FDI and the Role of Financial Market Quality

Abstract

In this chapter we analyze the role of financial factors in the undertaking of cross-border acquisitions. We discuss financial firm-specific advantages as drivers of these acquisitions as well as the role of the development of the home financial market in exploiting these advantages. Based on a sample of 1,447 European firms' cross-border acquisitions amounting to a total of 566 acquisitions spanning from 0 to 18 for individual firms, we find strong evidence in favor of a cost-of-equity effect on the occurrence of FDI, whereas the stand-alone effect of debt costs is indeterminate. However, allowing firm-specific financial characteristics to be conditioned by home-country financial development, both equity costs and debt costs are found highly significant explanatory factors for cross-border acquisitions undertaken by the sample firms.

Citation

Forssbaeck, J. and Oxelheim, L. (2011), "FDI and the Role of Financial Market Quality", Ramamurti, R. and Hashai, N. (Ed.) The Future of Foreign Direct Investment and the Multinational Enterprise (Research in Global Strategic Management, Vol. 15), Emerald Group Publishing Limited, Leeds, pp. 85-109. https://doi.org/10.1108/S1064-4857(2011)0000015010