Cross-border acquisitions and optimal government policy

This paper analyses the optimality of policy specifications used to regulate the acquisition and operation of local firms by multinational enterprises. We emphasise the consequence of such regulations on the price of the domestic firm in the market for corporate control. We show that it is optimal to impose ceilings on foreign ownership of domestic firms when the government’s objective is to maximise domestic shareholder profits, or a sum of those profits and tax revenues. While the optimal ceiling is high enough for the MNE to gain control of the domestic firm, it nevertheless influences the price that the MNE must pay for the domestic firm’s shares to the advantage of the domestic shareholders. Surprisingly, stringent restrictions on transfer pricing turn out to be strictly suboptimal in this context. JEL classification numbers: F23