Acquisition or direct entry, technology transfer, and FDI policy liberalization

This paper considers a number of symmetric multinational firms entering into a host country either directly or by acquiring local companies. The foreign multinationals strategically interact in both technology transfer and in the product market stage. Taking multinational firm competition into account implies that acquisition will more likely become the preferred mode of entry into the host country. This provides a possible rationale for the surge in the share of FDI taking place through mergers and acquisitions even in developing countries. Furthermore, we find that the level of the cost of technology transfer provides a possible rationale for the often observed pattern of investment liberalization. As the cost of technology transfer decreases, foreign multinational companies are first allowed to compete with local firms and in case of even lower cost of technology transfer, foreign ownership restrictions are also removed. Hence, we show that investment liberalization should go in tandem with host country policies that lower the cost of technology transfer.