DP3166 Investment Liberalization - Who Benefits from Cross Border Mergers

Author(s): Pehr-Johan Norbäck, Lars Persson
Publication Date: January 2002
Keyword(s): fdi, mergers and acquisitions, restructuring
JEL(s): F00, F20, K20, L10, L30, O10
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=3166

Investment liberalizing countries are often concerned that cross-border mergers & acquisitions might have an adverse effect on domestic firms and benefit multinational enterprises (MNEs). Given that domestic assets are sufficiently scarce, we identify a preemption effect and an asset complementarity effect which imply that the acquisition price is substantially higher than the domestic seller’s reservation price. The preemption effect also implies that the seller might capture some of the MNEs’ initial rents. Moreover, other policies used in times of investment liberalization, such as restructuring, are explained through their effect on the value of the domestic assets.