Productivity and the Role of the Global Acquisition Market

This paper presents a model of domestic and foreign acquisitions with heterogeneous firms. The model shows that acquisitions positively affect aggregate productivity by transferring cap-ital from the least efficient firms to higher efficiency firms. However, contrary to the existing literature, these acquiring firms are in a mid-range of productivity. The results of my model show that the most productive firms do not find domestic acquisitions profitable in either a closed or open economy, and do not find foreign acquisitions profitable in relatively integrated open economies. This is a result of a demand-cost framework in which mark-ups are variable and, conditional on total capital holdings, concentration of production in one location reduces firm-level efficiency. With this new framework, I show that if policy actions reduce the amount of acquisitions that occur, aggregate productivity falls. For example, foreign investment re-strictions always reduce aggregate productivity. Further, reciprocal trade liberalization, which has a strong negative effect on acquisition demand from abroad, may also reduce aggregate productivity