R&D Spillovers and Foreign Market Entry: Acquisition vs. Greenfield Investment

Abstract

This paper presents a three-stage game to model the entry behavior of amultinational\r\nfirm in the presence of R&D spillovers. The multinational firm’s entry mode choice –\r\nthat is, to invest to set up a new plant or merge with a local firm – is a function of the\r\nmagnitude of spillovers, as well as the relative cost of greenfield investment, and mergers\r\nand acquisitions (M&A). Our model shows that if there exist relatively high R&D leakages\r\nand relatively small difference in cost between M&A and greenfield investment, an R&Dintensive\r\nforeign firm tends to choose greenfield investment rather than M&A, while if there\r\nexist relatively low R&D leakages, the foreign firm is more likely to choose M&A rather\r\nthan greenfield investment. It is also shown that the size of social welfare of the host country\r\ndepends on the degree of R&D spillovers. These results produce strong implications for\r\nantitrust policy for particularly developing countries.