Firms seeking to strategically enter a foreign market can choose from three entry modes: greenfield investment, M&A (merger & acquisition) and strategic alliance. In the case of M&A and strategic alliance, they also must choose from among many potential partners. In this paper, we use a “circular road” model of firms under Cournot competition producing goods of heterogeneous quality to see which mode and partner the firm should choose. The results suggest that: (1) M&A is often the best choice if the merger cost does not exceed the net profit of acquisition; (2) low synergy effect, low quality of domestic firms and non-prohibitively high merger cost will result in a special case of M&A (brownfield investment); (3) when domestic firms are in lower quality, greenfield investment is the se...[ Read more ]

Firms seeking to strategically enter a foreign market can choose from three entry modes: greenfield investment, M&A (merger & acquisition) and strategic alliance. In the case of M&A and strategic alliance, they also must choose from among many potential partners. In this paper, we use a “circular road” model of firms under Cournot competition producing goods of heterogeneous quality to see which mode and partner the firm should choose. The results suggest that: (1) M&A is often the best choice if the merger cost does not exceed the net profit of acquisition; (2) low synergy effect, low quality of domestic firms and non-prohibitively high merger cost will result in a special case of M&A (brownfield investment); (3) when domestic firms are in lower quality, greenfield investment is the second best choice; when domestic firms are in higher quality, strategic alliance is the second best; (4) the foreign firm should always acquire a good firm; it will form alliance with a weak partner when synergy effect is low and with a strong partner when synergy effect is high. Whether or not synergy effects are endogenously determined does not alter the results.