The efficiency and market‐power interpretations of the multinational enterprise: Two out of three ain't bad

Research Summary We contend that contemporary scholarship must embrace the foundational approach in global business and strategy to consider the relevance of both efficiency and market‐power effects in factoring the implications of multinational activity. We empirically test the degree to which efficiency and market‐power effects manifest in a comprehensive sample of 4,370 cross‐border acquisitions materializing between 1986 and 2010. Specifically, we employ three different measurement approaches to distinguish efficiency enhancing from market‐power increasing cross‐border acquisitions. Empirical results indicate that efficiency enhancing transactions manifest in two‐thirds and market‐power increasing transactions manifest in one‐third of our sampled activities. Accordingly, our results affirm the literature's focus on efficiency effects, yet market‐power effects are sufficiently sizable to merit scholarly attention. Managerial Summary Contemporary wisdom generally considers multinational activities to be characterized by efficiency properties. While it is understood that market power may manifest in multinational activity, most observers implicitly assume that anti‐competitive effects are dominated by more‐healthy efficiency effects. Yet, the justification behind the prior that efficiency effects dominate market‐power effects is not evident, as multinational activities conceivably involve substantial market power. Accordingly, we test the received wisdom regarding the dominance of efficiency effects in an extensive sample of cross‐border investments. Our empirical results affirm prevailing assumptions as efficiency enhancing transactions constitute the majority of cross‐border investment activities. However, market‐power increasing transactions manifest as a sizable minority of cross‐border investments; thus, market‐power effects should not be neglected.