Heterogeneous Frictional Costs Across Industries in Cross-Border Mergers and Acquisitions

While there has been significant research to explore the determinants (and frictions) of foreign direct investment (FDI), past literature primarily focuses on country-wide FDI patterns with little examination of sectoral heterogeneity in FDI. Anecdotally, there is substantial sectoral heterogeneity in FDI patterns. For example, a substantial share of FDI (around 40-50%) is in the manufacturing sector, yet manufacturing accounts for a relatively small share of production activity in the developed economies responsible for most cross-border M&A. In this paper, we extend the Head and Ries (2008) model of cross-border M&A to account for sectoral heterogeneity and estimate the varying effects of FDI frictions across sectors using cross-border M&A data spanning 1985 through 2013. We find that non-manufacturing sectors generally have greater sensitivity to cross-border M&A frictions than is true for manufacturing, including such frictions as physical distance, cultural distance, and common language. Tradeability is positively associated with greater cross-border M&A, and is an additional friction for the many non-manufacturing sectors because they consist of mainly non-tradeable goods