Greenfield Fdi vs. Mergers and Acquisitions: Does the Distinction Matter?

Abstract

FDI flows to developing countries surged in the 1990s, to become their leading source of external financing. This rise in FDI volume was accompanied by a marked change in its composition: investment taking the form of acquisition of existing assets (M&A) grew much more rapidly than investment in mainly new assets (‘greenfield’ FDI), particularly in countries undertaking extensive privatization of public enterprises. This raises two issues. First, is the M&A boom a one-time effect of privatization, or is it likely to be followed by a rise in greenfield investment? Second, do these two types of FDI have different macroeconomic consequences – in terms of aggregate investment and growth? This paper focuses on establishing the stylized facts in terms of time precedence between both types of FDI, investment and growth using data for a large sample of industrial and developing countries. We find that in developing and industrial countries higher M&A is typically followed by higher greenfield investment, while the reverse is true only for industrial countries. In developing economies domestic investment leads both types of FDI, but not the reverse; while in industrial countries, domestic investment leads M&A FDI but is led by greenfield FDI. Neither type of FDI appears to precede economic growth in either developing or industrial countries, but FDI does respond positively to increases in the growth rate.