Much foreign direct investment (FDI) takes the form of mergers and acquisitions (M&A). It is commonplace in finance to view acquisitions as manifestations of the market for corporate control. Following on that insight we propose a model of FDI in which headquarters bid to control overseas assets. We derive an equation for bilateral FDI stocks that resembles the recently developed fixed effects approach to modelling bilateral trade flows. We estimate the model and use its parameters to construct benchmarks for evaluating multilateral inward and outward FDI. JEL classification: F21, F22, G34

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We analyze how China's emergence as a destination for foreign direct investment is affecting the ability of other countries to attract FDI. We do so using an approach that accounts for the endogeneity of China's FDI. The impact turns out to vary by region. China's rapid growth and attractions as a destination for FDI also encourages FDI flows to other Asian countries, as if producers in these economies belong to a common supply chain. There is also evidence of FDI diversion from OECD recipients. We interpret this in terms of FDI motivated by the desire to produce close to the market where the final sale takes place. For whatever reason # limits on their ability to raise finance for investment in multiple markets or limits on their ability to control operations in diverse locations # firms more inclined to invest in China for this reason are corresponding less inclined to invest in the OECD. A detailed analysis of Japanese foreign direct investment outflows disaggregated by sector further supports these conclusions. Barry Eichengreen Department of Economics University of California 549 Evans Hall 3880 Berkeley, CA 94720-3880 and NBER eichengr@econ.berkeley.edu Hui Tong Bank of England Threadneedle Street London, England hui.tong@bankofengland.co.uk Barry Eichengreen and Hui Tong April 2005 1.

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Cross-border mergers and acquisitions (M&As) have increased dramatically over the last two decades. This paper analyses the role of trade costs in explaining the increase in the number of cross-border mergers and acquisitions. In particular, we distinguish horizontal and non-horizontal M&As and investigate whether trade costs affect these two types of mergers differently. We analyse this question using industry data for 23 OECD countries for the period 1990-2001. Our findings suggest that while in the aggregate trade costs affect cross-border merger activity negatively its impact differs importantly across horizontal and non-horizontal mergers. The impact of trade costs is less negative for horizontal mergers, which is consistent with the tariff-jumping argument.

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This study examines the determinants of both inward and outward FDI for twenty emerging and transition economies in Europe (ETEE) over the period 1995-2001. We adopt a comparative perspective by explicitly comparing the determinants of FDI in ETEEs with alternative samples of both developed and other developing countries. Particular attention is paid to measures of governance and institutional change, including privatization, as determinants of both inward and outward FDI. We use a relatively broad measure of governance compared to other investigations of the direct investment process in emerging European countries. By and large, the determinants of foreign direct investment for our sample of ETEE countries are similar to those for other developing countries and, indeed, for developed countries as well. We find that governance is an important determinant of both capital outflows and capital inflows for all countries. However, we also identify ETEE-specific determinants. In particular, joining the EU, or even the prospect of joining the EU, promotes inward FDI (a halo effect), and this phenomenon particularly characterizes the former Communist countries. We interpret this result as suggesting the potential importance of a “locking in ” effect with respect to governance. That is, political integration into developed Europe provides longer-term assurances to foreign investors that institutional changes undertaken by transition economies will not be reversed.