Heterogeneous Frictional Costs Across Industries in Cross-border Mergers and Acquisitions
NBER Working Paper No. 22546
While there has been significant research to explore the determinants (and frictions) of foreign direct investment (FDI), past literature primarily focuses on country-wide FDI patterns with little examination of sectoral heterogeneity in FDI. Anecdotally, there is substantial sectoral heterogeneity in FDI patterns. For example, a substantial share of FDI (around 40-50%) is in the manufacturing sector, yet manufacturing accounts for a relatively small share of production activity in the developed economies responsible for most cross-border M&A. In this paper, we extend the Head and Ries (2008) model of cross-border M&A to account for sectoral heterogeneity and estimate the varying effects of FDI frictions across sectors using cross-border M&A data spanning 1985 through 2013. We find that non-manufacturing sectors generally have greater sensitivity to cross-border M&A frictions than is true for manufacturing, including such frictions as physical distance, cultural distance, and common language. Tradeability is positively associated with greater cross-border M&A, and is an additional friction for the many non-manufacturing sectors because they consist of mainly non-tradeable goods.
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Document Object Identifier (DOI): 10.3386/w22546
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