Heterogeneous Firms International Trade And Merger And Acquisition Incentives

In this paper, I study Merger and Acquisition (M&A) incentives in an international environment. I explore two classes of models to find mechanisms linking trade policy and M&A activity: oligopoly models with countable and few firms making Cournot conjectures about their competitors, and monopolistically competitive models with a continuum of firms and a Q-theory of mergers as reallocation. A basic Cournot model predicts a fall in M&A activity with trade liberalization. In oligopoly models with firm heterogeneity, either between domestic firms or between domestic and foreign firms, tariffs shift the reaction functions of firms, changing the profitability and incentives to merge. I study how changes in tariffs affect three merger motives in this context: market power, cost-reductions, and entry deterrence in the presence of synergies and foreign cost advantages. The monopolistically competitive models focus on the effect of changes in tariffs on the allocation of a fixed factor of production between heterogeneous firms. By increasing import competition and expanding the potential market of exporting firms, bilateral trade liberalization drives the least efficient firms out of the market and induces the most efficient firms to expand. M&A is one mode of expansion for acquiring firms and a way for target firms reallocating installed capacity in the process to exit. The reallocation motive for mergers is consistent with the Q-theory of mergers. I test some of the implications of these two classes of models using a new data set of global M&A, tariffs, and free trade agreements between 1965 and 2009 finding a statistically and economically significant increase in M&A activity caused by trade liberalization. Each percentage point fall in tariffs results in an average increase of 1 M&A per year. My identification strategy relies on exogenous changes in tariffs and I find significant effects with M&A increasing as tariffs fall, but only temporarily consistent with a story of M&A as reallocation.