Essays on Foreign Direct Investment, Capital Flows and Exchange Rates.

Abstract

This dissertation studies the relationship between foreign direct investment (FDI), firm performance and the exchange rate using a newly assembled dataset on transaction-specific mergers and acquisitions (M&A) and firm-level accounting data for U.S. public firms during 1979–2007. Acquiring firms from different parts of the world vary in productivity and factor endowments. Chapter 2 tests the hypothesis that these underlying heterogeneities have consequences for target selection, implementation of M&As, and, therefore, postacquisition target performance. The empirical analysis employs a propensity score matching methodology and finds that target firms are subject to significantly different restructuring processes depending on the nationality of the acquiring firm. Whereas industrial country acquirers increase profits in their targets by increasing revenues, developing country acquirers are more likely to reduce the labor costs of target firms. Chapter 3 examines the recent upsurge in foreign acquisitions of U.S. firms, specifically focusing on acquisitions made by firms located in emerging markets. The results suggest that emerging country acquirers tend to choose U.S. targets that are larger in size (measured as sales, total assets and employment), relative to matched non-acquired U.S. firms before the acquisition year. In the years following the acquisition, sales and employment decline while profitability rises suggesting significant restructuring of the target firms. Chapter 4 studies one of the underlying factors of FDI. Most theoretical works have lacked the detail and quality of data that satisfy the stringent assumptions of their models. I use transaction-specific data on foreign acquisitions of U.S. targets during 1979–2008 to examine the relationship between the value of the U.S. dollar and cross-border acquisitions. Using a model proposed by Froot and Stein, I test the implications of the theory. The value of the U.S. dollar is not significantly correlated with foreign direct investment for the extended period of 1979–2008. Once applying the regression to the more appropriate data of private acquiring firm investment inflows, however, a depreciating dollar is significantly correlated with an increase in acquisition FDI consistent with the model’s prediction.