Do Cultural Characteristics affect the ownership strategy for cross-border mergers and acquisitions?

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University of Amsterdam

MSc Finance, track Corporate Finance

Do Cultural Characteristics affect the ownership

strategy for cross-border mergers and acquisitions?

Master Thesis

Author: Friso Nilting

Thesis supervisor: dhr. Dr. J.E. Ligterink

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Statement of Originality

This document is written by Student Friso Nilting who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Acknowledgements

I want to thank my thesis supervisor dhr. Dr. J.E. Ligterink especially for the great support during my master thesis. He has helped me very well by providing me fast and supportive remarks, comments and feedback.

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Abstract

This research investigates the effect of the cultural characteristics on the ownership strategy of cross-border mergers and acquisitions. The ownership strategy depends on the trade-off between the costs and benefits of the different levels of ownership acquired in the entry mode. A worldwide database is constructed with 4,201 cross-border transactions conducted between 2000 and 2015. The cultural dimensions of Hofstede (1989) are used to define the cultural characteristics. Firstly, the effect of the cultural distance on the ownership strategy is researched, whereby the cultural dimensions are used to measure the cultural distance. Secondly, the influences of the individual cultural dimensions on the ownership strategy are researched. The findings in this research demonstrate a negative effect from the cultural distance on the percentage of ownership sought. As a lower percentage of ownership leads to a lower resource commitment, a lower equity stake is preferred when the exogenous uncertainty is higher due to the cultural distance. Moreover, a part of the equity can be left to the target firm to incentivize the target firm to maximize the profitability. A positive effect is found from the Individualism dimension, as firms from an individualistic society tend to be eager for control as they do not want to share it. Furthermore, the findings in this paper demonstrate a negative effect from the Long-term Orientation dimension, as firms from a society with a high Long-term Orientation index are eager to learn from other cultures and willing to establish long lasting partnerships.

Keywords: Cultural distance, Ownership strategy, Cross-border M&A, Ordered Logit Regression model, Hofstede dimensions

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List of tables

Table 1: Related literature overview 18

Table 2: Summary statistics 24

Table 3: Correlation matrix 27

Table 4: Ordered Logit Regression model and Logit Regression model Cultural Distance 37

Table 5: Ordered Logit Regression Model with cultural dimensions. 42

Table 6: Logistic regression analysis on the ownership strategy with cultural dimensions 47

Table 7: Robustness checks for cultural distance 50

Table 8: Robustness checks for the cultural dimensions 52

Table 9: Ordered Logistic regression robustness checks on the cultural distance. 66

Table 10: Ordered Logistic regression robustness checks on the cultural dimensions. 67

Table 11: Logistic regression robustness checks on the cultural distance. 68

Table 12: Logistic regression robustness checks on the cultural dimensions. 69

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1. Introduction

Cultural distance, which is the level of dissimilarities between the cultures of two countries (Anderson & Gatignon, 1986), has emerged to be one of the biggest obstacles for an effective integration process (https://www2.deloitte.com). According to research carried out by Deloitte (2009), the cultural distance between the countries of the target and the acquiring firms causes over 30 percent of all the integration failures. The cultural distance has a positive effect on the level of uncertainty and the level of complexity at cross-border mergers and acquisitions (Shane, 1994). Responding to these difficulties, acquirers can choose a lower ownership stake in their entry mode. An acquirer can choose different ownership strategies, whereas all the different levels of ownership come with advantages and disadvantages. The optimal level of ownership can be evaluated by analyzing the benefits and costs associated with the different levels of ownership. In case of a higher equity stake, the acquirer has less restricted access to all the assets of the target firm (Anderson & Gatignon, 1986). Moreover, the acquirer will have the power to determine the strategy. Yet, Malhotra (2011) argues that a 100% equity stake offers more control than a 50.01% equity stake. Therefore, firms can choose to acquire a level of equity higher than needed to grant the controlling interest, as a higher equity ownership should lead to more control. However, the amount of ownership acquired can increase the costs of contracting (Egger & Winner, 2005). A smaller equity stake can be chosen because it limits the resource commitment and therefore the risk. Further, it allows for an easier and faster reversion of the investment choice (Chari & Chang, 2009). A smaller equity stake can also be chosen to preserve the local managers, who have the experience and the capacity to maintain the local relationships (Chari & Chang, 2009). However, it does not bring the power.

The determination of the ownership strategy depends on both internal and external factors. Among the internal factors are the organizational characteristics of the acquiring firm which can influence the benefits of a partial ownership, the expenses of implementing the business strategy, and the process of integrating the target firm management (Di Guardo, 2016). The industry relatedness between the business activities of the acquiring firm and the target firm can affect the efficacy of the integration process (Chari & Chang, 2009). The ownership strategy depends on external factors, as the environmental characteristics of the acquiring firm influence the efficiency and effectiveness of the integration process (Damanpour et al., 2009). The cultural distance is one of the environmental characteristics which exert influence on the ownership strategy.

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2 The influence of the cultural characteristics on the determination of the ownership strategy, in particular, will be studied in this research. Chari and Chang (2009) explain that the level of ownership affects multiple factors such as the perceived risk and the resource commitment of the investment. However, when determining the ownership strategy, the effect of the cultural characteristics has to be taken into account. An acquirer can increase its ownership stake and thus exert more control in their entry mode which grants the acquiring firm the power to determine the strategy. The level of control can also mitigate the cultural differences between the international affiliates (Li & Guisinger, 1992). Furthermore, a higher level of control will positively affect the effectiveness of the transfer of tacit assets (Anderson & Gatignon, 1986). However, when the cultural distance is larger between the target and acquiring country, the level of exogenous uncertainty might increase (Shane, 1994). As the resource commitment serves as an exit barrier, the perceived risk of the acquiring managers will increase when the exogenous uncertainty is higher (Shane, 1994). As a result, a lower equity stake mitigates the resource commitment and therefore the perceived risk. Further, in cultural distant markets, local firm managers have more market experience and are better able to maintain local relationships (Kogut & Singh, 1988). Therefore, an acquirer can decide to leave a share of ownership to the target firm. Additionally, an acquirer can leave a share of equity to the target firm as an incentive to maximize the profitability (Chi, 1994).

The cultural dimensions established by Hofstede (1989) are used to calculate the cultural distance between the countries of the target and the acquirer. Professor Geert Hofstede made an overview of how values in the workplace are influenced by culture, by analyzing a large database of employee value scores, which were collected within IBM (Tayeb, 2013). He makes a distinction between the following six cultural dimensions: Power Distance, Individualism, Feminine/Masculine, Uncertainty Avoidance, Long-term Orientation, and Restraint/Indulgence.

The ownership strategy can be seen as an important topic because of the long-term impact it has on both the acquirer and the target firm. Multiple papers researched the effect of cultural distance on the ownership strategy, however, they didn’t find one unified answer. Whereas culture can exert influence on the ownership strategy in both directions, it is interesting to further research the cultural characteristics. Most of the papers that performed an empirical research used the Euclidian distance from Kogut and Singh (1988) to measure the cultural distance between the target and the acquiring countries. The formula designed by Kogut and Singh (1988) uses the cultural dimensions established by Hofstede (1989). However, these papers do not discuss the cultural dimensions individually, nor the relationship between the individual dimensions and the ownership strategy.

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3 Therefore, this thesis researched the effect of the cultural characteristics on ownership strategy for cross-border mergers and acquisitions and investigated the effect of the individual cultural dimensions on the entry mode choice. At first, the influence of cultural distance on the ownership strategy of cross-border transactions is tested. Subsequently, the influences of all the individual cultural dimensions on the ownership strategy are researched. Three different models are used to research this topic. In all three models, the ownership strategy is the dependent variable, which is applied differently in each model. The first model is an Ordered Logit Regression model. There are three different possible outcomes for the dependent variable in this model; ‘a minority stake’, ‘a majority stake’ and ‘a full acquisition’. The second model is a Logit Regression model where the dependent variable will be a dichotomous variable. The last model is a Panel Regression Model which will be used together with an OLS Regression Model to identify the time and entity effects on the dependent variable.

This research will contribute to the existing literature in multiple ways. Up to now, little empirical research has been performed into the ownership strategy of cross-border transactions. Moreover, most of these studies used a (Logit) Regression model where the dependent variable is either a full acquisition or a partial acquisition (Chari & Chang 2009; Di Guardo, 2016; Malhotra, 2011; Gomes-Casseres, 1989; Hennart & Reddy, 1997; Chen & Hennart, 2004). This research will investigate the ownership strategy of cross-border transactions, while using an Ordered Logit Regression model. The Ordered Logit Regression model can be seen as an extension of the Logit Regression model, which applies for dichotomous dependent variables, allowing for more than two response categories. Therefore, this research is able to analyze if the acquirer prefers the controlling interest or prefers to exert more control by doing a full acquisition, whereas Malhotra (2011) argues that a full acquisition grants more control than a partial acquisition with a controlling interest.

The dimensions of Hofstede (1989) are used to research the effect of cultural distance on the ownership strategy. Other papers that performed empirical research into the ownership strategy used the Euclidian distance of Kogut and Singh (1988) to research the effect of cultural distance on the ownership strategy (Chari & Chang, 2009; Ragozinno, 2009; Brouthers & Brouthers, 2000; Kogut & Singh, 1988). The Euclidian distance, as measurement of the cultural distance, is based on the cultural dimensions of Hofstede (1989). However, the papers that used this measurement did not research or discuss the cultural dimensions individually, nor did they relate the individual cultural dimensions with the ownership strategy. This research does investigate the individual cultural dimensions and their effects on the ownership strategy. As it is important to understand the

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4 underlying reasoning of the cultural distance, another point of view from the existing literature on the effect of cultural distance on the ownership strategy will be provided in this research.

This thesis will be structured in the following way. Firstly, the theory which originates from the related research will be discussed. Based on this theory, different hypotheses will be established to examine the research question. Secondly, more insight is gained into the variables and how the data is obtained. Subsequently, the six dimensions of Hofstede (1989) will be discussed and the relationship between the individual dimensions and the ownership strategy will be defined. In the methodology of this study, the models which are used to test the hypotheses will be analyzed. Further, the results are presented and interpreted and robustness checks will be performed to verify the results of the research. Finally, there will be a discussion based on this research.

2. Related literature

The related research will be discussed and set out in this section of this study. First, the ownership strategy and its implications are discussed and interpreted. Second, the influence of different factors on the ownership strategy will be discussed and demonstrated. Subsequently, an overview is presented of the different papers that examined the influence of culture on the ownership strategy. Finally, a framework is presented to summarize the findings with regard to the ownership strategy. Based on this prior research, three hypotheses are established which are presented in this section.

2.1 Ownership strategy in general

When a firm enters a foreign market, it has to choose an ownership level to enter the foreign market. Many papers researched the different determinants of the ownership strategy and investigated the differences between the ownership strategies. The differences between the entry modes are commonly based on the different levels of equity that is invested. Often there is a distinction made between entry modes with a relatively high level of equity invested (i.e. wholly owned subsidiaries, full acquisitions), a relatively small level of equity invested (i.e. joint ventures, franchises) and investments with relatively little to none equity invested (i.e. licensing, distribution contracts).

The optimal level of ownership at cross-border acquisitions can be analysed by evaluating the benefits and the costs of the different levels of ownership. A lower equity stake can be chosen, as it offers the opportunity to share the resource commitment and therefore the investment risks (Chari & Chang, 2009). Furthermore, a shared ownership allows access to complementary resources which were not available within each of the separate firms (Chari & Chang, 2009). However, the lack of

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5 control will lead to higher costs at a partial acquisition, as it will lead to the inability to fully integrate the target company, the costs of partner control and will increase the difficulty of relocating the tacit assets (Anderson & Gatignon, 1986). Anderson and Gatignon (1986) found that integration and control are closely related, whereas a higher equity stake as entry mode gives more control over all the operations as the acquirer has less restricted access to all the assets of the target firm. Moreover, Ekeledo and Sivakumar (2004) state that a higher equity stake will gain a higher return in general.

The level of ownership has impact on many factors such as the perceived risk and the resource commitment of the investment (Chari & Chang, 2009). The perceived risk of an acquiring firm is closely related to the resource commitment of a firm. Hill et al. (1990) describe the resource commitment as dedicating assets that cannot be reused for alternative investments without a loss of value. Therefore, Anderson and Gatignon (1986) state that higher resource commitment leads to higher switching costs. Moreover, they argue it will increase the firm’s exposure, i.e., potential currency changes which cause losses. Due to the resource commitment, a shared control mode will lead to a swifter and simpler reversion of the investment (Chari & Chang 2009). Thus, a higher level of ownership as entry mode can increase the return and risk, whereas low ownership entry modes limit the resource commitment, but often at the costs of returns (Anderson & Gatignon, 1986). The paper of Hill et al. (1990) illustrates the dependence of the resource commitment on the chosen entry mode. Hill et al. (1990) researched different factors that influence the entry mode of cross-border acquisitions and integrated it into a theoretical framework. They argue that there are three broad distinct ownership strategies: licensing, joint ventures and wholly owned subsidiaries, where every entry mode has different levels of control, resource commitment and dissemination risk. There are different levels of resource commitment involved per level of ownership. According to Hill et al. (1990), the level of resource commitment is the lowest at a licensing, where the licensee carries most of the costs by opening up and serving the foreign market. The multinational bears for instance the costs for training the licensees and monitoring if the licensees obey the licensing contracts (Hill et al., 1990). On the other hand, at a full acquisition, the multinational has to bear all the costs for opening up and serving the foreign market (Hill et al., 1990). As the multinational now owns all the revenue generating assets, its resource commitment is correspondingly high (Hill et al., 1990). They argue that the resource commitment of a joint venture depends on the ownership split and shared resources and will be somewhere between a licensing and a wholly owned subsidiary. Hill et al. (1990) state that the resource commitment serves as an exit barrier and makes the firm less flexible. The multinationals cannot exit the foreign market without incurring substantial costs when they

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6 have extensive resource commitments (Hill et al., 1990). Therefore, they propose that firms would prefer a lower equity stake as entry mode when the uncertainty and risks are higher in a foreign market, as the resource commitment serves as an exit barrier.

The relation between the resource commitment and the risk perceived by a firm is demonstrated in the paper of Ekeledo and Sivakumar (2004) as their research exhibits how firms align their ownership strategy on the cohesion of these factors. Ekeledo and Sivakumar (2004) used the data from a mail-survey from top-level managers in the United States to develop a framework for the entry mode choice of manufacturing firms. They researched to which extent these determinants apply for the entry mode choice in the service sector. The sample they used consisted of US manufacturing and US non-separable service firms that made an entry into a foreign market between 1985 and 1995. Ekeledo and Sivakumar (2004) used a Logistic Regression model to test the determinants on either a full acquisition (wholly-owned subsidiary) or a shared control mode (joint venture, licensing, or management contract). They conclude that the costs of contracting will increase at a full acquisition. However, the possible opportunistic behavior of the partner firm can be dodged by entering the market via a full acquisition (Ekeledo & Sivakumar, 2004). On the contrary, they argue that a partial acquisition as entry mode implies less risk due to the smaller resource commitment. The findings in their paper indicate that firms with extensive geographic experience and industry experience will prefer a full-control mode to enter a market. The geographical and industrial experience will mitigate the risk perceived by the acquiring firm (Ekeledo & Sivakumar, 2004). Therefore, the acquiring firm is more likely to acquire a higher equity stake.

Moreover, the positive relation between the perceived risk and the resource commitment is emphasized in the research of Hennart and Reddy (1997). Hennart and Reddy (1997) investigate the different determinants to choose between a full acquisition and a greenfield equity joint venture for Japanese investments in the United States. They specify that a full acquisition takes place when a Japanese parent firm fully acquires a manufacturing firm, or parts thereof, in the United States, whereas a joint venture takes place when a Japanese investor establishes a new manufacturing firm and shares the investment with an American partner. They obtained the data from Toyo Keizai and the Japan Economic Institute. Hennart and Reddy (1997) found that the longer Japanese firms have been in the United States, the more likely that they will prefer a full acquisition over a partial acquisition. The presence of Japanese firms in the United States will diminish the risk perceived at acquiring firms, causing an increase in their willingness to commit more resources to the investment. The research of Kim and Hwang (1992) indicates that there are significant differences between the entry modes and demonstrates that acquirers try to limit their exposure as the perceived risk

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7 increases. Kim and Hwang (1992) researched the global strategic considerations of the entry mode of multinationals. They try to investigate the determinants of the entry mode beyond the environmental and transaction factors by researching the strategic relationships a multinational considers between its operations in making the decision. Their data are obtained by the use of a survey for firms that entered a foreign market between 1982 and 1988. They are using three different entry modes in their research: licensing, joint ventures and wholly owned subsidiaries. They are using nine different characteristics to test if there are differences between the profiles of the different entry modes. The findings in their research reject their central hypothesis and state that the profiles of the three distinct entry modes have significant differences according to the nine key characteristics that are used. Moreover, Kim and Hwang (1992) found that the country risk and the location unfamiliarity have a negative influence on the level of ownership acquired, as they argue that acquirers can limit their resource commitment and therefore reduce their risk exposure by choosing a lower equity level when the perceived risk is higher.

2.2 Ownership strategy related to other factors

The main focus of this research is to investigate the influence of culture on the ownership strategy at cross-border mergers and acquisitions. Based on prior research, a brief overview of the other factors influencing the ownership strategy is presented below. First, the influence of uncertainty on the ownership strategy is explained and demonstrated. Subsequently, the effect of asymmetric information on the level of equity sought is discussed. Third, the relation between the competitive advantage of a firm and the percentage of ownership sought is presented. Finally, the dependence of the ownership strategy on the rigidity of employment contracts is explained and demonstrated.

2.2.1 Uncertainty

Uncertainty is one of the factors influencing the ownership strategy. Uncertainty is described by Anderson and Gatignon (1986) as the unpredictability of the firms’ environment. There are two different types of uncertainty, exogenous uncertainty and endogenous uncertainty. Endogenous uncertainty can be decreased by the actions of a firm, as Folta (1998) argues that it can be resolved by learning and investing, which reveals growth opportunities for the firm. On the contrary, exogenous uncertainty is largely unaffected by the actions of a firm and will most likely resolve over time, which gives the incentive of delaying the resource commitment (Folta, 1998). Uncertainty affects the ownership strategy as the different entry modes are preferred to the different levels of uncertainty. The exposure of the degree of uncertainty is higher at a full acquisition compared to a partial acquisition as the degree of resource commitment is higher (Folta, 1998). Therefore, Reuer and Tong (2005) argue that a partial acquisition can serve as an option for this uncertainty. As the risk of an investment increases due to an increase in the exogenous uncertainty in a foreign market,

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8 the acquirer can diminish this uncertainty by sharing the investment risk and acquiring a lower equity stake (Reuer & Tong, 2005). After the uncertainty resolves positively, the acquirer can scale up its ownership by acquiring the full company or by upscaling the investment (Reuer & Tong, 2005). However, if the uncertainty resolves adversely, the acquirer can sell its partial ownership and can reverse the investment more easily compared to a full acquisition (Chari & Chang, 2009). Anderson and Gatignon (1986) state that the acquirers should react to uncertainty by acquiring lower equity stakes, as ownership obligates the acquirer to the business which may not be appropriate. They also argue that the firms should preserve their flexibility by shifting the risk to outsiders by sharing the investment risk through a partial acquisition.

Different papers empirically researched the determinants of the explicit use of call options (real options) to acquire equity in international joint ventures (Cuypers and Martin, 2006; Folta, 1998; Reuer and Tong, 2005). Stock and Watson (2012) define a real option as the right to make a particular business decision. However, real options are often not traded in competitive markets along with the underlying assets (Stock & Watson, 2012). Cuypers and Martin (2006) argue that real options are especially appealing as they are linking the current strategic decisions of a firm with the uncertainty about the future outcomes. Cuypers and Martin (2006) examine the boundaries of real options by using a sample of 6472 Chinese joint ventures. They explain that a firm can obtain a real option by forming a joint venture, as the firm is also able to limit its losses to the initial resource commitment. Moreover, the firm can scale up its investment if the circumstances turn out to be favorable, such as a financial call option can be exercised (Cuypers & Martin, 2006).

The research conducted by Folta (1998) indicates that higher levels of uncertainty lead to the preference of lower levels of equity as entry mode. Folta (1998) uses real options to research the motives for initiating a joint venture instead of an acquisition of another firm already having the desired technology. The final sample of his paper consists 420 transactions which were conducted in the bio-industry since 1978. The dependent variable that is used is the choice of a minority investment, joint venture or acquisition as entry mode. The findings of the paper support the hypothesis that acquirers prefer a partial equity as entry mode when there is a greater dissimilarity between the partners. Moreover, the findings demonstrate that shared ownership is preferred over acquisition when there is greater technological uncertainty (Folta, 1998).

The paper of Di Guardo et al. (2016) demonstrates that the uncertainty experienced by the acquiring managers is not only related to the actual market knowledge and information the manager possesses, but is also related to the perception of familiarity of the foreign market. The historical linkage is a measurement for the historical business activities between the countries of the acquirer

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9 and the target prior to the transaction. They suggest that the historical linkage can have a direct effect on the risk perceived by the acquiring managers. Therefore, the historical linkage between the target and the acquiring country can diminish the uncertainty and risk perceived of a full acquisition (Di Guardo et al., 2016). Further, they researched the effect of corruption on the ownership strategy. They analyzed data from cross-border mergers and acquisitions performed in the seven largest European countries between 2000 and 2012. Di Guardo et al. (2016) tested if the historical linkage moderates the effect of corruption and if it positively affects the ownership strategy as it diminishes the uncertainty and risk perceived of a full acquisition. To test this hypothesis, they used a Logistic Regression model in which the dependent variable is a dummy variable for the ownership strategy which is a full acquisition if a 95% or higher equity stake is acquired. Di Guardo et al. (2016) confirmed the hypothesis as they found that the historical linkage increases the likelihood of a full acquisition. Argote et al. (2000) argue that the past transactions reveal information about the business environment and the culture which directly affects the risk perceived by the acquiring managers.

The paper of Tihanyi et al. (2005) indicates that high-technology industries experience more uncertainty, which influences the ownership strategy of the firms in these industries. Tihanyi et al. (2005) used 66 independent samples to research the effect of cultural distance on entry mode choice, international diversification and the performance of multinational enterprises. Tihanyi et al. (2005) argued that firms in high-technology industries already face a lot of uncertainty and risk due to the size of their investments in the technology. As a result, firms from high-technology industries might hesitate to further increase their resource commitment and risk (Tihanyi et al., 2005). The findings in their paper indicates that firms from high-technology industries prefer lower equity stakes in their entry mode as they already face higher uncertainty compared to firms in other industries.

2.2.2 Asymmetric information

There is possible asymmetric information in cross-border acquisitions, as the target firm has more information about the true value of its firm than the acquirer has. Asymmetric information can cause valuation problems which can influence the ownership strategy, as Akerlof (1970) states that asymmetric information leads to adverse selection. Balakrishnan and Koza (1993) state that due to the asymmetric information, it is hard for the acquirer to sort the good-quality firms from the bad-quality firms. They argue that the information asymmetry between the target firm and the acquirer is bigger if they are from different industries. The level of asymmetric information can exert influence on the ownership strategy as a partial acquisition can serve as a solution to the asymmetric

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10 information (Hennart & Reddy, 2004). A partial ownership is an efficient instrument to gather additional information about the true value of the partner’s assets (Hennart & Reddy, 2004).

The research performed by Chen and Hennart (2004) affirms that partial acquisitions are preferred in case of high asymmetric information between the target and acquiring firms. Chen and Hennart (2004) investigated why Japanese investors chose partial acquisitions over full acquisitions in their entry mode in the United States. They use an 80% ownership threshold to determine a full acquisition, as they argue that the traditional 95% cutoff may not provide enough space to control of fraud and misrepresentations. They used a sample of 269 entries, consisting of 114 acquisition and 155 greenfield investments, which are retrieved from the Tokyo Keizai and the Japan Economic Institute between 1981 and 1989. Chen and Hennart (2004) state that a partial acquisition is a possible solution for the asymmetric information, as a self-interested seller might misrepresent the value of its firm. Specifically, they argue that owners of a bad-quality company would try to sell the full company, whereas owners of a high-quality firm, who are confident about the future of their firm, are willing to sell partial ownership. The target firms can signal the good quality of the firm if they show their willingness to keep an equity stake (Chen & Hennart, 2004). They argue that as a result, the acquirer saves costs on the valuation process. They found a negative effect of the industry knowledge on the ownership strategy which supports their hypothesis that Japanese investors entering related industries are less likely to choose partial over full acquisition, as there is less asymmetric information.

Anderson and Gatignon (1986) argue that the valuation problem arises especially in case of a high-technology target firm, as the acquirer cannot know the precise value of the knowledge of the target firm. Anderson and Gatignon (1986) integrated the theory on entry mode into a unified framework. Based on this framework, they established testable propositions that investigate under what circumstances an entry mode is the most efficient choice in the long-run. Anderson and Gatignon (1986) point out that proprietary knowledge is subject to the hazards of transactions and the valuation of the knowledge. They argue that the acquirer only knows the true value of the knowledge of the target firm once it is fully disclosed. However, once the knowledge is fully disclosed, the acquirer does not have to pay for it anymore (Anderson & Gatignon, 1986). Due to this valuation problem, the holders of the information tend to exploit this knowledge themselves (Anderson & Gatignon, 1986). Therefore, they propose that a higher equity stake as entry mode is more efficient for highly proprietary processes or products.

The possible signaling effect of partial acquisitions is emphasized in the paper of Chari and Chang (2009). They investigated which factors determine the ownership strategy for cross-border

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11 acquisitions. They used 730 cross-border acquisitions announced by US firms between 1996 and 2002. The percentage of equity sought is the dependent variable in their regression model, which is obtained from the Mergerstat database and the Mergers & Acquisitions rosters. Their first hypothesis states that foreign firms will seek a lower share of equity in local firms when these firms are in a different industry compared to firms in the same industry. Their results demonstrate a positive and significant effect from the industry relatedness on the ownership strategy which means that a full acquisition is more likely to happen when an acquisition takes place within the same industry. Chari and Chang (2009) state that the positive effect is a result of the reduced need for signals when there is less asymmetric information.

The research conducted by Balakrishnan and Koza (1993) discusses the advantages of partial ownership with regard to asymmetric information. They used an event study with a sample of 165 acquisitions and 64 domestic joint ventures to research if the parent companies will prefer a joint venture over an acquisition when they are less informed about the target business. They tested whether investors react more positive to joint-ventures between parents operating in dissimilar businesses. They used the first three digits of both SIC codes to determine the level of dissimilarities between the businesses. Balakrishnan and Koza (1993) appoint the three main advantages of partial ownership with regard to asymmetric information. First, they argue that the adverse selection is mitigated due to repeated contracting and termination of the relationship. Second, a joint venture has, unlike a licensing, rights and obligations by a way of shared ownership which helps to reduce the incentives of opportunistic behavior (Balakrishnan & Koza, 1993). Finally, they argue that a joint venture gives the opportunity to learn and to gather information about the value of the partner’s assets. The results found in their paper confirm the hypothesis that the investors react more positive to joint-ventures between parents operating in dissimilar businesses.

2.2.3 Competitive advantage

The competitive advantage of an acquiring firm can influence its entry mode choice into a foreign market. When an acquiring firm has a competitive advantage in knowledge, the firm will protect this knowledge. Hill et al. (1990) explain that acquiring firms can use contracts to protect their knowledge. As Hill et al. (1990) integrate the different factors that influence the ownership strategy into a framework, they argue that there are three broad groups of variables which influence the entry mode decision: strategic variables, environmental variables and the transaction specific variables. Transaction specific variables exert influence on the entry mode choice by influencing the dissemination risk (Hill et al., 1990). They explain that if a firm grants a license to a foreign firm to use the knowledge to manufacture or to market a product, there is a risk of losing the specific knowledge. An employee might try to propagate the knowledge or will use it for other purposes

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12 than originally intended (Hill et al., 1990). The firm can be insured against the loss of the knowledge by setting up a contract, however, Hill et al. (1990) argue that a truly comprehensive contingent claims contract can never be drafted. The greater the incentive for a licensee or joint venture partner to misuse the knowledge, the greater are the transaction costs for the target firm as insurance against loss of the knowledge (Hill et al., 1990). They argue that the risk of the dissemination differs between the different ownership strategies. According to Hill et al. (1990), the risk is the lowest at a wholly owned subsidiary, where the multinational has the most power. The risk of dissemination is also less at a joint venture, where the multinational has greater control over its partner’s utilization of the firm-specific knowledge, compared to a licensing case (Hill et al., 1990). To conclude, the risk of dissemination of the firm-specific knowledge is negatively correlated to the amount of ownership acquired (Hill et al., 1990). Consequently, the larger the transactions costs, the more likely the firm will favor a wholly owned subsidiary as an entry mode (Hill et al., 1990). Based on this information, Hill et al. (1990) made the assertion that the higher the proprietary knowledge of a multinational, the more the multinational prefers an entry mode that minimizes the dissemination risk.

2.2.4 Contract Rigidity

The costs related to employment restructuring are closely related to the labor laws of the target country. Labor laws can influence the ownership strategy as these labor laws have different implications towards the costs associated with the integration and restructuring processes (Botero et al., 2004). Hennart and Reddy (1997) state that when a firm acquires a target firm, it also acquires the existing employers of the target firm, who have their own routines and cultures. They argue that due to the differences in routines and cultures it is hard to integrate these employees. If the employment contracts are not rigid, the employees of the target firm can easily be replaced by employees of the acquiring firm. However, when the employment contracts are rigid, these employees are hard and costly to replace, which will cause a rise in the transaction costs (Hennart & Reddy, 1997). Therefore, an acquirer may prefer partial ownership over a full acquisition, as the transaction costs will be lower. Further, Hennart and Reddy (1997) argue that in case of a joint venture the employees of the target firm can be induced to maximize the profit if they are awarded an equity stake as incentive.

The paper of Botero et al. (2004) researched the different implications of labor laws worldwide. They investigated the regulation of labor markets through employment laws, collective bargaining laws and social security laws with a sample that covers 85 countries. Botero et al. (2004) explain that the employment law protects the individual employees by the formation of the individual labor contracts, the binding minimal terms and conditions of such contracts and to govern the termination

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13 of the contractual relation of the employers. Three broad areas are used in their research to measure the labor regulations: employment laws, collective relations laws and the social security laws. The results found in their paper confirm that the labor laws differ heavily around the world. Further, they found that the amount of labor unions in a country has a positive effect on the rigidity of employment contracts.

The rigidity of employment contracts can also affect the productivity of firms, as the job security of the employees is higher with rigid employment contracts. This negative relation between the productivity of a firm and the contract rigidity is emphasized in the paper of Dollar et al. (2002). They investigate to what extent differences in performance across locations depend on differences in the investment climate. The data used in their paper were obtained by a survey which covers 1,032 firms from the software sector and the manufacturing industry. As the productivity is measured by the value that is added per worker, they found that the productivity is lower for firms which have greater employment contract rigidity. This means that a greater rigidity of the employment contracts leads to a lower productivity, which might negatively impact the profitability of the target firm (Dollar et al., 2002).

2.3 Ownership strategy related to culture

As the aim of this paper is to research the different aspects of culture and its impact on the different entry modes, this section will focus on the relation between culture and the ownership strategy. When an acquirer determines their entry mode into a foreign firm, the effect of culture on the ownership strategy has to be taken into account. Culture can be defined as the similar characteristics within a society which separates one society from another (Tihanyi et al., 2005). Culture at national level is explained by Tihanyi et al. (2005) as the sum of all the individual norms and values. Hofstede (1989) argues that the norms and values of a society originate from a societies culture. Cultural distance is the level of dissimilarities between the cultures of two countries (Anderson & Gatignon, 1986). Shane (1994) argues that an increase in the cultural distance leads to higher uncertainty levels and more complexity at cross-border transactions, since the environment is lesser known. As a response, acquirers can choose to mitigate part of the risk and uncertainty by acquiring a lower equity stake in their entry mode (Shane, 1994). Anderson and Gatignon (1986) argue that preserving the flexibility of the firm, which is the capability of a firm to make changes in the systems and methods, quickly and at low costs, should be especially important at a cultural distant market. Hennart and Reddy (1997) state that the main disadvantage of an acquisition, compared to a joined-venture, is an increase in management costs, which are involved with integrating the target’s labor force. Moreover, they state that these costs will be even higher in culturally distant countries. They

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14 conclude that joint ventures arise to reduce the transaction costs incurred in acquiring a target firm. Brouthers and Brouthers (2003) explain that transaction costs include the costs of operating in a foreign market and the costs to improve the effectiveness of the alternate organizational structures. As mentioned earlier, Anderson and Gatignon (1986) established a unified framework based on prior literature to develop testable propositions. They propose that the cultural distance has negative effect on the level of equity acquired as entry mode. They explain that firms would prefer a lower equity stake because the firm will experience a higher level of uncertainty in culturally distant countries as the market is unknown for them. A lower equity stake will mitigate the resource commitment and therefore the risk exposure to uncertainty (Anderson & Gatignon, 1986). Moreover, the integration process is also known to be more complex when the operating environment is different from the home environment (Anderson & Gatignon, 1986). At last, they argue that an increase in the costs of information, which are caused by the limited information about the culturally distant market, can be avoided by acquiring a lower equity stake.

The proposition stated by Anderson and Gatignon (1986) is confirmed by research conducted by Barkema and Vermeulen (1997). They researched which differences in the cultural backgrounds of the partner firms are detrimental for international joint ventures. Their study used data from the 25 largest Dutch firms which performed a foreign expansion and were listed on the Amsterdam Stock Exchange in 1993. Barkema and Vermeulen (1997) used a sample of 828 foreign entries between 1966 and 1994. The cultural distance between the target and the acquiring firm was calculated with the use of the dimensions of Hofstede (1989). With the use of a Historical Event Analysis and a Logistic Regression model, Barkema and Vermeulen (1997) found that the survival rate of cross-border investments is lower in culturally distant markets. They found that due to the relatively lower resource commitment and risk, firms prefer a lower percentage of equity as entry mode. Likewise, Barkema and Vermeulen (1997) found that cultural distance has a negative influence on the percentage of equity sought at cross-border transactions.

The paper of Li and Guisinger (1992) also indicates the negative effect of the cultural distance on the percentage of ownership sought as the cultural distance increases the difficulties of cross-border acquisitions. Li and Guisinger (1992) compared the business failures of foreign-controlled firms in the United States with the business failures of domestically-controlled firms. They examined the impact of the entry modes, the different ownership types and the difference in national culture on the failure of foreign-controlled firms in the United States. Li and Guisinger (1992) state that firms can obtain ownership advantages by exerting more control in their entry mode. They argue that transaction costs arise due to coordination of and conflicts between joint venture partners. Further,

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15 joint ventures can generate transaction costs associated with the disclosure of proprietary knowledge, and the opportunistic behavior of the partner firm (Li & Guisinger, 1992). If an acquirer has a larger ownership stake in the target firm, it can exert greater authority over their international operations and businesses (Li & Guisinger, 1992). Moreover, the acquiring firm will be able to minimize the cultural differences between the international affiliates by having a common governance (Li & Guisinger, 1992). However, with the use of the dimensions of Hofstede (1989), Li and Guisinger (1992) found that U.S. firms, of which the parents are from dissimilar countries, are more likely to fail than those with parents from similar cultural countries. More important, Li and Guisinger (1992) found that foreign acquisitions are more likely to fail than foreign greenfield investments, causing acquiring firms to prefer lower equity entry modes.

However, not all the papers that researched the effect of cultural distance on the percentage of ownership sought found a significant negative effect. Brouthers and Brouthers (2003) studied the international entry mode choice by using a sample of Japanese manufacturing firms entering Western Europe. They used a Logistic Regression model to analyze the choice between an acquisition and a green field start-up. Their final sample size consists of 136 transactions (both greenfield investments and acquisitions) conducted in the United Kingdom, France, The Netherlands, Germany, Belgium and Luxembourg. They used a 95% equity stake as threshold to determine an acquisition. Brouthers and Brouthers (2003) argue that cultural distance leads to higher risk levels and should therefore negatively influence the ownership strategy. However, they did not find a significant effect of the cultural distance on the entry mode choice.

Acquirers not only opt for partial ownership as entry mode in culturally distant countries to limit their resource commitment, there are also other benefits attached to partial ownership. Tihanyi et al. (2005) argue that the ownership strategy is highly influenced by the risk rationale of the acquiring managers. Barkema and Vermeulen (1997) found that the risk associated with cultural distance may be mitigated by the unique knowledge of the local firm managers. As a result, the loss of control related to low equity modes can be reimbursed by the unique local knowledge (Barkema & Vermeulen, 1997). Tihanyi et al. (2005) found that different societal value systems are involved in cross-border transactions. Consequently, even after the transaction, Chi (1994) argues that the acquiring firm will still be dependent on the local firm manager’s presence for some time. Chi (1994) researched the trading in strategic resources by developing a theoretical framework to analyze the exchange structure in the trading of imperfectly imitable and imperfectly mobile firm resources. Chi (1994) argues that a part of the local firm manager’s incentives can be preserved by leaving a share of equity to the target firm. Furthermore, the acquisition of a high equity stake can damage the

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16 performance of the firm as it gets more difficult to motivate the local target firm managers (Chi, 1994). Chari and Chang (2009) suggest that it is reasonable that the need for local target managers will increase when the cultural distance is larger.

The research conducted by Kogut and Singh (1988) demonstrates the need for local managers when entering culturally distant countries. They investigate if national culture influences the ownership strategy of cross-border transactions by using data from 228 transactions in the United States market by full acquisitions, wholly owned greenfield, and joint ventures. Kogut and Singh (1988) argue that the entry mode choice depends on the comparison of the costs and difficulties of integrating the target firm’s management with the costs associated with lower equity stakes. The local managers have the experience and the capacity to better preserve the local relationships than the foreign managers (Kogut & Singh, 1988). As a result, local responsibilities get often assigned to local managers by the acquirers (Kogut & Singh, 1988). They argue that a joint venture often serves as a function to assigning these management tasks to the local partners. Furthermore, they explain that the management costs will increase for culturally distant countries as the difficulties of managing a workforce in a culturally distant country will increase. Therefore, Kogut and Singh (1988) argue that the need to integrate the local firm managers into the acquirers business is larger than the costs of sharing the ownership and control. The findings in their paper confirm their hypothesis and state that acquirers will prefer a partial acquisition over a full acquisition in culturally distant countries.

H1: The cultural distance between the home and host country exerts a negative effect on the

percentage of ownership sought in the entry mode.

As this research uses the dimensions of Hofstede (1989) to indicate the cultural characteristics of a country, it is important to understand the underlying reasoning of the cultural dimensions together with the ownership strategy. Tayeb (2013) has written a paper which focusses mainly on the employment-attitude survey Hofstede conducted in IBM to establish the cultural dimensions. The cultural dimensions of Hofstede (1989) can be used to measure the cultural distance between the countries of the target firm and the acquiring firm. Hofstede (1989) conducted one of the most comprehensive studies on how culture influences the values in the workspace by analyzing data which were collected through surveys by the multinational enterprise IBM (Tayeb, 2013). At the time of the surveys, IBM was stationed in over a 100 countries (Tayeb, 2013). Therefore, the information contains much information about the cultural differences throughout the world (Tayeb, 2013). Based on this information, Hofstede (1989) made a framework of six dimensions which can compare cultures of different countries with each other. He made a distinction between the following six

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17 dimensions: Power Distance, Individualism, Feminine/Masculine, Uncertainty Avoidance, Long-term Orientation, and Restraint/Indulgence. Several papers argue that some of the cultural dimensions exert more influence on the ownership strategy than other dimensions. Chari and Chang (2009) found that the Individualism dimension has been noted as an influential dimension by other papers (Hofstede, 1989; Barkema et al. 1997). The empirical research conducted by Chari and Chang (2009) indicates that there was a negative effect of the Individualism dimension on the ownership strategy, however, this effect was insignificant. According to Hofstede (1989, p.148), the cohesion between the individual and the collectivity which dominates in a given society is represented in the Individualism index. Acquirers from an individualistic society are expected to be relatively less able to communicate with people from other societies and cultures, which increases the risk of failed integration (Vidal-Súarez et al., 2010). As a result, the acquirer will likely exert greater control in their entry mode to prevent a loss of profitability (Vidal-Súarez et al., 2010).

H2: The Individualism dimension exerts a positive effect on the percentage of ownership sought in

the entry mode.

In addition to the Individualism dimension, Barkema et al. (1997) as well as Barkema and Vermeulen (1997), found that the Uncertainty Avoidance dimension exerts the most influence on the ownership strategy. Hofstede (1989) describes the Uncertainty Avoidance dimension as the way a society deals with uncertainty. Kogut and Singh (1988) found that the higher the Uncertainty Avoidance in a culture, the less attractive a full cross-border acquisition is. This can be explained by the high organizational risk level of integrating the target firm into the acquirer’s organization (Kogut & Singh, 1988). A firm with a high Uncertainty Avoidance is likely to share the investment to minimize the investment risk by limiting its resource commitment (Vidal-Súarez et al., 2010). However, the opposite is possible as a firm can mitigate the endogenous uncertainty by exerting greater control in their entry mode (Folta, 1998).

H3: The Uncertainty Avoidance dimension exerts a negative effect on the percentage of ownership

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18 Table 1. Related literature overview

Theme Explanation Literature

General A lower equity stake offers the opportunity to share the resource commitment and therefore the investment risks. Moreover, a shared ownership allows access to complementary resources. However, a lower equity stake will lead to the inability to fully integrate the target company, the costs of partner control and increase the difficulty of relocating the tacit assets. Further, a higher equity stake will gain a higher return in general and gives more complete control over the firm.

Anderson and Gatignon (1986) Chari and Chang (2009) Ekeledo and Sivakumar (2004) Hennar and Reddy (1997) Hill et al. (1990) Kim and Hwang (1992)

Uncertainty The exposure to exogenous uncertainty is positively correlated with the percentage of equity acquired. As the risk of an investment increases due to an increase in the exogenous uncertainty in a foreign market, the acquirer can diminish this uncertainty by sharing the investment risk and acquire a lower equity stake. After the uncertainty resolves positively, the acquirer can scale up its ownership by acquiring the full company or by upscaling the investment.

Cuypers and Martin (2006) Di Guardo et al. (2016) Folta (1998)

Reuer and Tong (2005) Tihanyi et al. (2005)

Asymmetric information

Owners of a high-quality firm can signal their confidence about the future of their firm by selling partial equity. A partial acquisition can mitigate the adverse selection due to repeated contracting. Moreover, at a joint venture the acquirer has the rights and obligations to reduce the opportunistic behavior of the partner firm. Finally, a shared ownership gives the opportunity to learn and to gather information about the partner’s assets.

Anderson and Gatignon (1986) Balakrishnan and Koza (1993) Chari and Chang (2009) Chen and Hennart (2004) Hennart & Reddy (2004)

Competitive advantage

A multinational is at the risk of losing the specific knowledge if it grants a license to a foreign firm to use their knowledge. This risk can be mitigated by the use of contracts which increases the transaction costs. The greater the incentive for a licensee or a joint venture partner to misuse the knowledge, the greater are the transactions costs for the target firm as insurance against a loss of the knowledge. The risk of dissemination of the firm-specific knowledge is negatively correlated to the amount of ownership acquired.

Hill et al. (1990)

Employment contract rigidity

If the employment contracts are not rigid, the employees of the target firm can easily be replaced by employees of the acquiring firm. However, when the employment contracts are rigid, these employees are hard and costly to replace, which will cause a rise in the transaction costs. Therefore, an acquirer might prefer partial ownership over a full acquisition, if the employment contracts are rigid.

Botero et al. (2004) Dollar et al. (2002) Hennart an Reddy (1997)

Culture An increase in the cultural distance leads to higher levels of uncertainty as the environment is lesser known. Therefore, acquirers can choose a lower equity stake as entry mode to diminish the risk and uncertainty, as a lower equity stake mitigates the resource commitment. Also, the integration process is harder as the operating environment is unknown. Further, it is beneficial to retain the local managers who have the experience and the capacity to better preserve the local relationships than the foreign managers.

Anderson and Gatignon (1986) Barkema and Vermeulen (1997) Brouthers and Brouthers (2003) Chari and Chang (2009) Chi (1994)

Hennart and Reddy (1997) Hofstede (1989) Kogut and Singh (1988) Li and Guisinger (1992) Tihanyi et al. (2005)

Table 1: The table provides an overview of the related literature. The table demonstrates the different findings of the related

literature related to the ownership strategy. The findings are ordered on the themes related to the ownership strategy. First, the findings of the ownership strategy in general are presented. Subsequently, the findings are demonstrated for the effect on the ownership strategy of respectively uncertainty, asymmetric information, competitive advantage, employment contract rigidity and culture.

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19

3. Data

This section will provide the necessary information about the data used in this literature. First, it is explained how the data were obtained. Subsequently, this section will describe the dependent variable used in this research. Third, more information is provided about the cultural dimensions of Hofstede (1989). Further, the control variables used in this research are presented. Finally, to make the reader acquainted with the data, a summary of the variables is presented.

3.1 Obtaining data

Five different databases were used to construct the dataset used in this research. The ThomsonOne database is the first database that was used in this research. The ThomsonOne database provides financial data about mergers and acquisitions worldwide. A big advantage of this database is the possibility of using multiple search criteria to obtain the right information. The cross-border transaction option in ThomsonOne was used to ensure that only cross-border mergers and acquisitions were retrieved. The IF-function in excel was used to confirm that all the deals in the dataset were cross-border transactions. The announcement date of the deals which are retrieved from the ThomsonOne database had to be from January 2000 until December 2015. To research the ownership strategy of cross-border transactions, all the different strategies needed to be included into the dataset, therefore no criteria were used to select different percentages of shares sought prior to the transaction.

3.2 Dependent variable

The ownership strategy was used as the dependent variable in all of the regressions, which is applied differently in each model. When a firm owns more than 50% of the total ownership, the firm has the controlling interest. Therefore, this research makes a distinction between acquisitions in which ‘a minority stake’ or ‘a majority stake’ is acquired, by using a threshold of 50.01% ownership. Malhotra (2011) used a sample of over 100,000 cross-border acquisitions from 1976 to 2008 to examine the relation between cultural distance and the level of equity as entry mode. Malhotra (2011) argues that a 100% equity stake offers more control than a 50.01% equity stake or an 80% equity stake. 50.01% of the ownership will grant the power to make changes for the acquiring firm, however, Malhotra (2011) argues that it will not grant the acquiring firm the complete veto power to make all the essential changes. Therefore, he concludes that a higher equity ownership should lead to more control. Malhotra (2011) used a transaction of Wal-Mart in 2007 as an example which highlights this strategy. In 2007, Wal-Mart increased its 64,27% equity stake to a 97.77% equity stake in Seiyu Ltd. in Japan (Malhotra, 2011). The reason to increase the equity stake was the willingness to increase its flexibility to turn around the unprofitable venture in Japan (Malhotra, 2011). Therefore, an extra

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20 control will be used in this research for the different ownership strategies. In line with other papers, a 95% or higher equity stake is used to indicate ‘a full acquisition’ (Di Guardo, 2016; Malhotra, 2011; Gomes-Casseres, 1989; Hennart & Reddy, 1997). These three different strategies (<=50%, 50,01%-94,99%, >=95%) are being translated into numbers ranging from 1 to 3. These numbers are rankings, so the numbers cannot be interpreted by comparing the differences between the first and second category and the second and third category. The percentage of shares acquired can be found in the ThomsonOne database, which provides three values, the percentage of shares that the acquirer already held before the transaction, the percentage of shares sought in the take-over, and the actual percentage of shares that is acquired in the transaction. The percentage of shares sought is used as the dependent variable to display the outcome of the ownership strategy. This variable is used as the dependent variable as it reflects the original ownership strategy of the acquirer instead of the realized outcome of the acquisition.

3.3 Cultural dimensions Hofstede

The cultural dimensions of Hofstede (1989) are used to calculate the cultural distance. Professor Geert Hofstede made an overview of how values in the workplace are influenced by culture. He analyzed a large database of employee value scores which were collected within IBM (Tayeb, 2013). He made a distinction between six different cultural dimensions. Hofstede (1989) explains that the six dimensions represent the characteristics of a society’s preferences for one situation over another. Each country scores points per dimension ranging from 0 to 100. Hofstede (1989) argues that it is only relevant to compare different cultures, therefore, these scores are relative to each dimension. The following six dimensions were taken into account: Power Distance, Individualism, Feminine/Masculine, Uncertainty Avoidance, Long-term Orientation, and Restraint/Indulgence. The scores of each country on these six dimensions are collected manually and ordered into excel.

3.5 Control variables

Multiple control variables were used in this research to control for the potential effect of these variables on the dependent variable. A control variable is used for variables that are potentially related to the dependent variable. If we do not control for these variables, the results are not consistent due to potential omitted variable bias. The following control variables were used to prevent for this bias.

Historical linkage – The historical linkage between the countries of the target and the acquiring firm

is measured in two different ways. Firstly, the historical linkage is measured by counting all the deals that have been closed in the target country in the five years prior to the specific acquisition. Secondly, the historical linkage is measured by counting all the deals that have been closed between

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21 the acquirer and target countries in the five years prior to the specific transaction. Argote et al. (2000) argue that the past transactions reveal information about the business environment and the culture which directly affects the risk perceived by the acquiring managers. Di Guardo et al. (2016) explain that the perceived uncertainty by the acquiring managers is not only related to the actual market knowledge but also to the perception of familiarity with the foreign market.

High-tech industry (target and acquirer) – A dummy variable was used to control for the R&D

intensity of the target and the acquiring firms. When the firm is from a high-technological sector, the value of the dummy is one, zero otherwise. The list of SIC codes, which belong to a high-technological sector, can be found in the appendix (Chari & Chang, 2009). Firms that are active in a high-technological sector can influence the ownership strategy in multiple ways. At first, Tihanyi et al (2005) argue that acquiring firms might hesitate to further increase their resource commitment and risk, as they already face a lot of uncertainty due to the size of their investments in the technology. Furthermore, Anderson and Gatignon (1986) argue that it is harder for the acquiring firm to value the target when it is active in a high-technological sector. Hill et al. (1990) explain that R&D intensive firms are at risk of losing the specific knowledge when doing a partial acquisition. A firm can mitigate this risk by setting up a contract, however, this will increase the transaction costs of the firm. Hill et al. (1990) argue that the higher the transaction costs are, the more likely the acquiring firm will favor a wholly owned subsidiary as entry mode.

Acquirer public status – Ragozinno (2009) observed cross-border mergers and acquisitions

conducted by U.S. firms between 1993 and 2004 to research the effect of geographical distance on the firm’s governance decisions. Based on the research of Ragozinno (2009), a dummy variable is included to separate the public acquirers from the private acquirers. Privately-held firms tend to be smaller than publicly-held companies. Therefore, the publicly-held firms will have relatively more resources to finance their international M&A activities and can therefore acquire larger stakes in foreign firms. Moreover, publicly-held firms might have a different strategy than privately-held firms, as the public firms tend to have a different set of considerations. Publicly-held firms, for instance, have to pay attention to the voice of their stakeholders (Ragozinno, 2009).

Target public status – A dummy variable was included to control for the public status of the target

firms. Ragozinno (2009) found that private target firms were easier to fully acquire due to their relatively small size compared to public target firms. On the other hand, Ragozinno (2009) state that private targets are harder to value, as there is less information about these firms. Therefore, acquirers may only acquire a part of the company to reduce the risk of overpayment (Ragozinno, 2009).