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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Lars Persson

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lars.persson@ifn.se

Interdisciplinary European Studies

The European Union in a Changing World Order

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This book explores how the European Union responds to the ongoing challenges to the liberal international order. These challenges arise both within the EU itself and beyond its borders, and put into question the values of free trade and liberal democracy. 

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