Working Paper No. 644

Investment Liberalization - Why a Restrictive Cross-Border Merger Policy can be Counterproductive

Published: June 9, 2005Pages: 37Keywords: Investment Liberalization; Mergers & Acquisitions; Development; OwnershipJEL-codes: F23; K21; L13; O12

Investment Liberalization - Why a Restrictive Cross-Border Merger Policy can be Counterproductive Pehr-Johan Norbäck and Lars Persson


Investment liberalizing countries are often concerned that cross-border mergers & acquisitions, in contrast to greenfield investments, might have an adverse effect on domestic firms and consumers. However, 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 profits. Moreover, we show that for the acquisition to take place, the MNE must be sufficiently efficient when using the domestic assets, otherwise rivals will expand their business, thereby making the acquisition unprofitable. Consequently, restricting cross-border M&As may also hurt consumers.

 

Pehr-Johan Norbäck

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Ph: +46 8 665 4522
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Lars Persson

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Ph: +46 8 665 4504
lars.persson@ifn.se

An Agenda for Europe

Institutional Reform for Innovation and Entrepreneurship

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The authors of this book, Niklas Elert, Magnus Henrekson and Mikael Stenkula, advise the economies of the European Union to become more entrepreneurial in promoting innovation and economic growth. The authors propose a reform strategy with respect to several aspects to achieve this goal.

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