Mergers and acquisitions & trade: A global value chain analysis

• DOI: http://doi.org/10.1111/twec.12882
• Published date: 01 March 2020
• Author: Federico Carril‐Caccia,Elena Pavlova
• Date: 01 March 2020

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wileyonlinelibrary.com/journal/twec World Econ. 2020;43:586–614.

© 2019 John Wiley & Sons Ltd

DOI: 10.1111/twec.12882

SPECIAL ISSUE ARTICLE

Mergers and acquisitions & trade: A global value

chain analysis*

FedericoCarril-Caccia1,2

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ElenaPavlova3

1Departamento de Teoría e Historia Económica, Universidad de Granada, Granada, Spain

2Departamento de Análisis Económico y Economía Política, Universidad de Sevilla, Sevilla, Spain

3Euro Area External Sector & Euro Adoption Division, European Central Bank, Frankfurt am Main, Germany

Funding information

This work was supported by Generalitat Valenciana [GV/2017/052]; Junta de Andalucí [SEJ 340]; and PhD Traineeship from

the European Central Bank.

KEYWORDS

global value chains, gravity model, M&As, trade in value added, trade openness

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INTRODUCTION

During the past 30years, multinational enterprises (MNEs) accelerated the relocation of their produc-

tive activities. Between 1988 and 2016, foreign direct investment (FDI) grew sharply, evolving from

8.2% of the world's GDP to 35.1%.1 This phenomenon made central the concept of global value chains

(GVCs), which refers to the fragmentation across border of different production processes often set by

MNEs through FDI (Amador & Cabral, 2016). Trade in intermediate goods between MNEs' affiliates

or between MNEs and their partners hence represents an increasing share of international trade (Antras

& Yeaple, 2014). As a matter of fact, currently, intermediate goods account for nearly 44% of trade in

goods (UNCTAD, 2017a), and MNEs control approximately 80% of the world's trade (UNCTAD,

2013).

At the same time, increasingly ambitious trade agreements have been negotiated, while we have

also witnessed a surge in protectionist ideas. Recent examples of the former is the signature of the

African Continental Free Trade Area or the Free Trade Agreement (FTA) between the European

Union (EU) and Japan, while the Brexit vote or Trump's increase in tariffs on steel and aluminium

imports stand as good examples of the latter.

Trade policies may not only have a direct effect on trade flows but also influence MNEs' invest-

ment decisions. Initially, FDI and trade can be considered as substitutes: horizontal FDI is expected

1 UNCTAD's statistics on FDI stock over GDP.

*The information and views set out in this publication are those of the authors and do not reflect the views of the institutions

they are affiliated with.

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CARRIL-CACCIA And PAVLOVA

to be driven by increasing trade costs and lower foreign competition (Horstmann & Markusen, 1987).

However, FDI and trade may be complementary. In this case, decreasing trade costs and trade open-

ness are expected to foster vertical capital inflows, export support and export platform FDI (Ekholm,

Forslid, & Markusen, 2007; Hanson, Mataloni, & Slaughter, 2005; Krautheim, 2013). Through these

FDI strategies, MNEs slice up the value chain across borders by setting subsidiaries that engage in

specific economic activities (Krugman, Cooper, & Srinivasan, 1995).

Despite the growing role of GVCs in the world's production since the beginning of the 1990s

(Timmer, Erumban, Los, Stehrer, & Vries, 2014), the existing evidence on the nexus between FDI and

host countries' trade openness is still ambiguous. Some studies find a positive relationship (Ramasamy

& Yeung, 2010), while others report a nonsignificant (Kolstad & Villanger, 2008) or negative con-

nection (Wheeler & Mody, 1992). Since FDI could potentially favour, for instance, economic growth

or productivity (Alfaro, Chanda, Kalemli-Ozcan, & Sayek, 2004; Ashraf, Herzer, & Nunnenkamp,

2016), and countries' trade characteristics can be shaped through economic policy, it is relevant to

further explore the nexus between FDI and trade.

The ambiguity in the results may be explained by the fact that the indicators commonly used to

reflect trade openness, such as gross trade over GDP, give a poor insight into countries' trade char-

acteristics and policy. FDI strategies which are positively linked with trade might not be necessarily

attracted by trade openness per se, but by some specific involvements in trade and GVCs. For instance,

the capacity of producing intermediates goods which are later used in the production process in other

countries can favour vertical FDI (Beugelsdijk, Pedersen, & Petersen, 2009; Braconier, Norback, &

Urban, 2005). Alternatively, economies which can export goods to a wider number of countries are

more likely to attract export platform FDI (Medvedev, 2012). Additionally, trade openness may also

represent a higher level of foreign competition that would deter FDI (Wheeler & Mody, 1992). Trade

openness indicators might be positively related with these dimensions but do not allow us to disentan-

gle the relevance of each of these factors.

We extend the previous literature by accounting for the value added embedded in trade,2 the degree

of heterogeneity of exports destinations and imports sources, for both final and intermediate goods

and services, and the position and the degree of participation in GVC. These indicators are closely

linked with the FDI strategies described above that result in the international fragmentation of produc-

tion. The capacity of exporting to a wider number of countries is linked with the export platform FDI

hypothesis. In addition, the heterogeneity of destinations for intermediate goods exports is also related

with vertical FDI. In particular, if MNEs aim at incorporating firms located in countries that are spe-

cialised in the production of intermediates to be exported to only a few productive sites, or if MNEs

seek acquiring productive sites which provide inputs to several different production facilities accross

the globe. Alternatively, higher competition brought by imports from numerous countries entails

lower expected profits, allowing us to test whether foreign competition through trade deters FDI. The

GVC participation and position indexes represent the degree in which and how gross exports incorpo-

rate domestic and foreign value added (Martinez-Galan & Fontoura, 2019), offering further insight on

the relationship between FDI and the fragmentation of production across borders.

Another empirical concern comes from the fact that most of the previous studies deal with aggre-

gated inward FDI, overlooking the heterogeneity of sources.3 This is a limitation, since investment

2 Trade in value added statistics are retrieved from the World Input-Output Database (WIOD). The WIOD allows us to

unravel the value added embedded in trade and the flows which are consequence of two-way intermediate goods exchange.

Subtracting the pure double-counted flows from gross trade statistics gives a more precise measure of countries' trade

openness and links with the rest of the world.

3 See for example Asiedu (2002), Aizenman and Noy (2006), Botrić and Škuflić (2006), Chakrabarti (2001), Ramasamy and

Yeung (2010) and Teixeira et al. (2017).