Definitions and classifications A firm can undertake FDI in a host country in either of two ways: Greenfield investment in a new

facility, or acquiring or merging with an existing local firm. The local firm may be privately or state owned: privatizations involving foreign investors count as cross-border M&As, which entail a change in the control of the merged or acquired firm. In a cross-border merger, the assets and operations of two firms belonging to two different countries are combined to establish a new legal entity. In a cross-border acquisition, the control of assets and operations is transferred from a local to a foreign company, the former becoming an affiliate of the latter. To the extent that both Greenfield investment and cross-border M&As place host country assets under the governance of TNCs and, hence, contribute to the growth of an international production system there is no reason to distinguish between them. Both involve management control of a resident entity in one country by an enterprise resident in another. To the extent, however, that the assets placed under TNC control are newly created in the case of Greenfield FDI, and existing assets are transferred from one owner to another in the case of cross-border M&As, then there is reason to consider them separately.

Cross-border M&As can be functionally classified as: Horizontal M&As (between competing firms in the same industry). They have grown rapidly recently because of the global restructuring of many industries in response to technological change and liberalization. By consolidating their resources, the merging firms aim to achieve synergies (the value of their combined assets exceeds the sum of their assets taken separately) and often greater market power. Typical industries in which such M&As occur are pharmaceuticals, automobiles, petroleum and, increasingly, several services industries. Vertical M&As (between firms in client supplier or buyer-seller relationships). Typically they seek to reduce uncertainty and transaction costs as regards forward and backward linkages in the production chain, and to benefit from economies of scope. M&As between parts and components makers and their clients (such as final electronics or automobile manufacturers) are good examples. Conglomerate M&As (between companies in unrelated activities). They seek to diversify risk and deepen economies of scope.

Source: UNCTAD, cross border M&A database (based on data from Thomson Financial Securities Data Company).