Alum Ron Alquist, Nicolas Berman, Alum Rahul Mukherjee, and Professor Linda Tesar recently published the National Bureau of Economic Research (NBER) working paper entitled, “Financial Constraints, Institutions, and Foreign Ownership.”

"Financial Constraints, Institutions and Foreign Ownership” studies the factors that affect corporate control decisions in emerging markets. On the one hand, targets located in countries where financial markets are less developed and credit is constrained offer the potential for high rates of return for foreign investors. On the other hand, operating a firm in an emerging market may entail greater risks and inefficiencies, particularly in countries with weaker institutions for enforcing property rights. The paper shows that these trade-offs are important determinants of the location, the industry and the ownership structure of cross-border acquisitions in emerging markets.



This paper examines how external finance dependence, financial development, and institutions influence brownfield foreign direct investment (FDI). We develop a model of cross-border acquisitions in which the foreign acquirer's choice of ownership structure reflects a trade-off between easing target credit constraints and the costs of operating in an environment of low institutional quality. Using a dataset of cross-border acquisitions in emerging markets, we find evidence supporting the central predictions of the model that: (i) a foreign firm is more likely to fully acquire a target firm in sectors that are more reliant on external finance, or in countries with lower financial development/higher institutional quality; (ii) the level of foreign ownership in partially foreign-owned firms is insensitive to institutional factors and depends weakly on financial factors; (iii) the share of foreign acquisitions in all acquisition activity is also higher in external finance dependent sectors, or financially under-developed/high institutional quality countries; and (iv) sectoral external finance dependence accentuates the effect of country-level financial development and institutional quality. The theory and empirical evidence provide insight into the interaction between the financial, institutional and technological determinants of North-South brown field FDI.