Financial Constraints, Institutions, and Foreign Ownership / Ron Alquist, Nicolas Berman, Rahul Mukherjee, Linda Tesar.

Format:

Book

Author/Creator:

Alquist, Ron.

Contributor:

National Bureau of Economic Research.

Berman, Nicolas.

Mukherjee, Rahul.

Tesar, Linda.

Series:

Working Paper Series (National Bureau of Economic Research) no. w24241.

NBER working paper series no. w24241

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

This paper examines how external finance dependence, financial development, and institutions influence brownfield foreign direct investment (FDI). We develop a model of cross-border acquisitions in which the foreign acquirer's choice of ownership structure reflects a trade-off between easing target credit constraints and the costs of operating in an environment of low institutional quality. Using a dataset of cross-border acquisitions in emerging markets, we find evidence supporting the central predictions of the model that: (i) a foreign firm is more likely to fully acquire a target firm in sectors that are more reliant on external finance, or in countries with lower financial development/higher institutional quality; (ii) the level of foreign ownership in partially foreign-owned firms is insensitive to institutional factors and depends weakly on financial factors; (iii) the share of foreign acquisitions in all acquisition activity is also higher in external finance dependent sectors, or financially under-developed/high institutional quality countries; and (iv) sectoral external finance dependence accentuates the effect of country-level financial development and institutional quality. The theory and empirical evidence provide insight into the interaction between the financial, institutional and technological determinants of North-South brown field FDI.

Notes:

Print version record

January 2018.