The relation between corporate governance disparities and M&A success explained : evidence from Chinese acquisitions in The Netherlands

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Master Thesis – Entrepreneurship and Innovation

The relation between corporate governance disparities

and M&A success explained:

Evidence from Chinese acquisitions in The Netherlands

Student: Jelle Buitenhuis

Student Number: 5977800

Supervisor: Tsvi Vinig

2nd Supervisor: Zhe Sun

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Preface

This master thesis is the final part of the Master Business Administration of the Faculty of Economics and Business at the University of Amsterdam. This research on Chinese acquisitions in Western countries is part of the Innovation and Entrepreneurship Track.

I would like to thank Ms. Z. Sun for introducing the topic of Chinese internationalization and for providing excellent supervision during the thesis process. Writing the thesis on Chinese internationalization was an interesting way of completing the Innovation and Entrepreneurship track. In addition, I would like to thank Dr. Prof. Tsvi Vinig for the composition of a valuable Master program and his inspiring view on the constantly changing business environment.

Finally, conducting this research was not possible without the partaking from the business professionals. I would like to thank them for their participation and their various invitations to meetings and conversations about the interesting subject.

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Abstract

Mergers and acquisitions (M&A) are often used by Chinese companies in Western countries because it is a fast way to get access to strategic assets. In this manner, Chinese companies can close the gap with international standards. However, M&As are also risky, because of difficulties in managing the post-acquisition process. Existing literature acknowledges the important role of culture in explaining M&A success, especially in international M&As. National culture differences strongly influences employees and organizations. This results in corporate governance disparities between Chinese and Western companies, which for example are reflected in different decision-making processes and communication forms.

However, research on the relation of these differences and M&A success is contradictory and is largely based on Western multinationals. Therefore, the aim of this paper is to identify the relation between corporate governance disparities and M&A success in Chinese-Europe M&As. And to identify how Chinese firms cope with the disparities. This relation is investigated by case study research and interviews with M&A advisories in The Netherlands. The findings reveal that corporate governance disparities have a negative influence on M&A success. As a result of the interviews, M&A success was measured in the pre-acquisition stage in terms of M&A realization, and in the post-acquisition stage in synergy realization. In addition, the findings shows that participation of advisories and a hands-off integration approach, result in high levels of trust from the Western company towards the Chinese company. This in turn, positively influences the realization of M&As and the realization of synergies.

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1. Introduction

In today’s globalizing economy there is an increasing presence of emerging economy companies. Especially, the growth of China’s economy in the last decades and their rise as an important player in the international economy is impressive. Some scholars even argue that China has passed the United Stated as biggest economy in the world. To be specific, there are three indications of China’s growing influence into the world economy: (1) China is the world largest recipient of foreign direct investments, (2) China is the world’s largest exporter, and (3) China is rapidly expanding their outward foreign direct investments (Child et al., 2005; WTO, 2015).

An outward foreign direct investments is a business strategy where domestic firms expand their operations to a foreign country, via OEM manufacturing or joint ventures, organic expansion, or mergers and acquisition (M&A). Since 2000, Chinese outbound M&A have been growing rapidly, while before that period Chinese outbound M&A was negligible. The rise in M&A was the result of the implementation of the ‘going-global’ strategy in the 10th five-year plan. This was a specific strategy initiated by the Chinese government whereby Chinese companies were actively encouraged to do outward investments in order to grow as a company and the countries’ economy as a whole (Buckley et al., 2007). Total Chinese outbound M&A activities increased from US$ 1.64 billion in 2001 to US$ 56.9 billion in 2014 (PWC, 2015).

Late development of China resulted in the need to ‘catch up’ with the Western countries. Chinese companies prefer M&A as investment mode because it is a fast way to gain access to companies’ tangible resources, e.g., development centers, and intangible resources, e.g., organizational processes. In this way, Chinese companies can quickly close the gap with the world market and step up to the world-league table (Child et al., 2005). In contrast to developed country companies, who internationalize to exploit competitive advantages, Chinese companies internationalize to explore competitive advantages. Chinese companies are doing acquisitions in developed countries mainly to secure access to technology, R&D skills, and to acquire international brands (Deng, 2009; Ebbers et al., 2010). Even though some argue that Chinese companies are taking over Western economies, Chinese M&A in Europe only accounts for 6% of total Chinese M&A. In The Netherlands the numbers are also limited: in 2014 only six acquisitions by Chinese companies took place.

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At the same time, M&A is also a risky route due to the large financial investments needed, the lack of international experience by the Chinese companies, and the lack of managerial capabilities to manage the foreign asset. M&As in general are not very successful, and the emerging economy background of the Chinese companies and the big cultural differences will put pressure on the post-acquisition process (Zhou et al., 2014; Zheng et al., 2014).

However, the factors for success and the reasons why M&As often fail, remain poorly understood (Stahl et al., 2008). None of the most commonly studied variables, e.g., acquisition experience or degree of relatedness, are significant in predicting post-acquisition performance. In the basis, there has to be a strategic fit between the acquiring and target companies. But also the wider integration process has to be taken into account in explaining M&A performance (Cartwright et al., 2006). This is because the way in which both companies collaborate after the acquisition is crucial in M&A success (Child, 2001; Deng, 2009).

At the same time, in the globalizing business environment, the role of culture is crucial in organizational success, and especially in M&As (Teerikangas et al., 2006). In both domestic and international M&As, different national and organizational cultures should be taken into account. Especially in international M&As, the role of culture is important because national culture differences strongly influence employees and organizations (Arnold et al., 2005). This means that organizations differ in organizational structures, processes, and boundary spanning activities. These cultural differences result in corporate governance disparities between Chinese and Western companies, which for example include different organizational structures and a different decision-making process. Literature teaches us that Chinese companies use hierarchical organizational structures characterized by highly centralized decision-making, while Western companies use flat organizational structures in which there is participation in decision-making (Chen et al., 1997; Rarick, 2007).

In other words, national culture differences between Chinese and Western companies result in corporate governance disparities in the M&A process, which in turn may influence the success of M&As. For most Chinese companies, the most difficult task in the post-acquisition stage in cross border M&A is how to deal with cultural issues (Quah et al., 2012; Zhou et al., 2014).

However, the relation between cultural differences and M&A performance is not clear. Some researchers argue that cultural differences are negatively related with M&A success (e.g. Datta et al., 1995) while other found no relation, or a positive relation (Morosini et al., 1998).

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The results are contradictory, the studies use different measurements of culture differences and M&A success, and all studies are largely based on Western multinationals acquiring foreign companies. These Western theories aren’t applicable for Chinese companies because of China’s unique cultural and emerging economy background. Therefore the relation between corporate governance disparities and M&A success needs to be researched in its specific context. This leads to the following research question: How do China-Europe corporate governance disparities affect the success of Chinese outbound M&A?

The impact of cultural differences on M&A success cannot be isolated from the overall M&A process (Teerikangas, 2006). Other factors, like the integration approach or management style, determine the effect of cultural differences on M&A success. Therefore, cultural differences may be positive or negative associated with M&A success, depending on factors that are currently poorly understood (Stahl et al., 2008). So, in order to understand this relation it is important to open up the ‘black box’.

Current studies that try to explain M&A success and try to open up the black box are largely based on Western developed multinationals and aren’t applicable to Chinese internationalization. For example, the success of assessing strategic assets from the target company is for a large part dependent on the integration strategy (Child, 2001). Some classic M&A literature suggests that when acquiring companies have high acceptance towards power distance (Lubatkin et al., 1998) and when both companies have high combination potential (Larsson et al., 1999), the greater the organizational integration. However, recent research shows that Chinese companies, with high levels of power distance and combination potential, are using low levels of integration (Knoerich, 2010). In addition, successfully assessing strategic assets from the target company not only depend on the integration strategy chosen by the acquirer but also how it is perceived by the specific target (Teerikangas et al., 2006). It is likely that German company managers, with more advanced capabilities and a world-class business, are not willing to give up too much power over decision-making, while this could different be for emerging country companies.

Again, national culture differences between Chinese and Western countries result in corporate governance disparities between companies. For example, national culture differences on the role of trust results in strong personalized trust building in Chinese companies’ networks (guanxi), while Western companies are characterized by weak depersonalized trust building (Li, 2008). Therefore it is not only interesting to research in which way Chinese-Europe corporate governance disparities impacts M&A success, but also which factors influence that

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relation. Previous research shows that classic M&A theory is not applicable, and that it needs to be researched in its specific context. This leads to the following research question: How do China-Europe corporate governance disparities affect the success of Chinese outbound M&A? And how do Chinese acquiring firms cope with the disparities?

This paper seeks to advance our knowledge on corporate governance disparities and M&A success of Chinese M&As in Western economies. By doing this, this research tries to explore what factors influence the relation between corporate governance disparities and M&A success, and in that way it tries to open up the ‘black box’. The findings of this paper are translated in a couple of propositions that are presented in a Chinese outbound M&A model to indicate the relationships between the variables. This Chinese-Europe M&A model is the result of in-depth cases studies of two Chinese M&A deals in The Netherlands, and various interviews with M&A advisories active in Chinese-Dutch M&A transactions.

This research makes significant theoretical and managerial contribution. Theoretically, it researches the relation of corporate governance disparities and M&A success in its specific context. In this way it effectively shows how the relation between the variables in Chinese-European M&As is directed, and why this is different from general Western based M&A theory. Managerially, it shows how Chinese and European companies can take action to cope with the disparities in the pre- and post-acquisition process.

This paper is organized as follows. The following section offers the theoretical background of the various concepts of Chinese M&A in Western economies. The third section discusses the research design and data collection methods. In the fourth section present the findings, that result in four propositions. The fifth section contains a discussion of these findings and the presentation of a China-Europe M&A model. The final section is the conclusion and limitations of the research.

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2. Literature Review

2.1. Rational of Chinese cross-border acquisitions in advanced economies

2.1.1. Challenging classic internationalization theory

According to Buckley et al. (1999) internationalization can be defined as: ‘the crossing of national boundaries in the process of growth’. Classic internationalization theory focuses on the exploitation of competitive advantages that companies enjoy in their domestic country. Competitive advantage can be explained as a value creating strategy that is not being implemented by any current or potential competitor (Barney, 1991). Exploiting these competitive advantages internationally, mostly obtained in the domestic market, will stimulate companies’ growth. However, this classic internationalization theory is largely based on developed country multinationals and cannot be applicable to all companies worldwide. Especially China’s emerging system of capitalism with unique cultural- and institutional factors, and the latecomer perspective, results in very different motivations to internationalize and a need to adapt classic theory (Child et al., 2005).

The late development of China resulted in the need to ‘catch up’ with the Western countries. Developing country’ companies mainly lack the resources and capabilities to become global players in international markets. These countries had some initial competitive advantages, like low labor costs, but that became less crucial when firms moved into more sophisticated markets with higher-value products (Child et al., 2005). Especially, their outdated technology and unknown brand names were not suitable to compete internationally. Therefore these developing companies internationalize to address their relative competitive disadvantages. These companies did not start internationalizing from positions of strength but rather from the resource-meager position of firms seeking some connection with international technological and business mainstream (Mathews, 2002, p. 471). So, outward foreign direct investment (FDI) is a way for companies to close the gap with the world market through acquiring appropriate assets and resources.

Literature on internationalization tends to use a ‘push-oriented’ concept, with outward movement of firms by a strategic-objective. However, internationalization is not a linear process of increasing involvement. It must be reconceived as a ‘pull’ process as well as a ‘push’ process through multiple connections in the global economy (Child et al., 2005; Gattai, 2007). Chinese companies’ push factors relate to the domestic economic and political

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environment, such as the overcapacity and government policy to stimulate outward investments. Pull factors relate to the host country factors such as potential market and other location advantages (Gattai, 2007).

2.1.2. Motivations of Chinese companies in advanced economies

Chinese companies engage in outward FDI with generally five different motivations, these are: resource-seeking, diversification-seeking, technology-seeking, market-seeking, and strategic asset-seeking. Although these motivations are placed into five broad categories, the distinction between the categories is not always clear. This is because a company can pursue multiple objectives with an investment and motivations can change over time (Deng, 2004). The major motivation of Chinese companies investing in advanced economies is because of strategic assets.

The scope of Chinese companies’ strategy changed the past twenty years from becoming a national giant in efficiency in one particular industry, into becoming a global player that maximizes overall performance (Deng, 2004). These companies engage in overseas investments to explore competitive advantages and promote their long-term strategic goals. The main reason why Chinese companies engage in outward FDI in advanced economies is to acquire strategic assets (Deng, 2004; Zheng et al., 2014). Strategic assets refer to those resources and capabilities that are valued by the firm for their potential to contribute to competitive advantage. They mainly include international valued brand names, know-how, and advanced technologies.

The acquisition of advanced technology is needed because Chinese companies have a relative technological disadvantage in the global market. By acquiring an existing firm with advanced technologies, Chinese companies have access to all valuable resources available in the firm. The acquired technology is mostly transferred to China to upgrade their domestic manufacturing and develop new products for international markets (Deng, 2004).

Mainstream Chinese brands are regarded as simple products in lower-income markets and lack the reputation to compete in high value-adding markets. It is difficult to change the reputation from lower-quality producer to high-technology brand, and it will take many years. Therefore, acquiring Western companies is a quick way to sell Chinese products, under the Western brand name. Besides, it increases the reputation and credibility of the Chinese company because a low-quality Chinese producer is able to acquire an international respected brand name.

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At the same time, acquiring foreign companies is a fast way to gain access to local markets. In several industries in China is the competition fierce and the margins are low (Child et al., 2005). Changes in the political landscape, like opening up to foreign investors and joining the WTO, resulted in growth of the domestic economy but simultaneously in growth of competition. As a result, many Chinese companies try to sell their products in other markets. However, host country governments and international institutions want to stop the dumping of Chinese products in their markets. Therefore they created several trade barriers against Chinese companies. To get access to the foreign markets, Chinese companies have to engage in outward FDI and establish foreign subsidiaries (Deng, 2004; Deng, 2009). In addition, strategic assets like international respected brand names and established marketing/distribution channels will stimulate the growth of sales in local markets.

2.1.3. Motivations of advanced country companies participating in Chinese outbound M&A

Chinese companies’ outward investments motives are broadly described in

internationalization theory. However, the motives of Western companies to engage in acquisitions with Chinese companies are underexposed. But, no matter how hard Chinese companies are pushing towards acquisitions in advanced economies: they will always be dependent on the willingness of Western companies to sell their business, and there are several reasons to be skeptical about selling a developed country company to these developing country acquirers. Most cited reasons are: (1) Chinese companies are not ready for acquisitions in developed countries because they lack firm capabilities and international competitiveness, (2) distance in the cultural and institutional environment, and (3) worries about the real intentions behind the acquisition in relation with access to cutting-edge know-how and intellectual property as the only aim of the acquisition. These prejudices, whether justified or not, suggest a climate of doubt and reluctance around decisions to sell to a Chinese company. Company stakeholders are wary because of replacement (suppliers), a loss in quality (customers) and a loss of jobs (employees) (Knoerich, 2010).

But, despite previous assertions, Chinese acquisitions in the West are increasing and Western companies’ motivations behind the acquisition are interesting. In some cases, the takeover is out of necessity due to bad performances of the company and it is one of the last options available to these struggling companies. Especially because of the large amount of capital available to Chinese companies. While in other cases the acquisition can be a result of a premeditated growth strategy. Especially the latter is interesting because several successful

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developed country companies deliberately choose to be acquired by a Chinese company instead of a company from other countries, even though these companies are more familiar to the seller in cultural and institutional perspectives (Gattai, 2010; Knoerich, 2010; Zheng et al., 2014).

The reason behind this is because these successful firms nevertheless face competitive pressures and they can gain substantially from the global ambitions of the Chinese firms for advancement of their own business objectives (Gattai, 2010; Knoerich, 2010). This is because of complementarities in motivations between Chinese and Western companies for engaging in the deals, as well as the underlying strategic need (Knoerich, 2010). The goals of the acquisition from the Chinese and Western company are different, but are largely complementary, allowing each side to gain support from the other.

Knoerich (2010) distinguishes three complementary pillars that explain both companies’ motivation. First, funding vs. ROI, which includes the lack of capital to invest on the Western side, whereas Chinese companies have above-average amounts of capital which are looking for investments. Secondly, Chinese market vs. internationalization, which is about Western access to the Chinese market which was previously very difficult due to its vast size, rapid economic growth and structural change, and cultural idiosyncrasies. At the same time, Western companies can ease the process of Chinese internationalization by transferring know-how about international standards and using distribution channels. And lastly, lower-end market vs. high-end market, were Western companies can focus on innovation and move production to relatively cheap China, moving to a new (lower) market segment, and by this assuring long-term survival by manufacturing a larger range of lower-price products and thereby servicing more customers (Knoerich, 2010; Zheng et al., 2014). At the same time, are Chinese companies are upgrading their technological skills and other necessary capabilities and thereby moving into a higher-end market segment (Knoerich, 2010). In short, the adequate capital available, the access to the growing Chinese consumer market, and the available production facilities, makes in several cases Chinese firms most suitable as acquirers of Western firms.

Western national government stimulation of Chinese - Western M&A

In addition, the rise in Chinese OFDI is also increasingly having the attention on the industry and national level because every industry and European country wants to profit from the growth of the Chinese economy and the capital available. In some cases the acquisition of several ailing Western firms leaded to resurgence of a national Western industry (Gattai,

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2010). Western country’ governments are facilitating Chinese investments by designing supportive host-country investments environments. For example, an official report from the Dutch government states that the Dutch government puts considerable efforts in obtaining high-valuable Chinese investments by the Netherlands Foreign Investment Agency (NFIA), by regularly visits from high ranked Dutch government officials, and by designing simple legislation to enhance an open economy (Rijksoverheid, 2013).

2.2 Culture

The Open Door Policy, initiated in 1978, opened China’s closed economy to foreign investors by allowing them to open subsidiaries, and merge or acquire Chinese firms. This not only attracted a lot of foreign capital and economic activity but it also saw the first steps in exposing China to Western culture. Nowadays, Chinese companies are increasingly acquiring companies worldwide and their acquisition success is influenced by differences with the host country culture (Schein, 2010; Kilmann et al., 1985). The result of Chinese companies’ international acquisitions is that from one day to another, Chinese companies become global companies and they actually have to manage overseas subsidiaries. In many cases M&As incur organizational restructuring and cultural changes. This means dealing with differences in principles, norms, values, beliefs, and expectations (Kilmann et al., 1985). Understanding the differences in culture is important because it influences the integration process and M&A performance (Weber et al., 2011).

In the following part will main the differences on national and organizational culture be explained. First, the deeper underlying drivers of both national cultures will be explained, with an emphasis on Chinese schools of thought of Confucian and Taoism. Second, the main differences between Chinese and Dutch culture will be explained, and their impact on both organizations.

2.2.1. Chinese schools of thought

Differences between Chinese and Western national culture finds its origin in the time of the ancient Greeks who had, compared to the ancient Chinese, a very different approach to life in both subject content and method of thinking (Wong, 2001). The Greek laid the foundation for the development of the Western worldview in which logic is the underlying essential element. This in contrast to the Chinese. Keeping spiritual beings at a distance, and giving full attention to human activities became a distinctive characteristic of Chinese culture (Wong, 2001). Chinese philosophical traditions tend not to include religious beliefs and many scholars

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claimed that educated people in China were indifferent to religion.

It is key to understand Chinese culture and its deeper underlying schools of thoughts in understanding the differences between both cultures and their influence on Chinese managerial practice and leadership (Rarick, 2007; McElhatton et al., 2012). China has one of the world earliest civilizations and Chinese culture is formed by different schools of thought, in which Confucian and Taoism are the main discussed in literature. These philosophies have in common that they emphasize the consciousness of mind. Their focus is on life with an ‘intensional truth’, this in contrast to ‘extensional’ truth in science and mathematics like the Greeks (Wong, 2001). Remarkable about the philosophies is that they are able to accepts and reconcile alternative values, and as a result Chinese developed tolerance towards different faiths. This flexible and ambivalent attitude towards religion and life is also evident in many other aspects of Chinese life (Wong, 2001). This is in contrast to Western mindset were the emphasis on rational results in a discomfort to paradox, meaning something is good or wrong, either/or (McElhatton, 2012). Of course, the different philosophies have their own values, which in different ways influences Chinese culture. According to Rarick (2007) can be argued that Confucian has the greatest influence on Chinese culture compared to the other philosophies. In essence, The Confucian system values the importance of hard work, loyalty, dedication, learning, and social order (Rarick, 2007). Confucian requires that individuals first honor is duty to family and society, and the individual needs to be sacrificed for goals the group. Other important aspects of Confucianism involves the concern for harmony and trust in groups, and nourishing relationships with superiors, parents, and husband/wife (Rarick, 2007).

The second important school of thought in Chinese culture is Taoism, which is about living happily with apparent contradictions by ‘letting them exist without replying or favoring one solution over the other’ (Roberts, 2011, p. 3). Opposites in Taoism are complementary rather than irreconcilable, meaning that they work together to form a unity. For a large part, Taoism is influenced by the Yin Yang philosophy which is known for its black and white symbol and is about being “both/and” instead of “either/or” (Roberts, 2011). The Yin Yang philosophy embraces paradox and harmony (Fang, 2011). An important aspect of Taoism is wu wei which possess a certain passivity in human affairs, or putting it differently ‘letting events take their course’ (Roberts, 2011, p. 7). Interesting about this philosophy is that ‘not-doing’ constitutes a form of action. It is about acting without doing and teaching without saying, whereby the act

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of distancing or stepping back becomes a mean for coming closer to the object of study (Roberts, 2011). Mitchell (1991, p. 14) compares this notion of ‘doing nothing’ to the state reached by a good athlete, where ‘the right stroke or the right movement happens by itself, without any interference of the conscious will’. Whereby nothing is done under such circumstances because the ‘doer has wholeheartedly vanished into the deed’.

In short, understanding Confucian and Taoism is important because they strongly influence todays’ Chinese culture and it shows how Chinese culture differentiates in their approach to life. However, at the same time one should notice that there are also other schools of thoughts, like Legalism and Buddhism, who altogether form Chinese culture (Chen et al., 1997; McElhatton, 2012). In the next part the main differences of todays’ Chinese culture and Western culture will be described by the work of Hofstede, who describes the complex phenomenon of culture in simple and measurable terms.

2.2.2. National cultural differences between China and the Netherlands

National culture can be described as the set of values, assumptions and beliefs that are dominant in the population of a particular country (Arnold et al., 2005). People are conditioned by cultural influences at many different levels - family, social, groups – but generally the most influential determinant is national culture. Hofstede is one of the most cited and respected researchers in the field of culture by explaining the complex phenomenon of culture in simple and measurable terms. Hofstede defines national cultures by describing five different culture dimensions; (1) power distance, (2) individualism-collectivism, (3) masculinity-femininity, (4) uncertainty avoidance, and (5) long & short term orientation. His research (1980) showed that similar respondents in different countries use different solutions to these five basic concepts. In this way it is possible to measure and compare different countries’ cultures. His research widely serves as a starting point for many researchers in the field of national and organizational culture.

The study from Hofstede and Bond (1988) shows that there are three dimensions which separates Eastern cultures from Western cultures, these are: power distance, masculinity vs femininity, and collectivism vs. individualism. In contrast to the Netherlands, Chinese culture scores high on power distance, meaning that less powerful members in institutions and organizations relatively easier expect and accepts that power is distributed unequally. Secondly, China scores high on masculinity¸ meaning that Chinese people are relatively high success oriented and driven, instead of striving for quality of life. However, Chinese and

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Dutch national culture are in essence most different on the dimension of collectivism - individualism. This dimension has to do with whether people’s self-image is defined in terms of “ I” or “We”. China is a collectivistic society were people belong to ‘groups’ that take care of them in exchange for loyalty, whereas The Netherlands is an individualistic society, were people are supposed to look after themselves or direct family only (Hofstede et al., 2010).

2.2.3. Corporate governance differences between China and The Netherlands

A consequence of the national culture differences and different schools of thoughts is that it strongly influences employees and organizations (Arnold et al., 2005). As a result of the differences in national culture, the governance of both country’ companies has also big differences. Organizations can be defined in structure, processes, and boundary-crossing components (Child, 2005). Organizational structure includes hierarchy and task descriptions, organizational processes include decision-making and reward systems, and boundary-crossing component include alliances and managing networks. Organizational culture literature teaches us that next to the artifacts of organizational culture, like structure and processes, there are also deeper underlying beliefs, values, and assumptions that form of organizational culture (Schein, 2010). Understanding organizational culture is important because strong organizational culture gives guidance to organizational performance and success, especially in the internationalization of companies (Kilmann et al., 1985). Organizational culture is heavily influenced by national culture and is based on the values and principles shared by their leaders (Arnold et al., 2005; Schein, 2010).

Table 1 shows the main differences between Chinese and Dutch companies caused by their underlying cultural differences.

Table 1: Corporate governance disparities between China and The Netherlands

China The Netherlands

Hierarchical structure Flat structure

Centralized decision-making Employees participation in decision-making

Risk-aversion Risk-neutral

Group assignments and rewards Personal assignments and rewards High context communication Low context communication

Personalized trust Depersonalized trust

Sources: Hofstede (1980), Hofstede & Bond (1988), Ahmed et al. (1996), Rarick (2007), Chen et al. (1997), Li (2008)

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Chinese companies are more likely to adopt hierarchical structures in which subordinates are told what to do, while in in The Netherlands organizations are more likely to adopt a flat organizational structure in which employees throughout the organization participate in decision-making. Rank and hierarchy are important aspects of Chinese organizations. This organizational structure serves the paternalistic leadership style of Chinese managers that is characterized by authoritarianism, benevolent and morality-based leadership, were the leader acts like father figure (McElhatton, 2012). The great respect for authority and seniority is for example reflected in the fact that it is uncommon for young managers to advance over more senior managers, even if she/he is more qualified (Ahmed et al. 1996; Rarick, 2007).

The high degree of individualism in The Netherlands is reflected in the preference for flat organizational structures in which autonomy and responsibility is spread throughout the company. An important aspect of flat organizational structures is that it facilitates innovation, by giving more autonomy to individuals, teams, and departments by reducing the degree of centralized control by giving more responsibility, autonomy, and the ability to achieve work targets in the ways the determine are most appropriate (West et al., 1996).

Centralized decision-making vs. participation in decision-making

As a result of the hierarchical structures the decision-making in Chinese companies is highly centralized. This highly centralized control is characterized by downward communications which lacks dialogue and openness (Chen et al., 1997; Rarick, 2007). While in The Netherlands, decision-making is more or less balanced among different management levels. Risk aversion vs. risk neutral

In contrast to The Netherlands, in Chinese organizations there is a tendency to avoid risk and uncertainty because of the high degree of collectivism and homogeneity demanded in their culture. It generates individuals’ risk aversion because any errors or mistakes by a person can jeopardize the whole team (Ahmed et al., 1996). This climate of risk aversion obstructs a healthy innovation culture were employees are encouraged to innovate (Ahmed, 1998; Martins et al., 2003; Rarick, 2007).

Group assignments and rewards vs. personal assignments and rewards

As a result of the collectivistic culture in China, group members take responsibility for the assignments and share rewards, while the individualistic culture in The Netherlands results in personal responsibility and rewards. Chinese people are stimulated by tangible rewards while Dutch people are stimulated by socials needs, for example flexible work hours. In addition,

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China’s collectivistic culture strengthens motivation to work hard for the ‘group’ and expresses in high loyalty towards the company/group (Hofstede, 1980; Rarick, 2007).

High context culture vs. low context culture

Previous mentioned Chinese cultural factors trust and harmony also have their influence on thinking pattern and communication style. China can be characterized as a high context culture, which means that they have a non-confrontational and indirect attitude in their communication. This is contrast to The Netherlands, which can be characterized as a low context culture which includes a confrontational and direct communication style.

These context culture differences are mainly the result of Chinese focus on harmony. In essence, harmony is the end goal rather the mean of communication. This means that Chinese don’t see human communication as a process in which you strive to direct the interaction into your own favor but establishing a conflict free interpersonal and social relationship. This is expressed in the way in which Chinese think and communicate (Chen, 1997; Rarick, 2007).

In China, communication is seen as a multidimensional process which involves much more than linear process of written and spoken word in Western countries. Western countries are driven by rational and logic which expresses itself in the importance of relying on spoken word and contracts. This Western direct communication is experienced in China as aggressive or impatient. Chinese culture put great importance on social processes, while according to Western standards this is long on formality. Chinese communication can be characterized as indirect, silent, patient, and by avoiding saying ‘no’ (Chen et al., 1997; Rarick, 2007).

Personalized trust vs depersonalized trust

Understanding trust, and the causes of trust, is important because it facilitates cohesion and collaboration between people inside organizations (Mayer et al., 1995), and between organizations (Stahl et al., 2011). This is because trust determines the extent to which a person is confident in, and willing to act on the basis of, the words, actions, and decisions, of another. This interpersonal trust can be explained by three different factors: (1) ability, (2) benevolence, and (3) integrity, by which ability and benevolence got most attention in the literature.

Ability (or cognition) is a group of skills, competencies, and characteristics which a party has in its specific domain. For example, the technical background of an employee makes sure that

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he has knowledge about technical issues and that he can be trusted on technical issues related to that area. Benevolence (or affection) is the extent to which the trusted party wants to do good to the trusting party. This is illustrated by the relation between a mentor and a protégé. In this relation, the mentor wants to help the protégé, even though the mentor is not required to be helpful and there is no extrinsic reward for the mentor (Mayer et al., 1995). Important to notice is that the different types of trust can exist independently, and have different effects. One may know that someone has knowledge about a subject (ability), but may think he/she is not willing to help (benevolence). Trusting people’s benevolence consistently matters in knowledge sharing, but trusting people’s ability becomes more important when that knowledge is tacit and difficult to codify (Levin et al., 2002).

In China there is a strong orientation towards building strong and personalized trust inside relationships, while this is weak and depersonalized for Western countries (Li, 2008). So when developing interpersonal trust, Chinese culture is more focused on benevolence, in its willingness to help others. While Western culture is more focused on ability, which is focused on basic good intentions and practical outcomes. This different approach to trust is the result of differences between collectivism and individualism, and the relative centrality of affect (sentiment) or cognition (rationality). Trust, one of the key characteristics of Chinese culture, begins with the leader and is facilitated by maintaining a harmonious organization. Employees’ trust is seen as more important than abilities or performance (Rarick, 2007). Beside trust inside the organization, it is also an important factor in relationships with others. Chinese culture place heavy weight on particularistic relationships (guanxi) and establishes a clear boundary on in-group members, those that belong to the network, and out-group members (Chen et al., 1997).

Culture-performance relationships in M&A: the role of trust

Trust has a crucial role in knowledge sharing within social-networks (Abrams et al., 2003), and between organizations (Stahl et al., 2011). In contrast to formal processes and databases, personal relationships promote effective knowledge creation and sharing, in which trust is the central characteristic. Effective knowledge sharing influences organizational performance.

Especially, as a result of an acquisition announcement, employees and managers from the target firm can have distrust. This is because processes, routines and organizational culture, which are developed in many years, can be destroyed by the new management. Therefore, developing trust is crucial in the post-acquisition process. Research shows that high levels of

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trust positively influence the socio-cultural integration, which are positive attitudes and shared identity towards the new company. This in turn influences the transfer of capabilities, resource sharing, and learning (Stahl et al., 2011).

In addition, trust not only has a positive influence on knowledge sharing, but also on strategic decision outcomes (Parayitam et al., 2009). Generally, strategic decisions are vague, complex, non-routine, and it requires different teams to interact. In this process of decision-making, two types of conflict may occur: cognitive conflict and affective conflict. Interesting is that these different types of conflict have a contrary influence on decision-making outcomes. Conflict about content enhances quality decision-making and decision commitment, while affective conflict has no influence on decision quality but a negative influence on decision commitment. Interesting is that cognition-based trust in cognitive conflicts enhances decision quality as well as decision commitment, while affect-based trust has no influence in decision-making outcomes.

To foster knowledge sharing between employees, companies must shape conditions under which trust is developed and fostered (Levin et al. 2002). This can be done by creating a common understanding among employees regarding the nature and goals of the work, by modeling trust-building through discretion, and by bringing people together (Abrams et al. 2003; Levin et al. 2002). In M&As, the acquiring company can take action to promote trust and create sociocultural integration by: speed in the integration process, improving quality of information, offering proper incentives, and by respecting the target firm’s own culture.

Chinese and Western trust relationships can be improved by change from a bilateral relationship to a trust network, and from depersonalized to personalized trust (Li, 2008). In order to improve those relationships, the role of the leader is crucial and trust-building should be a priority in the companies. For example, appointing third party referral, either as persons in the personalized process or as institutions, can improve trust building between both sides. The core idea is that third party relationships predict the behaviors and have trust-related judgments in the relation between two parties (Ferrin et al., 2006). For example, Nooteboom (1999) researched the inter-firm linkages in knowledge-sharing in the innovation process. He showed that intermediaries have an important role in establishing collaboration between two companies, by revealing the right information between the parties and in the building of trust between the companies.

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2.3. Business Integration

Chinese OFDI is characterized by the relatively high amount of M&As over other internationalization routes like OEM and JV, because it is a fast way to gain access to strategic assets and because it brings in intangible assets known as ‘the way we do these things’ (Child et al., 2005; Deng, 2009). However, it is also a risky route due to high costs involved and the ability to manage overseas assets. Especially, the way in which both companies are being integrated is decisive for post-acquisition performance (Cartwright et al., 2006).

In general, acquisitions are not very successful and there are several reasons to be extra skeptical about Chinese acquisitions in developed countries. One of the most cited reasons are: low international competitiveness, lack of management capabilities and understanding of Western markets, low familiarity with Western culture and institutional environment, and language barriers (Knoerich, 2010; Zheng et al., 2014). In addition, Western companies and governments are concerned about the real intentions of Chinese firms because they think Chinese companies are only after transfer of critical technology to China and not concerned about the future and development of Western firms (Knoerich, 2010).

At the same time, acquisitions can be seen as a mutual agreement between buyer and seller that offers potential for both companies to develop in the future. As a result, most companies are not sold the highest bidder but to the company that offer the selling side the possibility to further develop. However, companies have to choose a solid integration strategy to realize these potential synergies.

2.3.1. Defining business integration: sociocultural integration and task integration The integration process can be separated in two distinct aspects; sociocultural integration and task integration. Sociocultural integration is defined as the creation of positive attitudes toward the new organization and the emergence of a shared identity and trust among organizational members. Whereas task integration is defined as the potential for synergy realization through the transfer of capabilities, resource sharing, and learning (Stahl et al., 2008). The concept of sociocultural integration and task integration is based on the research of Birkinshaw et al. (2000) who describe human integration and task integration as an interactive process, which requires efforts from both aspects for successful integration.

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The underlying basis of sociocultural integration is that people tend to be attracted to those whose attitudes and values are similar to their own (Stahl et al., 2008), also known as cultural distance (Hofstede, 1980). Research on trust development has shown that; ‘shared norms, ideologies, and values facilitate the emergence of trust and limiting the potential for conflicts’ (Stahl et al., 2008, p. 162). At the same time, trust can easily erode when a person is not sharing the key values of the group or organization. This ‘us versus them’ thinking of a group increases when there rises an external threat, e.g., an acquisition. Especially, international acquisitions which involves greater differences due to national culture differences, puts extra pressure on this concept. According to Stahl et al. (2008) cohesiveness among members of the target firm will increase due to takeover attempts. At the same time, acquiring managers may adopt an attitude of superiority over the target firm and treat their members as inferior. These concepts of shared identity, positive attitude, and trust are sensitive aspects of M&As and are an important part of business integration. In essence, knowledge can only be transferred to Chinese firms if employees stay with the company and are willing to cooperate (Knoerich, 2010).

Task integration

In contrast to sociocultural integration, task integration is based on the underlying logic that (cultural) differences create opportunities for value creation and learning. Task integration focusses on the way in which companies organize capability transfer, resource sharing, and organizational learning after the acquisition. By doing that, companies should search for their combination potential, in which interorganizational and intercultural frictions are minimized (Stahl et al., 2008). For example, developed country firms with more advanced capabilities, international competitiveness and world-class business are not willing to give up to much power over decision-making to a Chinese acquirer (Knoerich, 2010).

In order to realize a successful acquisition companies have to choose the right level of integration. There can be situations that only some departments will be integrated to minimize friction and maximize synergy. Even if acquired capabilities cannot be directly integrated into the acquiring company: ‘the infusion of new knowledge and practices is likely to boost the development of new knowledge’ (Stahl et al., 2008, p. 163).

2.3.2. Different levels of integration

Existing literature distinguishes different forms of integration, based on the level of integration. Haspeslagh et al. (1991) describe three different integration modes: (1) absorption, (2) symbiosis, and (3) preservation. Absorption involves the highest level of

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integration, which is explained by dissolving the boundaries between the companies, and minimizing autonomy of the target management. Symbiosis involve moderate levels of integrated, whereby companies are separate entities but they become interdependent. Lastly, preservation is characterized by low levels of integration, in which the acquired company’ management have high autonomy. Traditionally, Western country companies in international M&As take a power and efficiency perspective to partially or fully restructure and integrate the acquired overseas company in order to gain control over the organization (Zheng et al., 2014). However, this classic Western integration theory is not applicable to Chinese companies doing acquisitions in the west.

2.3.3. The hands-off integration approach

Given the Chinese relative disadvantages, like the lack of managerial capabilities, high levels of integration would work counterproductive. It would destroy the competitive advantages the Western company owns, like innovative processes and a strong international brand. Therefore Knoerich (2010) and Zheng et al. (2014) argue that Chinese firms use a different integration approach towards developed country acquired companies in order to realize synergies. Zheng et al. (2014) describe this partnering approach – or light-touch integration approach - in which the companies are being managed structurally separate, meaning with very low levels of integration, but with coordination in business activities that help create synergies. This hands-off integration reduces the unintended consequences of partially of fully integration, and it helps the Western acquired firm retain key personnel and maintain its original identity (Zheng et al., 2014). This hands-off integration approach is formed by three key aspects; (1) limited integration, (2) autonomy over daily operations, and (3) coordination of business activities.

Limited integration

With the hands-off integration approach the Chinese companies do not integrate the Western firms to a significant extent, but it allows both companies to remain separate, to operate as stand-alone-businesses, and to give the target firm management almost complete operational freedom in the same or related business. Chinese companies choose this integration approach because it reduces unintended consequences of structural integration, it minimizes complexity and avoids mistakes of having too many layers of takeovers, which may disrupt the routines and operations in both organizations and causes employee dissatisfaction. In addition, the partnering approach retains and maintains foreign companies’ own identity. Chinese limited international experience and other previously mentioned deficiencies in international M&As

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result in a modest approach towards the Western developed country companies, in which they rely on the willingness of those firms to collaborate in order to realize potential value (Zheng et al., 2014).

Autonomy over daily operations

The hands-off integration approach grants high levels of autonomy and independence towards the Western target firm. The management of the Western companies have a high amount of freedom to manage the company without close control from the Chinese parent firm. Retaining the management team and granting them autonomy helps retain industry- and firm specific knowledge and expertise, leverage the target firm’s human and social capital, and it sends a positive signal to employees, suppliers, and customers. Doing the opposite – granting local management low levels of authority – increases the risk of possible negative consequences. It may lead to the departure off key managers and a loss of talent, and it may lead to operation inefficiencies as a result of disrupted routines and misunderstanding because of local market conditions and cultural differences.

In addition, the high levels of autonomy are coupled with self-confidence about personal status in their relationships with Chinese managers, as well as the role of the Western company as part of the entire Chinese group (Knoerich, 2010). This equal distribution of power is reflected in the communication on an equal level between both companies and the ability to say ‘no’ to some demands of the Chinese firms. Besides, high levels of autonomy are perceived as trust towards both sides. On one hand high autonomy shows the trust of Chinese companies towards Western companies, while on the other hand, the high level of autonomy is a mean of building trust of Western companies towards Chinese companies (Zheng et al., 2014). To be more specific, you can argue that with the high levels of autonomy, Chinese companies show benevolence-based trust towards the Western companies, by showing good intentions and the willingness to help the other party. At the same time, the Western parties build competence-based trust towards the Chinese companies, by showing to possess the necessary skills and processes required in the post-acquisition stage.

Of course, the high levels of autonomy do not mean total independence. Even though Western managers have full control over daily operational decision-making, they have to consult the Chinese parent about important strategic issues. Comprehensive audit annually and financial reporting makes sure that both companies strategies are in line with each other (Knoerich, 2010; Zheng et al., 2014).

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Even though the companies use low levels of integration and operate structurally separate, they highly coordinate and align selective business activities to create synergies. In this coordination, Chinese companies use an approach with which they are familiar with as there role in strategic alliances, like supplier of raw material of original equipment manufacturer. In that approach, Chinese companies focus on a few sources of synergy realization in some SBUs rather than align every aspect of their business immediately. This focus on cooperation, in which both parties are being treated equal, creates an environment that fosters knowledge sharing. An example of this is the movement of production with modest technology to Chinese facilities.

However, it is interesting to notice that this partnering integration approach is also a result of the complementary motivations of both companies. The complementary nature means that Chinese parent companies are unfamiliar with these strategic assets, particularly technological and marketing capabilities and processes, and their global networks (Zheng et al., 2014). In essence, Chinese companies make use of these acquisitions to acquire assets and knowledge they do not own. In this way, the Chinese parent companies are dependent on the Western companies and its personnel to share their knowledge.

Therefore it is important to a have an integration strategy in which key personnel is retained, and an environment is created were they are willing to share knowledge. Important here is that the Chinese firm has to demonstrate that it is committed to the Western location and its future. One way by doing this is by investing in the growth and development of the firm. Like a manager in the research by Knoerich (2010) puts it: “I can tell my employees many times about Chinese intentions and dedication but they must feel it day-to-day”.

2.4. M&A Success

Off course, all the efforts, hurdles, and risks of overseas acquisitions are being taken with the goal to bring it to a success. In this part, M&A success is divided into pre-acquisition stage and post-acquisition stage. Based on the work of Ahmed et al. (1996), who divide international JVs in successfully formulating and managing JVs, M&A success in the post-acquisition stage is measured in terms of synergy realization, whereas M&A success in the pre-acquisition stage is measured in terms of M&A realization.

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Generally, domestic and international acquisitions are difficult. Cartwright et al. (2006) combined thirty years of M&A research and concluded that the failure rate remained constantly high. Failures in acquisitions often are the cause of overly optimistic market expectations and synergy estimations, poor merger integration, and excessive pricing in competitive tender offers (Gattai, 2010). So even domestic acquisitions are difficult due to a couple of reasons, let alone international acquisitions. It is likely that the national differences caused by the crossing of borders puts even more pressure on the relationship between the acquiring and acquired firm.

Research showed us that many acquisitions of Western companies by Chinese multinationals have resulted in unsuccessful stories (Deng, 2004; Gattai, 2010). The first most cited causes of where the Chinese multinationals lost money were inexperience and miscalculations (Deng, 2004). Later research revealed that by far the hardest challenge for Chinese companies is to deal with the liability of foreignness in managing acquired assets and preserving the equity of the acquired brand after the acquisition (Deng, 2009). Traditionally, international M&As are done by Western companies in which they exploiting competitive advantages. In those cases, the company with the competitive advantage retains control over the developed intangible assets. However, in Chinese M&A were Chinese companies acquiring critical assets, it is the other way around (Morck et al., 2008). New technologies must be updated continuously and high quality brand names needs to be maintained. It is difficult for Chinese companies to manage these foreign assets.

In the article of Morck et al. (2008) is an example given of a Chinese manufacturing company that acquires a Western company which owned a critical production technology and an international brand name. Big problems arose when the production continuously had to be updated and the reputation had to safeguard by continuous rigorous quality control. The Chinese companies typically lacked the ability to contract and monitor the foreign firms’ performance in these two dimensions. This shows that by far the hardest challenge is to deal with the liability of foreignness and manage the foreign assets as a result of the acquisition (Child et al., 2005; Deng, 2009). The challenges for companies are not just to acquire knowledge but also to integrate it so as to improve the post-M&A innovative performance.

In the past thirty years there has been a growing amount of research on variables that effect M&A performance but the key variables for success remain poorly understood. A meta-analysis of 93 published studies by King et al. (2004) found that none of the most commonly

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studied variables (degree of diversification of the acquirer, degree of relatedness, method of payment, and acquisition experience) were significant in predicting post acquisition performance. Besides, the study showed that target firms’ shareholders gain significantly from the M&A deal but in many cases there is no value created for the shareholder of the acquiring company. This means that synergies are often not realized, and the post-acquisition integration remains largely not understood (Stahl et al., 2008).

The researchers underline the role of culture in explaining M&A performance. Interesting about cultural differences is that it affects M&A performance in an opposing way, depending on the acquirer-target relationship (Stahl et al., 2008). It shows that M&A deals that require high levels of integration are hindered by cultural differences, while M&A deals that require low levels of integration are positively influenced by cultural differences.

2.4.2. Pre-acquisition success: M&A realization

Previously mentioned difficulties of synergy realization occur after the M&A deal is closed. However, the pre-acquisition stage before closing is characterized as a difficult process with many stakeholders involved. The pre-acquisition stage, which involves for example the negotiation stage, bidding stage, and government approval stage, is in many cases a unbridgeable hurdle of different parties and cultures involved. According to Quah et al. (2012) is the pre-acquisition stage an important process in which acquiring companies have to reassure target companies’ employees of their future with the company after the deal.

When researching Chinese-Western pre-acquisition literature, two interesting aspects stand out. First, when a Chinese company occurs as a potential acquirer, there is suspicion by Western employees, suppliers, and general public about the real intentions of Chinese companies and the future of the Western firm. Secondly, cultural differences in the pre-acquisition stage result in many failures. As a result, different third parties have a great deal in smoothing the process of M&A realization.

Different Western stakeholders worrying about Chinese intentions

Even though Chinese and Western companies have complementary motivations to engage in a M&A with mutual benefit, stakeholders of Western firms and general public are cautious about the Chinese background of the potential acquirer (Knoerich, 2008). Besides, the previously mentioned big cultural differences and questionable possession of necessary capabilities to manage the target, there is also suspicion by employees, governments, suppliers

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and general public about the real intentions of the Chinese company. The different stakeholders fear for a loss of value in cutting edge knowhow and technologies (Empson; 2001; Knoerich, 2008).

China’s emerging economy background with their motivation to catch-up with the world economy by acquiring Western developed technology and knowhow raises skeptics by general public. They think their only goal is to pull the knowledge out of the Western companies and move it to China. Especially because of the inefficient legal frameworks and weak intellectual property rights in China (Deng, 2009). This could results in a collapse of the Western company because critical knowledge and technology is pulled out of the company and their valuable assets are destroyed. Especially further suspicion is likely when the Chinese company is state-owned or there are strong links to the government (Knoerich, 2008).

In addition, the announcement of an M&A also creates a stressful environment of uncertainty, fear, and distrust by employees in both the acquiring and target company (Empson, 2001). These employees fear a loss of status and changes to their established work norms, especially when knowledge transfer is the primary motivation of the M&A. This is because most difficult and tacit knowledge cannot be codified into a large system, but is dependent on the sharing between individuals. So, effectiveness of knowledge management systems, and as a result knowledge transfer, is predicated on the interpersonal trust between individuals (Empson, 2001). Uncertainty by employees in the post-acquisition period may result in a lack of trust, and reluctance by employees to share knowledge. Empson (2001) explains the fear of exploitation and the fear of contamination as the main causes for a lack of knowledge sharing in M&As. The fear of exploitation is described as extreme anxiety that individuals appear to experience in M&As, when they are being asked to give away valuable knowledge to new firm members, while there is very little being offered in return. This is not a result of rational or a commercial consideration, but a result of subjectivity and very personal evaluations. The fear of contamination contains the risk that employees experience when their company’s image is called in to question when they are associated with the new ‘down market’ company.

These Chinese acquisitions, and as a result their access to knowledge, is also a sensible issue for Western countries’ governments. On the one hand, Western governments are stimulating Chinese M&A because they want to profit from the capital available and the opportunities of the Chinese market (Rijksoverheid, 2013). On the other hand, there are doubts because the effects of the investments are still largely unknown (Ebbers et al., 2010). For example, the Dutch Advisory Council on International Affairs, who advices the Dutch government, raises

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concerns about the transfer of ownership of strategic infrastructure and critical knowledge to China (AIV, 2013). They state that China is an opportunity and a partner but also a competitor and a threat.

In summary, different stakeholders, like employees, customers, and suppliers are worrying about M&As. For example, employees about losing jobs and companies’ identity, customers about maintaining the high quality of the Western brands, and current suppliers about fear of being replaced by cheaper Chinese partners. All these prejudices create a climate of doubt and reluctance which affects the decision to sell to a Chinese company (Knoerich (2008).

Confidence building measures

To overcome this suspicion, Knoerich (2008) describes three confidence building measures by which the Western company is assured that it goals are fulfilled after the completion. These confidence building measures positively influences the realization of M&As.

Chinese company generally generate trust by three measures. Firstly, by granting a high degree of autonomy to Western managers. Often the Western company had full control over what knowhow can be transferred and what not. Thereby, the Chinese parent invested in the local Western assets by fully financially stimulating innovation. Secondly, Chinese companies had to give assurances in acquisition contracts according to local Western law. An example of these assurances, is the guarantee that the Western location would not be closed down in the future. The autonomy and assurances both mitigate the suspicion from Western stakeholders. Thirdly, Western company managers have a good status in relationships and voice. This means conversation on equal level, the ability to say ‘no’, and maintaining decision-power in China-based operations. The factors together, which are uncommon in classis M&A relationships, result in confidence in the future of the company and about Western companies’ role in the relationships. In this way, decision-makers are confident about M&A perspectives and they could get support from Western firm stakeholders. This is a critical aspect in the realization of M&As (Knoerich, 2008).

Cultural differences in pre-acquisition stage

Besides the fear about the intentions of Chinese companies in M&A deals, cultural differences in the pre-acquisition stage also play a big role in M&A realization. Big national culture differences result in a different approach and behavior in the pre-acquisition stage, e.g., the negotiation stage, bidding stage, and government approval stage. This pre-acquisition stage not only influences M&A deal completion, but it also lays the groundwork from which the relationship can be nurtured (Ahmed et al., 1996; Buttery et al., 1998).

The relation between corporate governance disparities and M&A success explained : evidence from Chinese acquisitions in The Netherlands