Financial Constraints, Institutions and Foreign Ownership

Ron Alquist, (AQR Capital Management), Nicolas Berman (Aix-Marseille University), Rahul Muhkerjee (Graduate Institute, Geneva), and Linda L. Tesar (University of Michigan)

Cross border mergers and acquisitions (CBMA) as a form of foreign direct investment (FDI) by multinational corporations (MNCs) have grown rapidly in the last two decades. For emerging market economies (EMEs) in particular, the number of CBMA, mostly by firms from developed markets, grew at an average annual rate of 14.5% during 1990-2014. While the determinants of the volumes of these flows are well studied, relatively little is known about what drives MNC ownership structure choices when acquiring EME firms. Yet, existing research has established that the extent of foreign ownership is an important determinant of a number of outcomes that have traditionally motivated policy makers to encourage FDI.  These include post-investment changes in labor productivity, wages, or export participation, and spillovers through technology transfer to subsidiaries.[1] In a forthcoming article, we set out to study the underlying determinants of FDI ownership structure in a broad set of EMEs.[2]

In a nutshell, our main argument is as follows.  Acquiring firms in EMEs entails both benefits and costs for MNCs from developed nations. Among the benefits, MNCs may have superior access to funding that they can use to relieve financial constraints of target firms, thus increasing the profitability of the acquired firm. At the same time, these acquisitions come with costs inflicted by weak local institutions, since operating firms in EMEs involves sourcing local inputs in an unfamiliar environment with insecure property rights and distortionary policies. So, how do MNCs deal with these competing forces? We show in our paper that an MNC’s choice of ownership structure is critical in balancing the aforementioned benefits and costs. To this end we develop a theoretical model that emphasizes the role of finance and institutions, and that delivers predictions about the optimal degree of foreign ownership, which we then take to the data.

To highlight the trade-offs facing a foreign acquirer, our theoretical model postulates that production in EMEs requires capital and a local input. The foreign acquirer solves for an optimal ownership contract between itself and the domestic target firm that captures its advantage in having greater access to capital markets relative to the credit-constrained target, and the potential disadvantages of operating a firm in an EME. The MNC’s disadvantage compared to local firms, which is due to weaker institutions, is modeled as a markup on local inputs that is paid only by an MNC. The markup thus incentivizes operating the firm with a local co-owner. The MNC then faces a choice between obtaining full control of the credit-constrained target, in which case it is compelled to pay a higher price for the local input, or to take partial ownership, in which case the domestic equity owner can provide the local input at a lower price.

Three distinctive sets of predictions emerge from the model. The first and second pertain to the ownership structure chosen by an MNC. Full (relative to partial) foreign ownership of targets is predicted to be more likely in sectors that have a greater dependence on external finance, and in countries that are less financially developed, while better institutions are found to tilt the scales towards full ownership. The effects of institutions and financial development are also predicted to be the largest for the sectors of the economy most dependent on external finance. The second set of predictions pertains to partial ownership. Here the model predicts that financial factors should play a weaker role in determining the precise size of partial stakes, while the input price markup is predicted not to influence the ownership structure in partial acquisitions at all. Our final predictions, which relate to the overall likelihood of foreign acquisitions, are that foreign acquisitions are more likely in sectors that have a greater dependence on external finance, in countries where financial markets are less developed, and when institutions are better.

We test these theoretical predictions in a large panel of CBMA transactions by developed market firms in fourteen EMEs over the period 1990-2007. We use the measure of sectoral external finance dependence due to Rajan and Zingales and country-level credit-GDP ratios as our main financial indicators, and anti-corruption indices as our baseline measure of institutional quality.[3]

The regression evidence confirms the main predictions of the model. The estimated effects are also quantitatively large. For example, the likelihood of an MNC choosing to own a domestic firm fully versus partially is predicted to be:

  • 22 percentage points larger for the sector with the highest (professional and scientific equipment) versus the lowest (tobacco) level of dependence on external finance
  • 21 percentage points lower in the most (Indonesia) versus the least (Chile) corrupt country
  • 14 percentage points lower in the most (South Africa) versus the least (Peru) financially developed country

As per the model, while dependence on external finance has the strongest effect in financially underdeveloped countries, it ceases to matter when local financial development, measured by private credit over GDP, exceeds 70%. In the same vein, external finance matters roughly three times more in countries with the lowest levels of corruption than in the most corrupt countries.

Our model’s predictions concerning the effect of financial factors on the overall prevalence of cross border acquisitions across sectors and countries are also borne out by the data. For example, we find that moving from the sector that is most to least dependent on external finance raises the share of CBMA (among all acquisitions) by 22 percentage points. At the same time, the share of CBMA is predicted to be 27 percentage points lower in the most versus the least financially developed country.

Taken together, our theoretical model and empirical evidence show that the interaction of financial, institutional, and technological factors plays an important role in determining the pattern of foreign ownership in North-South FDI flows. It also throws light on a number of empirical features of CBMA across sectors and countries, for example, why full foreign acquisitions are seldom observed (roughly 19%)  in countries such as Thailand that have both developed financial markets and weak institutions.  Our results also point towards improvements in institutions as a way to encourage higher MNC equity participation. For example, according to our estimates, a country like China would experience a doubling in the share of full acquisitions if it were to improve its corruption situation to the levels of Chile.


Alquist, R., N. Berman, R. Mukherjee, and L.L. Tesar, (forthcoming); “Financial Constraints, Institutions, and Foreign Ownership.” To appear in Journal of International Economics, DOI:

Bircan, Çağatay, (2019); “Ownership Structure and Productivity of Multinationals.” Journal of International Economics 116 (2019): 125-143.

Havranek, T., and Z. Irsova, (2011); “Estimating Vertical Spillovers from FDI: Why Results Vary and What the True Effect is.” Journal of International Economics 85(2): 234-244.

Javorcik, B. S., and M. Spatareanu, (2008); “To Share or Not to Share: Does Local Participation Matter for Spillovers from Foreign Direct Investment?Journal of Development Economics 85(1-2): 194-217.

Rajan, R., and L. Zingales, (1998); “Financial Dependence and Growth.” American Economic Review 88.3 (1998): 559-86.


[1] See for example, Javorcik and Spatareanu (2008),  Havranek and Irsova (2011), and Bircan (2019).

[2] See Alquist, Berman, Mukherjee and Tesar (forthcoming).

[3] See Rajan and Zingales (1998).

Professor of Economics, King’s Business School

King’s College London is one of the top 10 UK universities (2018 QS World University Rankings) and the fourth oldest university in England, with over 31,000 students (including more than 12,800 postgraduates) from some 150 countries, and over 8,500 employees. King’s Business School is the ninth and newest faculty located in the iconic Bush House in the heart of London, a hub for engagement with business, the City, social enterprise, government and the public sector. King’s Business School attracts students from over 80 countries into our undergraduate and specialist MSc programmes.

Our Business School is one of the top ten ranked centres for the study of management and business in the UK. The Economics group has grown rapidly over the past few years and contains a growing cluster of economists who are highly active in a number of research areas in applied microeconomics and political economy, labour economics and macroeconomics. In order to achieve our future ambitions we are now looking to recruit a Professor of Economics to add significantly to the Economics Subject Group’s research and teaching capacity and take a leading role in promoting the visibility of Economics at King’s. We are looking for a distinguished scholar who already has an outstanding international profile in the field of economics.

The School places a premium on international levels of scholarship and research excellence and you will be expected to play a role in the standing and development of the Group in this regard. The successful candidate will contribute both to excellent teaching and development of our undergraduate and postgraduate programmes. The successful candidate will be expected to strengthen the Business School’s research capacity and will require a publication list that includes peer reviewed articles published in leading relevant journals. In addition, applicants must have substantial experience in supervising doctoral research students. The person appointed will be expected to carry their share of administrative duties within the Business School.

King’s Business School is committed to ensuring an inclusive interview process and will reimburse up to £250 towards any additional care costs (for a dependent child or adult) incurred as a result of attending an interview for this position.

The selection process will include a panel interview and a presentation.

For an informal discussion to find out more about the role please contact: James Ralphs via email at .

To apply, please go to: and register with the King’s College London application portal and complete your application online.

Closing date: Midnight on 15th April 2019.

Workshop on Development Economics: Organisations, Institutions and the Mind

24-25 June 2019, University of Kent

The School of Economics at the University of Kent is hosting a workshop, sponsored by the Royal Economic Society, that will bring together internationally leading and junior academics from the fields of Political Economy, Organisational Economics and Development Economics working on questions relating to identity, norms, motivation, belief formation and their effect on the functioning of institutions and organisations.

Confirmed speakers include Professors Sonia Bhalotra (University of Essex), Maitreesh Ghatak (LSE), Lakshmi Iyer (University of Notre Dame), Gilat Levy (LSE), and Dilip Mookherjee (Boston University).

A call for papers for the workshop is currently open. Details about the call can be found here.

Call for Papers ITSG (Italian Trade Study Group) – Milano 2019

The next meeting of the “ITSG – Italian Trade Study Group” will be organised by Department of Management Engineering, Economics and Industrial Production Politecnico di Milano and Fondazione Manlio Masi on May 16-17 2019.

The Scientific Committee of this meeting includes:
Davide Castellani (University of Reading), Luca De Benedictis (Università di Macerata), Stefano Elia (Politecnico di Milano), Anna Falzoni (Università di Bergamo), Giulia Felice (Politecnico di Milano), Giorgia Giovannetti (Università di Firenze), Enrico Marvasi (Università di Firenze), Lucia Piscitello (Politecnico di Milano), Lucia Tajoli (Politecnico di Milano)
The Keynote lecture of the Workshop will be delivered by Alan Deardorff, University of Michigan.

Complete paper (or advanced drafts) should be submitted to the Segreteria Fondazione Masi –  by April, 5th 2019. The acceptance of the papers will be notified no later than April 18th, 2019.

For further details on Call for Paper, please visit the website: 

SSDEV2019 Summer School in Development Economics – CALL FOR APPLICATIONS

The Italian Development Economists Association (IDEAs), Monash University, the Universities of Trento, Salerno, Verona, and Wisconsin, Institute of Studies on Mediterranean Societies (INRC), Italian Center for International Development (ICID), Action Research for Co-development (Arco)
organize the 2019 (11th Edition) of the Summer School in Development Economics (
June 18‐20, 2019 – Prato (Tuscany, Italy), Monastero San Leonardo, Villa del Palco (

Deadline for Applications April 29, 2019

The workshop is intended for PhD students, post‐docs and junior faculty members. The aim is to provide young researchers with mentoring as well as with exposure to cutting‐edge empirical and theoretical research in development economics. Participants will have the opportunity to present their own research projects and to discuss th em with leading researchers in a relaxed and constructive atmosphere.

The workshop will include presentations of both completed research papers and work‐in‐progress, both empirical and theoretical. The number of participants will be limited to about 60. About 15 will be selected for a forty-five minutes presentation, thus allowing for in‐depth discussion of each contribution. About 15-20 papers will be selected for a poster session that will be in place for the whole duration of the conference. Presentations by graduate students, post‐docs and other junior researchers who have recently acquired their PhD will be key components of the workshop. Applicants can submit either a complete paper or a detailed and well‐developed research proposal. We particularly welcome the submission of work‐in‐progress proposals that describe on‐going and promising research, likely to bene fit from an open discussion about the main conceptual and methodological problems related to the project. Please note that participants are expected to attend the entire conference. Participants who do not wish to present a paper are also welcome.

Speakers who agreed to join include Martina BJORKMAN (Stockholm School of Economics), Erwin BULTE (Wageningen University), Dilip MOOKHERJEE (Boston University), Andrew F. NEWMAN (Boston University), Rohini SOMANATHAN (Delhi School of Economics), Rajesh RAMACHANDRAN (Goethe University).

Applications and deadlines
Applications can be submitted at, starting from February 7, 2019. The application should be submitted no later than April 29, 2019.

Participants who wish to present a paper should
a) Complete the application form on the conference web site.
b) Submit a short CV (pdf file).
c) Upload, no later than April 29th, the complete paper (pdf file) or a detailed and well‐developed research proposal (pdf file).
Acceptance decision will be announced by May 7, 2019. All applicants will be informed by email about the results.
Prospective participants who are interested in attending the workshop but do not intend to present a paper are required to fill in the application form only.

Logistics, Accommodation and Fees
Graduate students and post‐docs will be asked to pay a registration fee of €500, while faculty will be asked to pay a fee of €650. The fee should be paid no later than May 28, 2019. The fee will cover the costs of meals and lodging in double or triple room for the duration of the workshop (arrival 17th June 2019 – departure 21st June 2019), but participants have to cover their travel expenses.

We look forward to your submissions.

The Organizing Board Adalgiso AMENDOLA (University of S alerno, CELPE), Ian COXHEAD (University of Wisconsin, Madison), Salvatore CAPASSO (Institute of Studies on Mediterranean Societies, ISSM-CNR), Marcello D’AMATO (University of Salerno, CELPE), Giuseppe FOLLONI (University of Trento), Sisira JAYASURIYA (Monash University), Martina MENON (University of Verona), Dilip MOOKHERJEE (Boston University), Federico PERALI (University of Verona, ICID), Alessandro TAROZZI (Universitat Pompeu Fabra and Barcelona GSE), Denni TOMMASI (Monash University).

GENERAL DATA PROTECTION REGULATION (GDPR) – University of Verona, Department of Economics

The General Data Protection Regulation (GDPR), came into effect on May 25, 2018. It consists in strengthening the obligation of information and transparency towards you.
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PhD Position: Institute of Development Policy (IOB, U Antwerp, Belgium)

The Institute of Development Policy (IOB) of the University of Antwerp wants to contribute to a more just and sustainable world through multidisciplinary academic research, education, partnerships and political engagement. More information about the institute and its activities can be found at

The Institute of Development Policy (IOB) is seeking to fill a full-time (100%) vacancy for an

Academic assistant in the area of “migration, trade and inclusive development”

Job description

  • Your research and societal service delivery is situated in the field of development processes, actors and policies, with particular attention to economic development and empirical work on migration and/or trade shocks in developing countries. Your research focus matches the research line “Global governance and inclusive development”.
  • Your research discusses the causes and consequences of migration or trade shocks in developing countries, with a strong emphasis on causal identification. A quantitative background together with some experience in dealing with micro-level data (household, firm, farms,…) and satellite-based and/or geo-referenced data would be an asset.
  • You prepare a doctoral thesis in development studies in this domain (appr. 50% of your time).
  • You contribute to the strengthening of the research line, i.a. through joint research and outreach activities and collaborating in applications for externally funded research grants.
  • You assist in teaching assignments within the framework of the IOB master programs.
  • Your research adopts a multidisciplinary perspective and uses a combination of quantitative (and, preferably, also qualitative) methods, in accordance with the IOB Research Strategy 2017-2022.
  • IOB PhD regulations allow joint or double PhDs degrees.
  • Your work includes activities of societal outreach.
  • You actively support the cooperation of IOB with its partner institutes in the South.
  • You function well in groups and you are willing to contribute to the service delivery to IOB, to the University of Antwerp and the wider society.

Profile and requirements

  • You hold a master degree in development studies or in related social science disciplines (preferably with a proven interest in regression and big data analysis).
  • You obtained outstanding academic results.
  • You preferably have experience with development processes in the South.
  • You show interest in interdisciplinarity and preferably engage with a combination of methodological approaches.
  • The focus in your teaching corresponds to the educational vision of the university.
  • Your academic qualities comply with the requirements stipulated in the university’s policy.
  • You are quality-oriented, conscientious, creative, social and cooperative.
  • You are fluent in English.

We offer

  • an appointment as an academic assistant for a period of two years, with the possibility of renewal twice, each time for a further two-year period after positive evaluation;
  • the date of appointment will be 1 September 2019;
  • a full time gross monthly salary ranging from € 3.338,21 tot € 5.649,28;
  • a dynamic and stimulating work environment.

How to apply?

  • Applications may only be submitted online, until the closing date 24 March 2019.
  • The application must be completed with a PhD research proposal (appr. 1000 words) and an argument (appr. 500 words) how this proposal can strengthen the profile of the research line and of the IOB in general. This document must be submitted in English.
  • A pre-selection will be made from amongst the submitted applications. The remainder of the selection procedure is specific to the position and will be determined by the selection panel. The selection interview will take place on 7 May 2019.
  • More information about the application form can be obtained at .
  • For questions about the profile and the description of duties, please contact prof. dr. Jean-Francois Maystadt ().

The University of Antwerp is a family friendly organization, with a focus on equal opportunities and diversity. Our HR-policy for researchers was awarded by the European Commission with the quality label HR Excellence in research.

We support the Science4Refugees initiative and encourage asylum-seeking, refugee scientists and researchers to apply for a job at the University of Antwerp.