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Financial Globalization and Real Reallocation in the Market for Corporate Control

English title Financial Globalization and Real Reallocation in the Market for Corporate Control
Applicant Mukherjee Rahul
Number 172690
Funding scheme Project funding (Div. I-III)
Research institution Département d'Economie internationale IHEID, The Graduate Institute
Institution of higher education Graduate Institute of International and Development Studies - IHEID
Main discipline Economics
Start/End 01.06.2017 - 30.11.2020
Approved amount 256'902.00
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Keywords (4)

capital reallocation; financial globalization; mergers and acquisitions; foreign direct investment

Lay Summary (French)

Lead
Ce projet s’intéresse à l’interaction de deux facteurs clés - la technologie et le financement - sur le marché des fusions et acquisitions nationales et transfrontalières. Notre approche, à la fois théorique et empirique, combinera des modèles d’optimisation dynamique à des données exhaustives collectées au niveau des entreprises. L'objectif principal du projet est de mieux comprendre un élément central de la mondialisation en étudiant la manière dont les ressources réelles et financières sont allouées entre les entreprises étrangères et locales et au sein de ces firmes, afin de quantifier plus précisément les gains engendrés par la mondialisation; un sujet d'intérêt académique et politique.
Lay summary

L’objectif de ce projet est d’étudier l’interaction de deux facteurs clés – la technologie et le financement – sur le marché des fusions et acquisitions nationales et transfrontalières. Ce projet s'appuiera notamment sur nos travaux passés et sur la littérature existante pour: a) concevoir un modèle théorique dynamique analysant les décisions optimales en matière d’investissement, de propriété et de réallocation des ressources réelles entre entreprises hétérogènes; b) construire une base exhaustive des prises de contrôle d'entreprises sur le marché européen à partir de données de transactions individuelles (travail rendu possible par la disponibilité des données Zephyr, Amadeus et SDC) et calculer des indicateurs clés relatifs à la productivité et à la santé financière des entreprises; c) utiliser ces données pour tester les prédictions de notre modèle théorique et quantifier précisément les gains générés par l’investissement étranger à travers les canaux financiers, technologiques et de réallocation des ressources.

Le contexte scientifique et sociétal de ce projet est lié à l’intégration financière croissance observée depuis trois décennies. Les investissements directs étrangers sous forme de fusions et acquisitions transfrontalières ont joué un rôle déterminant à cet égard, représentant une source majeure de financement et de technologie pour les sociétés du monde entier. Si plusieurs études ont comparé les gains provenant des retombées technologiques à ceux générés par l’apport de financement externe, la manière dont ces deux sources de gains potentiels interagissent au niveau micro est encore mal comprise, et nous en savons encore moins sur la manière dont ces gains s'agrègent au niveau macro. Notre étude vise précisément à mieux comprendre ces processus et ces interactions, et présente donc un intérêt à la fois académique et en termes de politique économique.

Direct link to Lay Summary Last update: 19.05.2017

Lay Summary (English)

Lead
This project studies the interaction of two key elements -technology and financing - in the market for domestic and cross-border mergers and acquisitions. It takes both a theoretical and empirical approach using dynamic optimizing models and rich firm level data. The overarching goal of this project is to help complete a key part of the jigsaw puzzle of globalization by seeking a deeper and more nuanced understanding of the process of resource reallocation - both financial and real - across and within foreign and domestic firms, thereby providing a precise quantification of the welfare gains from globalization that will be of academic and policy interest.
Lay summary

The objective of this research project is to study the interaction of two key elements –technology and financing – in the market for domestic and cross-border mergers and acquisitions.  In particular, this project will build on our own and other existing research on this topic to: a) develop a fully dynamic theoretical framework to analyze optimal investment, ownership, and real resource reallocation across heterogeneous firms; b) create a rich new dataset at the level of individual firms and transactions in the market for corporate control in Europe (guided by data availability from the Zephyr, Amadeus and SDC databases) to estimate a number of key firm-level indicators of productivity and financial health; and c) use these data to test the predictions of our theoretical framework and provide a precise quantification of the relative gains arising through the financing, technological and real reallocation channels from foreign investment and ownership.

The broad social and scientific context of this project is the sharp increase in financial globalization that has marked the last three decades. Foreign direct investment in the form of cross-border mergers and acquisitions has played a critical role in this regard, and has come to represent a major source of technology and financing for firms across the world. While the gains of financial globalization arising from technology spillovers versus financing have been studied individually by academics, less is known about the interplay of these two sources of potential gains at the micro level; even less is known about how these gains aggregate up to the macro level. This project seeks a deeper understanding of these processes, and will be of academic as well as policy interest.

Direct link to Lay Summary Last update: 19.05.2017

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Abstract

The last three decades have been marked by a sharp increase in financial globalization - the mostly gradual, but at times, sudden and disruptive process by which productive resources have come to be financed or owned globally while producing locally. The repercussions of this process for the international diffusion of technology, prosperity and growth, as well as local innovation and financial deepening, have been profound. Foreign direct investment (FDI), especially, has played a critical role in this regard, and has come to represent a major source of technology and financing for firms across the world. While the gains of financial globalization arising from technology spillovers versus financing have been studied individually, less is known about the interplay of these two sources of potential gains at the micro level; even less is known about how these gains aggregate up to the macro level. To take a simple example, a credit-constrained firm in Estonia may benefit from receiving Swiss FDI either through access to superior technologies or by access to more financing through the Swiss owner. A set of crucial questions then arise: What part of the gains from financial globalization at the level of firms stem from productivity improvements versus the relieving of financial constraints? How do these benefits aggregate up to the macro-economy and how do they vary over the business cycle? More fundamentally, what are the mechanisms through which resources - real (e.g., machinery, labor), technological (e.g., knowhow, management, labor productivity), or financial (e.g., cash, credit lines, other liquid assets) - get reallocated among firms in a global economy?The aim of this research project is to get at a precise quantification of the welfare effects of globalization by analyzing the interaction of two key elements -technology and financing - in the market for domestic and cross-border mergers and acquisitions (M&As). The M&As market is especially suitable in this regard: Both foreign and domestic firms compete for ownership of other firms in this market, leading to massive reallocations of real, technological and financial factors of production across and within the boundaries of firms. In particular, this project seeks to combine rigorous theoretical models with rich new firm-level data to explore the dynamics of this reallocation, and hence understand the sources of welfare gains - real and technological versus financial - from globalization. We will build on our own and other existing research on this topic to: a) develop a fully dynamic theoretical framework - which will let us evaluate welfare effects - to analyze optimal investment, ownership, and real resource reallocation across heterogeneous firms; b) create a rich new dataset at the level of individual firms and transactions in the market for corporate control in Europe (this choice is guided by data availability from the Zephyr and Amadeus databases described later in this document) to estimate a number of key firm-level indicators of productivity and financial health; and c) use these data to test the predictions of our theoretical framework and provide a precise quantification of the relative gains arising through the financing, technological and real reallocation channels from foreign investment and ownership. At the finer level, this project will greatly expand the frontiers of present-day knowledge regarding the mechanisms through which the productivity and financial position of globally owned firms interact in a dynamic environment; how technology, management, knowhow, and most importantly, financial resources, are shared between such global entities and local firms in the countries in which they operate; and how technology and financial resources act as substitutes or complements in such sharing arrangements under different aggregate and firm-level conditions. The overarching goal of this project is to help complete a key part of the jigsaw puzzle of globalization by seeking a deeper and more nuanced understanding of the process of resource reallocation - both financial and real - across and within foreign and domestic firms, thereby providing a precise quantification of the welfare gains from globalization that will be of academic as well as policy interest.
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