Picking Cherries or Lemons: A unified theory of cross-border mergers and acquisitions
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Abstract
This paper provides a theoretical framework that enhances understanding of empirical evidence suggesting that international mergers and acquisitions, a key source of Foreign Direct Investment, seemingly target in-country firms that are at the extremes of the productivity spectrum – either high-productivity firms, so-called ‘cherries’, or low-productivity firms, the ‘lemons’. The framework demonstrates that foreign firms with intermediate inputs seek high-productivity domestic firms, while foreign firms with managerial expertise seek low-productivity domestic firms. We also show that because of the difference in available outside options, high-productivity domestic firms can demand a significantly higher portion of profits in the partnership than low-productivity domestic firms.