The choice of market entry mode: greenfield Investment, M&A and joint ventures

Abstract

Multinational firms may enter a market by different modes of foreign direct investment (FDI). This paper endogenizes both the mode and the size of FDI. It shows that the credibility of greenfield investment decides on the success of a joint venture or of a merger as it determines the outside option of the target firm. If greenfield investment is a credible threat and any other FDI option does not require any fixed cost, a joint venture will be agreed to by the local firm, and the foreign firm prefers a joint venture to a merger. In case of fixed costs across the board of all FDI options, a foreign firm prefers a merger to a joint venture if the efficiency of cost-reducing investments is small.