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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 capital 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 restrictions always reduce aggregate productivity. Further, reciprocal trade liberalization, which has a strong negative effect on acquisition demand from abroad, may also reduce aggregate productivity.