Foreign Direct Investment and Technology Transfer

This paper examines the welfare effects of foreign direct investment, focusing on the asymmetric technological transfers and innovation efforts among different entry modes of FDI, such as greenfield FDI and cross-border M&A. Traditionally, greenfield FDI has been preferred by developing host countries, while recent research shows that cross-border M&A also has strong welfare-improving effects. We demonstrate that country asymmetries in terms of technologies and market sizes among integrating countries explains why greenfield investments are preferred to cross-border acquisitions in most developing economies: mainly because of asymmetric technology transfer effects. More specifically, when the host country has comparative advantage in production factor cost and in market size, greenfield FDI is the optimal investment regime, while cross-border M&A might be the optimal policy in the adverse case, as widely observed in recent FDI features in developing economies.