Foreign direct investment in vertically related markets

We study an MNE's choice of FDI mode in a vertically related market with local input sourcing. We show how the market's vertical structure and trading features affect this choice. An MNE's incentives to expand through cross-border acquisition rather than through greenfield investment are stronger in markets with higher upstream bargaining power, upstream concentration and unobservable contract terms. The opposite holds in markets in which wholesale price contracts, instead of two-part tariffs, are used. Our welfare analysis suggests that the host country should not always welcome FDI and should discourage FDI through acquisition.