The Theoretical and Empirical Studies of Foreign Direct Investment Choice Based on Real Option Approach 1

When Cross-border Mergers and Acquisitions have became the main form of FDI, however, China's FDI inflow is still Greenfield investment. Based on this phenomenon, this paper built a real option dynamic model to analyze the factors of FDI choice. We discover that uncertainty of investment environment, the additional cost and flexibility are the main reasons. The main reason of most FDI into China preferring to the greenfield investment is that the foreign direct investment concentrates in the manufacturing industry as well as the constraint of our country's legal and political environment. Key words Foreign direct investment, greenfield investment, Cross-border M&A, Mode Choice, Real Option With the continuing globalization of the world economy and the international capital flows, foreign direct investment (FDI) is growing fast. The proportion of Cross-border mergers and acquisitions in the amount of global FDI increases gradually from 40 percent in 1940s to over 80 percent now and even More than 90% in the United States. Whereas, in a long time, Chinese absorption of foreign investment is mainly in the mode of greenfield investments. Although Cross-border M&As is developing in China, the proportion is still low, since foreign capital purchasing in the total amount of FDI is still only about 10%. 3 So what are the reasons that cause transnational corporations gradually abandon greenfield investment and tend to cross-border M&As? And what is it that causes foreign investors prefer