UNIVERSITY OF ECONOMICS ERASMUS UNVERSITY ROTTERDAM HO CHI MINH CITY INSTITUTE OF SOCIAL STUDIES VIETNAM THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE DISCREPANCIES OF DETERMINANTS BETWEEN CROSS-BORDER M&A AND GREENFIELD FDI: EVIDENCE IN EMERGING COUNTRIES BY TA THI THANH TRA MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, DECEMBER 2017 UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE DISCREPANCIES OF DETERMINANTS BETWEEN CROSS-BORDER M&A AND GREENFIELD FDI: EVIDENCE IN EMERGING COUNTRIES A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By TA THI THANH TRA Academic Supervisor: DR VU VIET QUANG HO CHI MINH CITY, DECEMBER 2017 DECLARATION I declare that the thesis entitled “The discrepancies of determinants between cross-border M&A and Greenfield FDI: evidence in emerging countries” has been absolutely conducted by myself under the supervision and guidance of Dr Vu Viet Quang from The University of Economics Ho Chi Minh City I commit that the whole interpretations in the research are based on my academic knowledge and the understanding of literature review presented following the references and this thesis has not been submitted to any graduate program I take full responsibility for the concepts, contentment, and results of this study TA THI THANH TRA ACKNOWLEDGEMENT This thesis reflects not only my work in current times, this is also a milestone that marks one of my most amazing journey When I were freshman, I have been introduced this master program Since then, I have made plan to attend this course because of its unique opportunities and advantages Throughout two years I have learned many different economic fields such as finance, development economics, and international trade This thesis presents the lessons learned in researching one of those aspect: two entry modes of foreign direct investment namely Greenfield investment and Cross-border M&A This thesis is also sweet fruit of dozens of lucky encounters I have experienced from many remarkable individuals who I wish to acknowledge I would first like to express my deep gratitude to my supervisor, Dr Vu Viet Quang for his wholehearted guidance, enthusiastic support and unceasing encouragement He has mentored me since I have just got an idea and no direction He is the one who supported me all the time without hesitation His insightful knowledge, valuable suggestions help me to brainstorm concept, expand the literature review, collect data and finish this research Additionally, his optimism and cheerfulness is what I will remember most, the time spent working with him is truly precious and memorable Besides, I am always grateful to all the lecturers and the staff of Vietnam – Netherlands Program This is my biggest fortune to have the most conscientiously supporters, they always take me in touch and support when I have any difficulty I owe my deepest gratitude to Dr Nam, Dr Thuy, who suppose me with all their resources Even this New Year holiday, they spend precious time to help me unconditionally I am indebted to my precious teammates for their sincerity and willingness to help Although we are very different in personality, interests, and even purpose while attending this course, fate let us meet together and give us precious friendship in real life It is an honor for me to encounter and be friend with all of you Additionally, I would like to give my personal thanks to Mr Khang, Mr Tam, who help me a lot while I am confusing and struggling with this research I wholeheartedly wish that we all can graduate on time and the friendship is forever I wish you all the best and hope your dream come true Last but not least, I would like to spend my inexpressible gratefulness to my beloved family who always believe me and give me freedom to whatever I have decided They have cherished with me every great moment and supported me all the time This thesis would not have been possible without their encouragement ABBREVIATION Cross-border M&A: Cross-border Mergers and Acquisitions FDI: Foreign direct investment Greenfield FDI: Greenfield Foreign Direct Investment IIAs: International Investment Agreements ODA: Official development assistance OLI – theory: Ownership, Location, and Internalization theory RBV: Resource-based view S&P500: The Standard & Poor's 500 TCE: Transaction Cost Economics ABSTRACT Cross-border M&A and Greenfield FDI have been a common strategy when a firm intends to participate in new markets Those two strategies are FDI mode choice and represent a notable alternative for the expansion plan Both Greenfield FDI and Cross-border M&A play an important role in economic growth in the host country Therefore, this empirical research works on the determinants of home firm decision based on two main respects This study estimates the determinants affective those two decisions Then, this research also provides the empirical evidence of the discrepancies of those determinants affecting Cross-border M&A and Greenfield FDI The observations are collected from emerging countries as host firms and use United States firms as home firms This research presents four results Firstly, host countries’ macroeconomic determinants between Cross-border M&A and Greenfield FDI have the similar effect Secondly, an enhancement of IPR protection law in the host countries will increase inward Greenfield FDI, while SHR protection law supports cross-border M&A decision Thirdly, firm level determinants have a strong impact on Cross-border M&A decisions Finally, macroeconomic determinants have a positive effect on Greenfield FDI decisions Key words: Cross-border M&A, Greenfield FDI, emerging countries JEL Classification: F20, F21, F23 TABLE OF CONTENTS LIST OF TABLES CHAPTER 1: OVERVIEW OF RESEARCH 1.1 Introduction: 1.1.1 World Investment context: 1.1.2 Problem statements: 1.2 Research objectives: 1.3 Research questions: 1.4 The importance of the study: 1.5 Structure of research: CHAPTER 2: LITERATURE REVIEWS 2.1 Theoretical Review: 2.1.1 Cross-border M&A and Greenfield FDI as choice to entry in a foreign market 2.1.2 Firm level and industry level factors affecting the decision of a mode of entry 11 2.1.3 Country level factors affecting the decisions of mode of entry 12 2.1.4 Research needs on cross-border M&As as a mode of entry 13 2.2 Empirical Review: 14 2.2.1 Macroeconomic and firm level determinants: 14 2.2.2 Legal environment in host-country: 17 2.3 Research hypotheses: 18 CHAPTER 3: DATA AND METHODOLOGY 20 3.1 Data collection 20 3.2 Empirical model 21 CHAPTER 4: RESULTS AND CONCLUSIONS 25 4.1 Summary statistics: 25 4.1.1 Data description: 25 4.1.2 The correlation matrix 28 4.1.3 Empirical results: 29 CHAPTER 5: CONCLUSION 36 5.1 Main findings: 36 5.2 Policy implications: 38 5.3 Limitations and further research recommendation: 39 REFERENCES 40 LIST OF TABLES Table 4.1: Summary statistics 25 Table 4.2: Summary statistics of entry mode choice via regions 27 Table 4.3: The correlation matrix 28 Table 4.4: The determinants of Cross-border M&A and Greenfield FDI 29 Table 4.5: The estimated results for the value of Cross-border M&A and Greenfield FDI using Seemingly Unrelated Regression (SUR) 33 CHAPTER 1: OVERVIEW OF RESEARCH 1.1 Introduction: 1.1.1 World Investment context: In 2017, global investment is slightly getting better with cautiously optimism forecast from UNCTAD report FDI will be increased by higher economic growth projections around the world, the report expects the value of FDI will reach nearly $1.8 trillion in 2017 However, this report show the ineffective legal policy and geopolitical risks are significant factors that practically damage the recovery In contrast, tax policy represented by corporate tax mostly affect Cross-border M&A decision In 2006, FDI prospects to emerging countries are generally positive excluding those countries in Latin America and the Caribbean Emerging countries as a whole are predict to get about 10 percent of FDI total value in 2017 This assumption bases on considerable development in emerging countries in Asia and Africa, where investors are more confidence to invest due to a better view in major economies through oil prices and regional integration In contrast, Latin America and the Caribbean still face uncertain macroeconomic and policy outlook, especially terrorism and wars which lead to investor’s hesitance Therefore, FDI flows to emerging economies would be continue their recover with a steadily speed, while those flows to developed economies would remain unchanged in 2017 FDI flows come to growth momentum period in 2016 about percent after a strong boost in 2015 Noteworthy is the fall of 14 percent from emerging economies However, they still remain the largest and the most important external source of financial capital for emerging countries – compared with investment portfolio, remittances and ODA In Asia emerging markets, FDI flows fell the first time in five years by nearly 15 percent to $443 billion in 2016 In those market in Africa, FDI flows decrease continuously percent from 2015 to $59 billion In Latin America and the Caribbean, trend in FDI flows speed up to 14 percent to $142 billion, based on weak commodity prices and pressures on exports In conclusion, FDI in lower middle income economies remained delicate with a decline of 13 percent in 2016, while middle income countries fall percent In contrast, upper middle income countries stay stable at $24 The correlation between variables ranges from -0.524 for the correlation between Ln(Population) and Ln(GDP) to 0.8791 for the correlation between Ln(Total sales) and Ln(Total assets) Most of the correlations are not higher than the absolute value of 0.8, proving that there is no multicollinearity among those variables in the estimation model However, the correlation between Ln(Total sales) and Ln(Total assets) to 0.8791, there is multicollinearity between these two variables In literature review, the previous authors agree that there is a strong relationship between the total assets and the total sales of a company They argue that the more total assets a firm get, the more total sales it gains from operating This research, however, plan to test the impacts of both determinants on Cross-border M&A and Greenfield FDI Therefore, the next regression would separately run these two variables to eliminate the multicollinearity That is means that this study estimate the influence of firm size to Cross-border M&A and Greenfield FDI by choosing Ln(Total sales) and Ln(Total assets) separately 28 4.1.3 Empirical results: In the empirical results, this research will display the empirical results via two Probit model method and Seemingly Unrelated Regression method The results from Probit regression answer for the first research question, while SUR provide empirical results for second research question First of all, this paper estimates the impact of region to investment decision Table 4.4: The determinants of Cross-border M&A and Greenfield FDI Probit Cross-border M&A Greenfield FDI Cross-border M&A Greenfield FDI -0.101 0.121 -0.115 0.127 Ln(Population) (-0.45) (0.55) (-0.48) (0.54) -0.199 0.461 -0.206 0.442 Ln(GDP) (-0.56) (1.44) (-0.60) (1.44) 3.166 0.131 3.55 -0.152 Bilateral Trade (0.87) (0.03) (0.83) (-0.03) -0.871 2.313 0.437 1.258 Coporate Tax (-0.09) (0.27) (0.04) (0.13) 0.244* 0.229** SHRightsScore (1.87) (2.04) 0.675*** -0.775*** 0.686*** -0.774*** IPRsensitive (2.89) (-3.40) (2.8) (-3.22) -0.0744 0.117 -0.0531 0.0979 SHRsensitive (-0.17) (0.27) (-0.13) (0.23) -0.0804** 0.0692* Ln(Total assets) (-2.31) (1.91) -0.0482 -0.127 0.0483 -0.185 EAP (-0.06) (-0.20) (0.07) (-0.30) 0.0599 -0.902 0.203 -0.942 ECA (0.04) (-0.72) (0.16) (-0.81) 0.0264 -0.937 -0.00742 -0.849 LAC (0.03) (-1.61) (-0.01) (-1.32) -0.774*** -0.715*** IPRightsScore (-3.62) (-4.09) -0.0908* 0.0721 Ln(Total sales) (-1.91) (1.42) 3.629 -4.332 3.676 -4.184 Constant (1.33) (-1.16) (1.33) (-1.11) N 120 120 120 120 t statistics in parentheses: * p