A consumer-surplus standard in foreign acquisitions, foreign direct investment, and welfare
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This study scrutinizes the ramifications of the strategic use of a consumer welfare argument in regulating foreign acquisitions and foreign market entry (i) on a multinational’s choice between acquiring a local firm’s existing assets (via negotiations or auctions) and investing in new assets via greenfield entry, or trade, under both complete and incomplete information; and (ii) on welfare. Any foreign acquisition fulfilling a minimum output requirement imposed by the host country as part of the foreign market entry regulation is in the best interest of the multinational even when there is complete trade liberalization. A local firm appropriates a bigger share from acquisition gains in an auction, and prefers generating information asymmetries. Welfare improves with a larger scope for ex-post firm heterogeneity when the foreign market entry regulation includes a minimum output requirement for foreign acquisitions based on consumer welfare.
KeywordsTrade Greenfield entry Foreign acquisitions Consumer welfare Foreign market entry regulation
This research was funded by the METU Research Grant (Project Nr. BAP-08-11-2016-052). Earlier and incomplete versions of this paper were distributed under the title “Foreign Direct Investment for Sale” and presented at the University of Otago (New Zealand) and at the Otago Workshop in International Trade. Revised versions were presented under the title “A Consumer-Surplus Standard in Merger Approvals, Foreign Direct Investment, and Welfare” at the annual meeting of the European Trade Study Group in Helsinki, at the Mainz Workshop on Foreign Direct Investment and Multinational Corporations, and at the University of Tuebingen (Germany) and greatly benefited from discussions and suggestions of the conference and seminar participants.
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