Greenfield or M&A? The Role of Economic Policy Uncertainty in Home and Host Countries

ABSTRACT

This paper examines the impact of economic policy uncertainty in home and host countries on the choice of foreign establishment mode. Using 777 foreign subsidiary establishments made by Chinese firms from 2004 to 2015, we find that firms prefer M&A compared to greenfield investment as the establishment mode when the host country is experiencing high economic policy uncertainty. Firms that face high economic policy uncertainty in their home country prefer cross-border M&A when entering the host country. Economy policy uncertainty in the home country is the main factor when economic policy uncertainties in both the home and host countries are considered.

KEYWORDS:

• Foreign direct investment
• cross-border M&A
• greenfield investment
• economic policy uncertainty
• establishment mode

JEL:

• D8
• F21
• F23

Notes

1. As one of the largest emerging countries, China has experienced a rapid expansion in OFDI since 2000. According to the statistics of the 2019 China Foreign Direct Investment Statistics Bulletin, the scale of China’s foreign direct investment (FDI) reached US$136.91 billion in 2019, whereby its global ranking rose to 2nd, from 26th in 2002. Meanwhile, the scale of foreign investment stocks was also as high as US$2.2 trillion, rising from 25th in 2002 to 3rd.

2. It is worth noting that entry mode is different from establishment mode. Entry mode usually involves a decision regarding the level of control and resource commitment (Ahsan and Musteen 2011). Such decisions range from the lowest level of control in the form of non-equity or contractual agreement to the highest level of control in the form of wholly owned subsidiaries. Whereas the establishment mode decision involves the choice between M&A and greenfield investment, it has been shown that the establishment mode decision is independent of entry mode choice (Brouthers and Hennart 2007; Padmanabhan and Cho 1996).