Entry mode choice and target firm selection: private and collective incentive analysis

The purpose of this paper is to formalize the choices of market entry strategy (Export Vs Greenfield investment Vs Cross border M&A) and the target selection (Acquisition of high-productivity firm or low-productivity one) for a foreign firm, and to delineate the relationship between foreign firm’s incentive and host government’s intention from an Industrial Organization (IO) perspective. It is found that cross border M&A is always the most profitable entry mode under both greenfield investment and export credible threats. If greenfield FDI is viable, entering firm prefers acquiring the low-productivity firm, when the integration ability is strong and the technological gap is sufficiently small; otherwise it prefers highproductivity one. Moreover, there is always the ambiguity between the foreign firm’s preference and the government’s judgment. If export entry option is viable, the variation of trade cost will alter the choice of target firm by the influence of acquisition price. The higher the trade cost, the more likely foreign firm purchases low-technology firm. In addition, the unanimity of private and collective incentive appears under certain circumstances.