Heterogeneous firms, international trade, and merger and acquisition incentives

Available from: 
October 2013
Paper author(s): 
Daniel Gómez Gaviria (Fedesarrollo)
Topic: 
Globalization and Trade
Year: 
2013

Lacea2013
In this paper, I study Merger and Acquisition (M&A) incentives in an international environment. I explore two classes of models to find mechanisms linking trade policy and M&A activity: oligopoly models with countable and few rms making Cournot conjectures about their competitors, and monopolistically competitive models with a continuum of rms and a Q-theory of mergers as reallocation. A basic Cournot model predicts a fall in M&A activity with trade liberalization. In oligopoly models with rm heterogeneity, either between domestic rms or between domestic and foreign rms, taris shift the reaction functions of rms, changing the protability and incentives to merge. I study how changes in tariffs affect three merger motives in this context: market power, cost-reductions, and entry deterrence in the presence of synergies and foreign cost advantages. The monopolistically competitive models focus on the effect of changes in tariffs on the allocation of a fixed factor of production between heterogeneous rms. By increasing import competition and expanding the potential market of exporting rms, bilateral trade liberalization drives the least efficient rms out of the market and induces the most efficient rms to expand. M&A is one mode of expansion for acquiring rms and a way for target rms reallocating installed capacity in the process to exit. The reallocation motive for mergers is consistent with the Q-theory of mergers. I test some of the implications of these two classes of models using a new data set of global M&A, tariffs, and free trade agreements between 1965 and 2009 finding a statistically and economically signicant increase in M&A activity caused by trade liberalization. Each percentage point fall in tariffs results in an average increase of 1 M&A per year. My identication strategy relies on exogenous changes in tariffs and I find signicant effects with M&A increasing as tariffs fall, but only temporarily consistent with a story of M&A as reallocation.  

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Research section: 
Lacea 2013 annual meeting
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