Cross-border mergers with flexible policy regime: The role of efficiency and market size |
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| Institution: | 1. Department of Economics, Missouri University of Science and Technology, 500 West 13th St., Rolla, MO 65409, USA;2. Department of Economics, Southern Illinois University Carbondale, 1000 Faner Dr., Carbondale, IL 62901, USA;1. Department of Economics, National Central University, Taiwan;2. Graduate Institute of Industrial Economics, National Central University, Taiwan;1. Department of Economics, University of Pretoria, South Africa;2. Wits Business School (University of the Witwatersrand) and VU University, Amsterdam, The Netherlands;3. Kiel Institute for the World Economy, Kiellinie 66, 24105 Kiel, Germany;1. Halle Institute for Economic Research (IWH) and Friedrich Schiller University Jena, Germany;2. Department of Economics, Chinese University of Hong Kong, China;1. Department of Civil, Architectural, and Environmental Engineering, Missouri University of Science and Technology, Rolla, MO, USA;2. Department of Economics, Missouri University of Science and Technology, Rolla, MO, USA;3. SAMRC/Wits Developmental Pathways for Health Research Unit, Department of Paediatrics and Child Health, School of Clinical Medicine, Faculty of Health Sciences, University of the Witwatersrand, Johannesburg, South Africa |
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| Abstract: | This study provides a theoretical and empirical framework for understanding the determinants of cross-border mergers. Past literature has focused on the effect of trade liberalization as the key factor triggering international mergers. We introduce the idea of flexible policy regime in which optimal policies are sensitive to whether a cross-border acquisition has taken place or not. In a free-trade model given asymmetries in marginal cost, we find that optimal subsidies decline when firms acquire inefficient foreign firms while optimal subsidies increase when firms acquire efficient firms. We also find that as the efficiency of the acquirer increases, the profitability of the acquisition and hence the likelihood that it takes place also increases. We find that the role of market size in triggering cross-border acquisitions may be limited even with free trade. |
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| Keywords: | Production tax Flexible policy Market size Japan OECD Efficiency |
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