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Type: Journal article
Title: Endogenous market structure and foreign market entry
Author: Markusen, J.
Stähler, F.
Citation: Review of World Economics, 2011; 147(2):195-215
Publisher: Springer
Issue Date: 2011
ISSN: 1610-2878
Statement of
James Markusen, Frank Stähler
Abstract: Models dealing with cross-border acquisitions versus greenfield investment usually assume that the entry of a foreign firm into a market has effects on the outputs of all domestic firms in that market, but exit or entry of local firms is not considered. The purpose of this paper is to re-examine the acquisition versus greenfield versus exporting question under fixed versus free entry assumptions for local firms. Our finding is that greenfield entry and exporting options are more attractive relative to acquisition when the local market structure adjusts to foreign entry through local entry or exit than when it is fixed. With respect to welfare in the host economy, existing theory models and policy discussions maintain that the effects of greenfield versus acquisition entry differ substantially. We show that under free entry and exit, there is no difference between the two for consumer surplus, but acquisition improves welfare a little through rent extraction by the local acquired firm. Thus the existing conventional wisdom may be leading to inappropriate policy choices by host governments.
Keywords: Cross-border acquisitions; foreign direct investment; multinational firms; endogenous market structures
Rights: © Kiel Institute 2010
DOI: 10.1007/s10290-010-0085-3
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Economics publications

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