Privatization and Strategic Mergers across Borders

We present a theoretical model to capture the role of privatization in the incentives for and implications of cross-border horizontal mergers. Absent any merger incentives in an autarkic equilibrium, we show that a decrease in the degree of privatization will lower the incentives for diversification of international production. The incentives for diversification for any given degree of privatization will fall when the private and public firms are allowed to move sequentially rather than simultaneously. The presence of the public firm also introduces a new source of asymmetry in the incentives for cross-border mergers: a reduction in the degree of privatization at home will dampen the potential gains from a take-over of a home firm by a foreign firm but magnify the potential gains from a take-over of a foreign firm by a home firm.