Financing Constraints and the Mode of Outward Foreign Direct Investment: Cross-Border Mergers and Acquisitions or Greenfield Investment

Abstract

In this paper, two investment modes, greenfield investment and cross-border mergers and acquisitions, are introduced on the basis of Manova (2008), and it is found that enterprises with less financing constraints tend to choose cross-border mergers and acquisitions. Therefore, this paper takes Chinese industrial enterprises that conducted cross-border mergers and acquisitions and greenfield investment in 2003-2010 as examples to test the above hypothesis. The result shows that enterprises with lower financing constraints are more likely to choose cross-border mergers and acquisitions, while those with stronger constraints choose greenfield investment. More specifically, a 1% reduction in financing constraints raises the probability of choosing cross-border mergers and acquisitions by 2.51%. The authors also find that the influence of financing constraints varies under different investment motivation. For business service and production-related investment, enterprises with lower financing constraints tend to choose cross-border mergers and acquisitions; while for R&D investment, financing constraints have no impact on the choice of investment mode.