border acquisitions. Cross-border acquisitions involve firms trading heterogeneous corporate assets to exploit complementarities, while greenfield FDI involves setting up a new production division in the foreign country. In equilibrium, greenfield FDI and cross-border acquisitions coexist within the same industry, but the composition of FDI between these modes varies with firm and country characteristics. Firms engaging in greenfield investment are systematically more efficient than those engaging in cross-border acquisitions. Furthermore, most FDI takes the form of cross-border acquisitions when production-cost differences between countries are small, while greenfield investment plays a more important role for FDI from high-cost into low-cost countries. These results capture important features of the data.

Original languageEnglish (US)
Pages (from-to)529-557
Number of pages29
JournalReview of Economic Studies
Volume75
Issue number2
DOIs
StatePublished - Apr 2008

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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