Firm-productivity and cross border merger

We examine whether higher productivity of a foreign firm increases the incentive for a cross border merger, which is a dominant form of foreign direct investment in recent decades. In line with the empirical evidence, we show that the relationship between productivity of a foreign firm and cross border merger is mixed. We show that the market concentration effect plays an important role in determining the relationship and provides a rationale for a generally ignored empirical evidence showing a negative relationship between firm-productivity and cross border merger. Our results hold under both Cournot and Bertrand competition.