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Impact of Greenfield FDI versus M&A on growth and domestic investment in developing Asia

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Abstract

A large literature establishes the growth-enhancing benefits of foreign direct investment (FDI) flows into emerging market economies in general. Conventional wisdom holds that FDI is a preferable form of external financing compared to other types of capital flows because of its stabilizing properties. While this might hold true largely for FDI flows of the Greenfield variety, in reality, a greater share of FDI to emerging economies in general and Asian economies appears to be in the form of mergers and acquisitions (M&A). Do all types of FDI flows produce similar macroeconomic benefits? This paper empirically explores whether the type of FDI flow, i.e. Greenfield versus M&A, matters in the way it impacts economic growth and domestic investment for a large panel of developing Asian economies over 1990–2013. We find Greenfield FDI contributes positively to economic growth while FDI in the form of M&A appears to have no significant growth influence. We also find that the effects of Greenfield FDI on domestic capital formation are stronger and larger relative to M&A flows.

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Fig. 1

Source: Complied from UNCTAD FDI Statistics

Fig. 2

Source: Complied from UNCTAD FDI Statistics

Fig. 3

Source: Complied from UNCTAD FDI Statistics

Fig. 4

Source: Complied from UNCTAD FDI Statistics

Fig. 5

Source: Complied from UNCTAD FDI Statistics

Fig. 6

Source: Complied from UNCTAD FDI Statistics

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Notes

  1. While not explicitly captured by the data, there has been a shift in portfolio flows – from predominantly portfolio equity flows per Asian financial crisis to both portfolio bond and equity flows in the global financial crisis.

  2. While Greenfield and M&A are in the form of new investments, a non-negligible component of FDI is in the form of retained earnings. However, data on this component are not systematically available.

  3. While this ratio dipped a bit after the financial crisis, there appears to have been an uptick again since 2012 onwards.

  4. In view of the complex linkages between the various capital flows, Chuhan et al. (1996) and Claessens et al (1995) argue that it may be misleading to look at capital flows individually, with the latter maintaining that it is only meaningful to examine aggregate financial accounts. Also see Sarno and Taylor (1997).

  5. The discussion follows Gopalan and Rajan (2016).

  6. Among the early works see Barro (1997); Borensztein et al. (1998); Mencinger (2003); Alfaro et al. (2004); Razin (2004); Carkovic and Levine (2005); Bosworth and Collins (1999); and Mody and Murshid (2005); For more recent assessments, see Herzer (2012) and Iamsiraroj (2016).

  7. As UNCTAD (2000) notes, FDI in the form of M&A is inferior to Greenfield FDI when the objective is to promote economic development through enhancing capital-stock.

  8. It is useful to note that the choice governing a multinational enterprise about the form of its entry mode is a significant area of research interest in the field of international business. See Slangen and Hennart (2007) for a review of this related empirical literature.

  9. That being said, both the papers appear to emphasize the importance of a threshold level of human capital for FDI of both types to have an impact of growth.

  10. It is useful to note that while our data includes 42 economies, in the regressions, the final count of countries drops to 24 and those countries are highlighted in Table 3.

  11. We also perform our empirics with two-year averages but do not report the results in the paper. They are available on request from the authors.

  12. UNCTAD Statistics also report the value of Greenfield FDI projects, but it is not available until 2003. Also most of the UNCTAD Greenfield inflow values are much larger than FDI inflows as the reported figures are estimated value of Greenfield investments. Further, a caveat to bear in mind is that while a great deal of focus has tended to be on how to attract new equity investments, not enough attention is being paid to existing investors and how to make sure that they keep investing in the country they are already in. UNCTAD data suggests that about 40 per cent of global FDI is in the form of retained earnings. While important, there is a dearth of data on reinvested earnings, which prevents us from doing further analysis on this component.

  13. The difference-in-Hansen tests cannot reject the null hypothesis, indicating that the instruments are exogenous.

  14. We also tried interactions of commodity exporters with the key FDI variables but the results were insignificant. Results are available on request.

  15. Although, for the developing economies sub-sample, they find that neither Greenfield FDI nor M&A have any significant relationship in increasing TFP.

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Acknowledgements

This paper was supported by China National Social Science Fund (Grant No.: 16BJY167).

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Authors and Affiliations

  1. Asia Competitiveness Institute, Lee Kuan Yew School of Public Policy, National University of Singapore, Singapore, Singapore

    Sasidaran Gopalan

  2. China Academy of Public Finance and Public Policy, Central University of Finance and Economics, Beijing, China

    Alice Ouyang

  3. Lee Kuan Yew School of Public Policy, National University of Singapore, Singapore, Singapore

    Ramkishen S. Rajan

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  1. Sasidaran Gopalan
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  2. Alice Ouyang
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  3. Ramkishen S. Rajan
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Correspondence to Sasidaran Gopalan.

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Gopalan, S., Ouyang, A. & Rajan, R.S. Impact of Greenfield FDI versus M&A on growth and domestic investment in developing Asia. Econ Polit 35, 41–70 (2018). https://doi.org/10.1007/s40888-017-0085-z

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