Template-Type: ReDIF-Paper 1.0
Title: Serving Abroad: Export, M&A, and Greenfield Investment
Author-Name: Francesco Paolo Conteduca
Author-Email: francesco.conteduca@gess.uni-mannheim.de
Author-Name: Ekaterina Kazakova
Author-Email: Ekaterina.kazakova@gess.uni-mannheim.de
Classification-JEL: F14, F23
Keywords: Multinational Firms, Foreign Direct Investment, Mergers, Greenfield Investment, Services

Abstract: This paper studies foreign-market entry patterns in the professional services industry. We build a structural
model of horizontal foreign direct investment (FDI) with firms that are heterogeneous in terms of service quality.
Firms can choose to serve foreign markets via exporting, cross-border mergers (M&A), or greenfield investment.
Greenfield investment and exporting are subject to the standard proximity-concentration tradeoff and, in
addition, associated with uncertainty about foreign quality perception, while M&A resolves this uncertainty by
letting multinationals access the demand of the acquired firm. Reproduction of high quality abroad potentially
requires larger fixed entry costs, inducing high-quality service firms to export. The model is sufficiently flexible
to accommodate different orderings of entry types in terms of firm’s service quality. We then structurally
estimate the fundamental market-specific parameters of the model using firm-level FDI and trade data for
a sample of German firms. We find that entry patterns are reversed compared to the standard sorting in
 manufacturing: only the firms providing the highest service quality export, while lower-quality firms conduct
FDI. The relative sorting of M&A vs. greenfield FDI in terms of firm quality is market-specific and depends
on the relative importance of uncertainty about quality perception, the structure of entry costs, and size of
synergies associated with M&A. Finally, we calibrate the model equilibrium to the data on multinational and
trade flows between the EU, the US, and the rest of the world. Simulation of the service-trade liberalization
between the EU and the US, as planned for TTIP (Transatlantic Trade and Investment Partnership), shows
that the reduction of non-tariff trade barriers and introduction of quality standards reallocate quality across
entry alternatives, as well as make FDI a more prominent entry type

Note: 
Length: 52
Creation-Date: 2018-01
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp008
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2018_008