The effect of comparative advantage of host country’s industry on multinationals’ M&A vs greenfield FDI decisions

Purpose – The purpose of this paper is to argue that comparative advantage of host country’s industry can be one of the significant determinants of the decision on mergers and acquisitions (M&A) or greenfield in foreign direct investment (FDI). Design/methodology/approach – The authors extract five-related properties of an industry with comparative advantage in a host nation from Bernard et al.’s (2007) international trade model with heterogeneous firms and attempt to empirically test their roles in a multinational enterprise’s (MNE) M&A or greenfield investment decision, using the inward FDI data set in Korea from 1999 to 2006. Findings – The theoretical framework finds that the five properties derived from an industry with comparative advantage in a host country have mixed motives for M&A or greenfield. The empirical results show that selected conventional independent variables generally affect the M&A or greenfield entry mode decision with significance individually and that their impacts become more or less prominent when the authors employ interaction terms combining them with comparative advantages in the industries. Research limitations/implications – This implies that MNEs not only consider their own firmspecific advantages or other country-level factors for foreign market entries as the previous research generally found, but also seriously take into account industry-specific factors, especially industry-wide comparative advantages based on heterogeneous productivities of firms. Originality/value – This paper reconciles multinationals’ strategic motives under an oligopolistic market with their efficiency gains under a monopolistic competitive market, which are considered as twomain factors for cross-border M&A. Furthermore, this paper adds a new firm-level data set into entry mode research.