Cross border M&A: who buys whom when market size and technology levels differ?

Abstract

Global FDI activities are dominated by cross border acquisitions, especially between industrialized countries. In small industrialized countries, there is a growing concern of losing leading technological firms to large foreign companies through acquisitions. In this paper, we identify under what conditions a technology leader from a small country acquires a laggard from a large country, and vice versa. We answer this question using a two-firm two-country Cournot model, where firms in both countries can enter the foreign market, either through greenfield FDI or acquisition. We consider the roles of technological and market size asymmetries, technology transfer costs and M&A transaction costs; like merger integration costs and fees charged by legal and financial advisors. To become the acquirer, a firm from a small country needs not only a strong technological lead but also the ability to exploit it on a global scale, which requires low international technology transfer costs. Moreover, we find that a multilateral liberalization of greenfield investments may actually increase the incentives for foreign acquisitions. The effect of such liberalization on the nationality of the acquirer depends largely on the extent of the technology gap.