Home country institutions and cross-border acquisitions:

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Home country institutions and cross-border

acquisitions:

To what extent do home country institutions influence the decision

of undertaking a partial or full stake in a cross-border

acquisition?

by TIM DIEPERINK S3026450 Supervisors Dr. H.J. Drogendijk Dr. O. Lindahl Master Thesis University of Groningen Faculty of Economics and Business MSc. International Business and Management

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ABSTRACT

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INTRODUCTION

Chikhouni et al. (2017:40) state that ‘’internationalisation decisions are rooted not only in the perception of uncertainty, firm experience and external risk, but also in the location of the firm's parent country’’. In a different context, but with the same essentials, de Jong (2016) states that, social, human and personal capital influence the way leaders develop themselves. These three factors are often shaped by family background, religion and education. In other words, where you come from and how you were raised, play an important role in your current behaviour. Translating this to businesses, home country institutions could be of great

influence on the (international) behaviour of multinational enterprises (MNE) and in

particular, on the decision of undertaking a partial or full cross-border acquisition. However, whereas the current literature has extensively focused on host country institutions, research on the effect of the home country institutions on internationalisation strategies is

under-investigated.

Hitt et al. (2009) state that companies are implementing international strategies, because they could increase market potential, reduce their dependency on markets in the home country and create locational advantages. However, by engaging in international operations, MNEs need to deal with different institutions across countries, which could lead to an increase of the liability of foreignness (Zaheer, 1995; He and Cui, 2012). Institutional theory is important when researching internationalisation strategies. Therefore, it has been extensively researched in order to understand how MNEs fill in their internationalisation activities (Hoskisson et al., 2000; Peng et al., 2008). Research on institutions roughly consists of two main streams. North developed the New Institutional Economics perspective, where he distinguishes informal (traditions, codes of conduct, customs) and formal (rules and regulations) institutions. While North used an economic point of view, Scott (1995) argues that, from a sociological

perspective, institutions can be defined by means of three aspects: regulative, normative and cognitive pillars.

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5 being foreign. In further research, Meyer et al. (2009) contribute here by mentioning that whenever companies expand their businesses to an institutionally strong environment, they are more likely to choose for an acquisition or greenfield investment, whereas joint ventures are more often chosen in institutionally weaker environments. Guler and Guillén (2010) add that whenever a firm gains more experience abroad, it is more able to deal with the

institutional differences in the host country environment.

Previous research has shown that home country’s institutions are important for a firm’s internationalisation process (Wan and Hoskisson, 2003; Ma and Delios, 2010). This is confirmed by Barney (1986), who mentions that the routines and repertoires of the MNE are often shaped by the institutional and cultural environment of the firm. However, according to He and Cui (2012: 353) ‘’research from the home country perspective has been mainly limited to the impact of restrictive and/or supporting policies and regulations of emerging economy governments on firms’ international expansion’’. For example, India’s government increased requirements for foreign direct investment, as well as Brazil’s (Wells, 1983). Moreover, the Chinese government started to encourage local firms to expand their business across borders by loosening the rules and regulations regarding the expansion (Buckley et al. 2007). Furthermore, recent studies from Wan and Hoskisson (2003); Mcgahan and Victor (2010); Lin and Jiang (2012) also looked at home country institutions, but with different strategic phenomena. For example, these studies focus on the influence home country institutions have on a firm’s foreign policy and on the foreign direct investments. However, they do not specifically focus on how it influences the internationalisation process (that is, among others, the market entry strategy) of the firm going abroad. Research of He and Cui (2012) found out that home country institutions and in particular the quality of regulatory institutions influence the degree of internationalisation. That is, MNEs originated from a home country with strong regulatory institutions are more likely to internationalise than the MNEs with weak regulatory institutions at home. This paper takes a similar point of view by examining the influence of home country institutions on the internationalisation process of MNEs. However, this research does not look to what degree home country institutions foster internationalisation, but investigates how these institutions influence the degree of ownership within one particular market entry strategy: cross-border acquisition.

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6 acquisitions are most likely to fail in about 50 percent of the cases. That is, they are not able to create the synergy effect that was estimated. According to Beugelsdijk et al. (2013), the firm needs to determine the strategic choice of going for a partial acquisition or a full acquisition. Nevertheless, the current literature lacks knowledge on two fronts. First of all, from a host country perspective, there is a scarcity of papers that reveal how the degree of ownership in for example acquisitions and joint ventures might be used as a strategic way to overcome the liability of foreignness. Secondly, from a home country perspective, the literature does not cover how home country institutions may have shaped the behaviour of local MNEs in their internationalisation process and thus, in their choice of undertaking a partial or full acquisition.

By bringing in the home country institutions to determine how they will affect the strategy of undertaking a partial or full stake in the acquired firm, this research will offer new insights into the internationalisation process of firms and thereby contributes to the current

international business expansion literature. Moreover, the paper contributes to the current literature by taking a worldwide sample. Thereby, also the effect of formally weaker institutions for firm’s strategic choices abroad will be investigated and this is important, because, in 2014 MNEs from emerging economies contributed 39 percent to global foreign direct investment outflows, compared to only 12 percent at the beginning of this century (UNCTAD, 2014). However, Chikhouni et al. (2017:32) state that ‘’much of what we know about the internationalisation of MNEs (e.g. entry mode and ownership structure) stems from theoretical and empirical studies performed on multinational enterprises from developed countries (DMNEs)’’. This argument indicates the importance of integrating the acquisition behaviour of MNEs from emerging markets as well.

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THEORY

Cross-border Acquisitions

Pongelli et al. (2016:789) state that ‘’although not always unilaterally determined by the firm, entry mode is one of the most critical strategic decisions related to internationalisation’’. They continue to distinguish two types of entry modes, non-equity based mode and equity-based mode, where acquisitions belong to the equity-based mode of entry. Together with greenfield investments, scholars in the IB field have extensively focused on these two types of entry modes. Even though some scholars state that greenfield investments are more easily managed than acquisitions (Hennart et al., 1998; Barkema and Vermeulen, 1998), research of Pablo and Javidan (2009) mention that the liability of foreignness and the suffering from newness have been found to be less for acquisitions compared to greenfield investments. As a result, acquisitions could be found to be a more attractive mode of entry in order to access local market knowledge and to limit the liability of foreignness (Arslan and Larimo, 2012).

The cross-border acquisition is a form of entry mode that occurs often in order to get access to the target firm’s local market knowledge, resources and locational advantages (Vermeulen and Barkema, 2001; Ferreira et al., 2016). Nevertheless, there are costs involved, such as a take-over premium of 20 to 40 percent and the integration of the acquired firm into the acquirer’s organisation (Vermeulen and Barkema, 2001). In the current literature, the overall conception is that entry mode strategies are based on the environment in the host country and that when looking at acquisitions, the degree of ownership mostly depends on host country’s institutions. For example, Hoffmann & Schaper-Rinkel (2001) state that a partial acquisition might be an initial investment to ‘explore’ the host country’s institutions and over time, the acquirer might take the full stake. It might also be that the firm only wants to access location-specific advantages. Sometimes even, formal institutions of the host country restrict full ownership, where a partial acquisition remains as the only option (Delios and Beamish, 1999; Meyer et al., 2009)

All in all, in the literature, the general assumption is that the host country plays a significant role in the internationalisation process of the firm. In contrast, the importance of the home country has been under-investigated. Morosini et al. (1998) state that, in order to stay globally competitive, MNEs need to possess a wide-ranging set of routines and repertoires. Barney (1986) mentions that the routines and repertoires of the MNE are often shaped by the

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9 national cultures than other routines do, partly as a result of the institutional environment (Hofstede, 1984; Barney, 1986; Morosini et al., 1998). Morosini et al. (1998:140) furthermore argue that ‘’the organizational routines and repertoires that lead to a firm's sustainable

competitive advantage tend to be constrained by national culture’’. Institutional Environment of the Home Country

Institutions play a crucial role in the market economy. They try to reduce uncertainty, so that transaction costs decrease and are often referred to as ‘’the rules of the game’’(North, 1990). Moreover, North (1991:97) gives the following definition to institutions: ‘’Institutions are the humanly devised constraints that structure political, economic and social interaction’’.

According to North (1990), institutions consist of formal and informal institutions. Formal institutions most commonly take on the role of the regulator (North, 1990). These institutions mostly consist of the constitution, laws and property rights. Hoffmann (1999:353) states that formal institutions ‘’guide organisational action’’ by rules and regulations, thereby having legal sanctions for those who do not obey the law. With regards to the informal institutions, North (1990) states that these refer to the values, beliefs and norms that are embedded in a society. Hofstede (1984) mentions that the values, beliefs, norms and assumptions are integrated into the national culture. Peng (2003) adds that informal institutions are more difficult to detect and to understand for people and firms outside of this society.

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10 Formal institutions

Based on research conducted at The World Bank by Kaufmann et al. (2009), this paper uses the WGI in order to assess the formal institutions (that is, voice and accountability, political stability, government effectiveness, regulatory quality, rule of law and control of corruption).

Voice and accountability. In their paper, Kaufmann et al. (2009:6) state that the voice and accountability can be defined as ‘’capturing perceptions of the extent to which a country's citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media’’. Ali et al. (2010) state that the discovering of international opportunities is low by firms in home countries with poor voice and

accountability. Furthermore, they continue to mention that in countries with a high level of authoritarianism, firms are often not encouraged to go abroad. In countries with high levels of voice and accountability, however, firms sooner go for international business opportunities, as they are more confident (He and Cui, 2012).

Political stability. This dimension assesses the political risks in a country (Kaufmann et al., 2009). According to Kobrin (1979), the decision-making process of MNEs is partly based upon the assessment of political stability in the home country and potential political risks. In addition, Click and Weiner (2010) state in their research political instability can be fatal for the economy of a country. In other words, the degree of political stability influences the behaviour of the firm and its internationalisation activities (He and Cui, 2012). Moreover, ‘’ in countries with a high level of political stability, ﬁrms perceive certainty and continuity in government policies, which encourages them to invest in risky activities, such as international expansion’’ (He and Cui, 2012:356). Similarly, Acemoglu and Johnson (2005) state that MNEs from politically unstable countries are more cautious in their investments, as public policies are unpredictable. These arguments imply that MNEs from politically stable countries could have a higher commitment of resources when internationalising.

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11 of government effectiveness is high, there are relatively low institutional costs, which results in firms being able to invest more in their internationalisation activities (Brewer, 2004).

Regulatory quality. This dimension determines to what extent the government is capable of formulating and implementing solid policies and regulations that encourage private sector development. Moreover, trade policies, government intervention and capital restrictions are part of the regulatory quality (Kaufmann et al. 2009). Ghemawat and Khanna (1998) state that excessive political involvement in the economy of a country results in regulatory quality to be low. They continue that such an environment will constrain firms as they encounter

bureaucracy in their home country. In addition, Wells (1983) mentions that in an institutional environment with low regulatory quality, firms need to establish and maintain their

relationship with the government by using extra resources to accomplish this. Because of this, MNEs from countries with a low level of regulatory quality need to limit their investments, in particular, their investments abroad (Cuervo-Cazurra and Genc, 2008). Likewise, countries with high regulatory quality enhance the economy and positively affect the performance of MNEs located in these countries, thereby fostering new business activities, domestic and abroad (Luthans et al., 2000).

Rule of law. The rule of law consists of the quality of contract enforcement, the law, the protection of property rights and the degree of crime and violence in a country (Kaufmann et al., 2009). In a country with low levels of obedience to the law, contracts and property rights cannot be fully enforced and protected. In addition, the opportunistic behaviour occurs more often in these countries (Henisz, 2000). This results in uncertainty and may cause doubts about whether or not to take on international opportunities. Likewise, a strong rule of law offers a pleasant area to develop one’s business. Moreover, it could offer intellectual property rights protection and takes away uncertainties, which leads to a relatively predictable

environment (Kaufmann et al., 2009). Cuervo-Cazurra and Genc (2008) state that in countries with a strong rule of law, firms are more likely to internationalise and have a higher

commitment of resources abroad.

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12 countries with strong control of corruption, where solid laws and regulations prevent

corruption, business activities are positively influenced by this strong control (Ali et al., 2010). In addition, He and Cui (2012) state that in these countries, the orientation is more on making profit and firms are willing to take on more risk, for example in terms of a higher commitment of resources abroad.

All countries vary from one another in terms of the above-mentioned dimensions. However, based on research of Jackson and Deeg (2008), He and Cui (2012:358) state that ‘’ these institutional dimensions do not vary randomly from each other, but are formed in a

complementary manner, which leads to typical types of institutional environments’’. From these types of institutional environments, country clusters can be derived. Meyer et al. (2009:63) argue ‘’institutional arrangements to be 'strong' if they support the voluntary

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13 Hence,

H1: For firms in the home country, the level of formal home country institutions is positively related to their decision of undertaking a full acquisition.

Informal institutions

With regards to the influence informal institutions have on MNE’s behaviour, Arslan and Larimo (2012:325) state that ‘’the informal institutional environment has been found to influence the transfer of organizational practices to the MNE subsidiaries, the management of subsidiaries, human resource practices in subsidiaries, and adaptation to the local professional environment’’. In addition, Peng et al. (2008) mention that the informal institutional

environment could affect the strategic behaviour of MNEs, because of the continuous interaction of the MNE and its institutional environment, which implies home country

informal institutions could affect MNE’s strategic behaviour. Moreover, in a different context, de Jong (2016) argues that social, human and personal capital play a significant role in the development of a leader. As these different capitals are shaped by family background, religion and education, implications are that the environment where one grows up, influences one’s behaviour, now and in the future. This is supported by Zahra et al. (2005), who claim that from a socio-psychology perspective, one’s behaviour is constrained by their internal attributes, but also by the external cultural, institutional, political and technological environment.

In order to measure home country informal institutions and how these affect MNE’s

acquisition behaviour, the cultural dimensions of Hofstede are used in this paper. Out of the six dimensions of Hofstede, this paper will use three of them, namely: power distance,

individualism and uncertainty avoidance. These three variables focus on the division of power and the control of risk and uncertainty, which play a major role in acquisitions and the

determination of a partial stake or a full stake. The three variables that are left out in this paper (masculinity, long-term orientation and indulgence) focus more on the reflection of relations to other individuals and to time, matters that do not show a potential direct effect on cross-border acquisition behaviour of firms. This approach is supported by Harzing and Pudelko (2016), who also choose characteristics based on their explanatory power and relevance.

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14 (2001), this measurement is still widely used among researchers, including this paper. One of the limitations of the Hofstede model that is often mentioned is that the scores are based on a limited group of people (that is, a sample of IBM) and therefore cannot be generalised to a national culture (e.g. Shenkar, 2001). However, this paper focuses on exactly that group of people that decide on cross-border acquisitions, namely, the business people. Therefore, the values, beliefs and norms that are aggregated into the six dimensions of Hofstede should form a proper reflection on the values, beliefs and norms of the decision-making unit within the firm that are investigated in this paper. Another form of critique that is widely mentioned is that the Hofstede cultural dimensions are outdated. According to Beugelsdijk et al.

(2015:237), the ‘’Hofstede-based culture research in global strategy should not be discarded simply because Hofstede’s country scores appear outdated’’. This is due to the fact that the values change, but in an absolute way and not relatively, which makes the model still useful for research.

Power distance. Hofstede (2001) states that power distance (PDI) refers to the degree in which people or employees accept the fact that there is unequally distributed power. He continues to mention that in high PDI countries, everyone generally accepts the hierarchy that exists, whereas, in low PDI countries, people feel the need to equalise power as much as possible and ask for justification whenever this need is not satisfied. Tse et al. (1997) state that in home countries with high PDI, a firm would rather opt for a relationship where they have more control or full control. They continue to mention that, because of their need for power and being less willing to share, they are more likely to go for an equity-based entry mode. In addition, Doney et al. (1998) mention that managers in high PDI countries tend to have low levels of trust in other people, resulting in the need for authority and power. Papers of Makino and Neupert (2000) and Erramilli (1996) confirm this by stating that in high PDI countries, firms sooner go for a wholly-owned subsidiary than for a joint venture. This implies that firms in countries that have a high score on this dimension are more focused on power and accepting inequality, resulting in going for a full acquisition sooner in order to satisfy the need for power, while countries with lower power distance may not necessarily choose a full acquisition based on the pursuit of full control. Hence,

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15 Uncertainty avoidance. Hofstede (2001) mentions that uncertainty avoidance (UAI) is the degree to which people feel uncomfortable with uncertainty. He continues by stating that members of a society with a high UAI tend to be more emotional, do not like the idea of change and are less open to extreme ideas. In other words, people from countries with a high UAI have the urge to get control over certain matters. In contrast, countries with a low UAI are more pragmatic-oriented, more tolerant of change and let certain matters just happen (Hofstede, 2001). Countries with a high UAI tend to perceive joint ventures as a risk, because of the shared component. According to Geletkanycz (1997), from a transaction costs economy perspective, this risk implies that transaction costs increase, as fear for opportunistic

behaviour arises. In order to reduce this uncertainty, managers may opt for a highly structured organisation (e.g., wholly-owned subsidiary), in which they reduce the uncertainty of

cooperating with managers from other cultures (Hennart and Larimo, 1998). However,

research of Tse et al. (1997) state that firms from countries with a high UAI initially avoid the more equity based modes of entry and rather opt for a strategic alliance of joint venture, where the risk is shared. Nevertheless, Bremer et al. (2015) mention that once firms with a high UAI opt for an equity mode of entry and in particular, a cross-border acquisition, they aim to acquire 100 percent of the target in order to obtain full control and reduce the uncertainty. This is confirmed by Erramilli (1996), who state that dealing with foreign partners could cause uncertainty and for that reason, high UAI firms would like to have the majority of ownership in order to integrate their own management style. Furthermore, ‘’ low-UAI firms, on the other hand, are more likely to be run by individuals who feel secure enough to be more tolerant of other cultures’’ (Erramilli, 1996:232), and thus, not necessarily feel the need to obtain a majority of the ownership from an uncertainty avoidance perspective.

Therefore,

H2b: For firms in the home country, uncertainty avoidance is positively related to their decision of undertaking a full acquisition.

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16 where people look after each other in exchange for unquestioning loyalty (Hofstede, 2001). According to Crossland & Hambrick, (2011) individualistic societies more or less push managers to carry out a unilateral decision-making process, to act strong and as an individual leader. Moreover, managers from individualistic countries tend to have a higher discretion level and limit group communication. In contrast, managers from collectivistic countries ‘’are expected to work on the basis of negotiation, consensus and compromise’’ (Vidal-Súarez et al., n.d.:8). Based on characteristics of individualistic countries, Vidal-Súarez et al. (n.d.) mention that it can be concluded that countries with high IND are more likely to opt for a wholly-owned subsidiary, rather than a joint venture. Implications of this statement are that firms from individualistic countries try to avoid sharing control of a venture and are therefore sooner tempted to acquire a large stake when going for an acquisition. Hollensen (2007) confirms this by stating that managers from collectivistic countries sooner opt for joint-decision making. Hence,

H2c: For firms in the home country, individualism is positively related to their decision of undertaking a full acquisition.

Below, in figure 1, an overview can be seen of the hypotheses. Predictions are that H1, as well as H2a, H2b and H2c, have a positive relationship with the decision of undertaking a full acquisition.

Figure 1. Conceptual model

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METHODOLOGY

In order to get to the sample, this paper used two stages. In the first stage, a sample of

countries was selected and in the second stage, a sample of firms within each chosen country was selected (Wan and Hoskisson, 2003).

Country Sample

This paper aims to understand to what extent home country institutions could explain the cross-border acquisition behaviour of firms. Therefore, the country sampling needed to make sure that the home countries varied from each other both in terms of formal institutions and informal institutions. This in order to be able to explain the differences within each

independent variable. Moreover, to get a global coverage, countries from each continent are included in the sample. The sampling process covered the following steps.

Firstly, an overview of geographically spread countries, ranked on their scores on the WGI, was used (He and Cui, 2012). These scores originated from the latest report of Worldwide Governance Indicators research project written by Kaufmann et al. (2009) and provided the foundation for the clusters needed for H1. Secondly, based on the WGI scores, countries were either labelled having ‘strong’ institutions or ‘weak’ institutions (for scores of the sampled countries on the WGI, see Appendix I). Thirdly, the countries that satisfied the criteria for H1 in terms of WGI, also needed to vary from each other in terms of the three cultural

dimensions, in order to be useful for testing H2a, H2b and H2c as well (for scores of the sampled countries on the cultural dimensions, see Appendix II). This paper aimed to select one strong institutional country and one weak institutional country per continent, eventually resulting in a selection of 16 countries, 8 countries with strong institutions and 8 countries with weak institutions. Moreover, with regards to the informal institutional countries, the 16 countries that are selected, are more or less evenly spread over the scale of ~ 0 – 100 in order to get the desired variation.

Firm Sample

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18 (March 2014 – March 2017). Previous empirical studies mainly focused on large, listed companies, as their strategies and data are better accessible (Nadkarni et al. 2011; Cuervo-Cazurra and Genc, 2008). Furthermore, He and Cui (2012:359) state that ‘’the home

institutional environment may be less relevant to smaller and born global ﬁrms, who are more likely to take an opportunistic approach in internationalisation’’. Therefore, in this paper, the acquirer is listed in its respective home country.

Once the criteria were determined, firms that satisfied these criteria remained. From there, a random selection per country has been made, ensuring a maximum variety of firms to be included in the final sample.1

According to Peduzzi et al. (1996), with a threshold of 10 subjects per variable in a logistic regression, no major issues occurred. That is, it accurately estimates the regression

coefficient, the standard errors and the confidence intervals. That would imply that a sample size of 110 is sufficient. However, Comfrey and Lee (1992) state that a sample size of 200+ is getting fair. Therefore, this paper aims for a sample size of approximately 200, but because of potential observations that might be falling out for missing values or other data problems, it has been decided to collect a slightly higher number. As a result, this paper obtained data on 14 firms per country, 16 countries in total, resulting in a final sample of 224 acquisitions.

Variables

Dependent variable. The dependent variable is the partial vs. full stake cross-border

acquisition. A cross-border acquisition can vary from any number between 1 to 100 percent.

As the aim of the paper is to find out whether firms from certain home countries sooner opt for a partial stake or a full acquisition, this variable is split up into two categories, namely: a partial stake (<100 percent) or a full acquisition (100 percent). This variable is coded in a binary variable, such that 0 – partial stake and 1 – full acquisition. Research of Ferreira et al. (2016:63) also used the same binary dependent variable and state that ‘’this simplification does not jeopardise the study since we do not propose associations that may be enriched scrutinising the actual percentages of equity held’’.

Independent variables. For H1, the independent variable are the formal home country

institutions. Each of the 16 countries in the sample is assessed by means of the WGI

investigated by Kaufmann et al. (2009), which points out the governance quality of a country.

1

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19 The voice and accountability reflect the degree to which home country’s citizens have the ability to select their government and enjoy the freedom of speech, free media and freedom of expression. Political stability refers to the degree to which a government is able to overcome potential instability or an overthrow by means of for example violence or terrorism.

Government effectiveness focuses on certain qualities in a country, such as the quality of civil service, of public services, of policy formulation and implementation and the degree of

government’s commitment to policies. Regulatory quality refers to the degree to which a government is able to make and enforce proper policies and regulations that enhance

country’s development. The rule of law reflects the public’s opinion on how they perceive the effectiveness of the law and to what extent one abides by the rules set in a country. Moreover, the rule of law also reflects on the quality of the police, the court and property right

protection. Lastly, control of corruption is the act to which one uses public power for private gains. The outcome of this assessment resulted in two clusters, where each country was labelled having ‘strong’ institutions or ‘weak’ institutions, depending on the outcome of the six WGI for that country. This same approach is used in research of He and Cui (2012) and Meyer et al. (2009). This implies that formal home country institutions are based on the six WGI, but are coded in a binary variable, such that 0 – weak institutions and 1 – strong institutions. The cut-off point for weak and strong institutions is based on research of He and Cui (2012) and lies around 3,30 on a scale of 1 to 5.

H2 consists of three independent variables. The measurement of these variables is done by means of the Hofstede 6-D model (Hofstede, 2016), where each of the six dimensions, among which power distance, uncertainty avoidance and individualism, is given a score on a scale of about 1 to 100. Firstly, for H2a, the independent variable is power distance. This variable reveals differences in the degree of power between for example an employer and employee in a particular country. For power distance, the higher the score given, the higher the power distance is perceived in that particular country. Secondly, the independent variable for H2b is

uncertainty avoidance. This dimension refers to the degree to which people feel

uncomfortable with uncertainty. For this dimension, a score of 100 implies a very high uncertainty avoidance behaviour and 1 a very low behaviour of uncertainty avoidance. The last independent variable is individualism (H2c). According to Hofstede (2001),

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20 more on individual rights and personal achievements. The three independent variables of H2 are measured as continuous variables (1-100).

Control variables. This paper determined several control variables that can be found to influence the dependent variable. The first control variable is the size of the acquirer, because the larger the firm is, the more resources it has and therefore, the firm is sooner able to opt for a full acquisition (Kogut and Singh, 1988; Ferreira et al., 2016). Measurement of this control variable is often done by means of the number of employees or assets of the firm. In this paper, the size of the acquirer will be measured by means of the net assets of the firm. This is a reasonable measurement, as the net assets, as opposed to the number of employees, give a clear overview of the financial resources and thus the capability of acquiring a full stake.

The second control variable is the industry and in particular high technology firms. According to Ferreira et al. (2016:64), ‘’it is possible that technological and production aspects drive MNCs to protect, internalising, their assets thus using full acquisitions to expand’’. In addition, Brouthers and Hennart (2007) state that firms with a high knowledge intensity or rich competences sooner opt for full control of the firm in order to prevent potential knowledge leaking to competitors. This paper coded high technology in a binary variable, such that 0 – not high technology and 1 – high technology. In order to distinguish high technology firms and not high technology firms, this paper follows the criteria of Li and Li (2010:1557), who categorise high technology firms as follows: ‘’medical and

pharmaceutical products, special-purpose equipment, transport equipment, electronic

equipment and machinery, electronics and telecommunications, and instruments and meters’’.

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21 cut-off point for weak and strong institutions is the same as used for the independent variable ‘formal home country institutions’.

The fourth, fifth and sixth control variables are the host country’s informal institutional

distance and in particular, the differences in power distance, differences in uncertainty avoidance and differences in individualism. When examining the role of cultural distance,

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RESULTS

Out of the total sample, 133 cross-border acquisitions were full acquisitions, which is about 60 percent. Moreover, 20 of the 224 cross-border acquisitions were done by high-technology firms. Of these 20 firms, most of them originated from strong institutional countries. From the 112 cross-border acquisitions originated from countries with weak institutions, almost 68 percent of the cross-border acquisitions took place in strong institutional countries, whereas for the cross-border acquisitions originated from strong institutions, about 29 percent went to weaker institutional countries. The cross-border acquisitions in the sample took place in 55 countries, most of them (~38 percent) in the United States, the United Kingdom, the Netherlands, Germany and Singapore, all countries with strong institutions.

The statistical analysis that is used is a logistic regression. This type of analysis is applicable whenever several independent variables estimate the outcome of a dichotomous dependent variable. The logistic regression analyses how the percentage of ownership, coded in a binary variable (partial stake or full acquisition), responds to the different independent variables (that is, formal home country institutions, home country power distance, home country uncertainty avoidance, home country individualism). Then, the first step, which is the correlation matrix, is presented in Table 1. In order to test for potential multicollinearity, the correlation

coefficient has been checked and in addition, the variance inflation factor (VIF) has been calculated. The highest correlation coefficient in the matrix is -0,632 and exists between the two independent variables home country’s power distance and home country’s WGI. This score is below the threshold of 0,8 Neter et al. (1985), which implies that there are no issues with multicollinearity. Furthermore, this paper also tested for multicollinearity by calculating the VIF. All VIF values are well below 2,5, which again does not point to any issues of multicollinearity, taken the threshold of 5,6 that Hair et al. (2006) suggest.

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23 indicates the models are good. Secondly, the obtained data show significant results. Model 6 shows that the independent variables, formal home country institutions (β = -1,11, p < ,01) and home country’s uncertainty avoidance (β = -0,02, p < ,05), are found to be significant. Both variables show a negative relation, implying that the stronger the home country

institutions are, the less likely firms undertake a full cross-border acquisition. This means that both the hypothesised relations of H1 and H2b are found to be significant, but in the opposite directions. With regards to the uncertainty avoidance variable, the results here imply that the higher a home country’s uncertainty avoidance behaviour, the less likely a firm is about the acquire 100 percent of a foreign firm. This relationship is significant, yet the β is close to zero, which implies that there is a very small and negative relationship. Furthermore, two control variables are also found to be significant. According to the results, industry type (β = -1,16, p < ,10) plays a role in the determination of undertaking a full or partial acquisition, however, not in a way that was expected. Brouthers and Hennart (2007) state that firms with a high knowledge intensity or rich competences sooner opt for full control of the firm in order to prevent potential knowledge leaking to competitors. Nevertheless, the results in this paper show an opposite relationship, where the non-high technological firms sooner tend to opt for a full acquisition than the high technological firms. Moreover, the host country’s power

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24 Table 1. Correlation matrix.2

1 2 3 4 5 6 7 8 9 10 11 1. Partial vs. full stake 1 2. Home WGI ,155* 1 3. Home PDI -,110 -,632** 1 4. Home IND ,042 ,253** -,593** 1 5. Home UAI -,146* ,078 ,083 -,033 1 6. Size acquirer3 -,158* -,006 ,088 -,020 -,043 1 7. Industry acquirer ,131* -,063 -,013 ,015 -,109 -,049 1 8. Host 4 WGI -,064 -,402** ,346** -,245** ,041 ,011 -,049 1 9. Host PDI ,022 -,223** ,235** -,238** ,064 ,110 -,097 ,344** 1 10. Host IND -,033 -,041 ,200** -,154* ,265** ,035 -,065 ,086 ,378** 1 11. Host UAI ,029 -,053 ,125 -,203** ,036 ,075 -,082 ,075 ,319** ,239** 1

* Significant at a 0,05 level ** Significant at a 0,01 level

2_{A list of abbreviations can be found in Appendix III} 3_{Variables 6 to 11 are control variables.}

4

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25 Table 2. Logistic regression for partial vs. full ownership in cross-border acquisition

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Acquirer size 0,00* (0,00) 0,00* (0,00) 0,00 (0,00) 0,00* (0,00) 0,00 (0,00) 0,00 (0,00) Industry -1,01* (0,59) -1,17* (0,60) -1,05* (0,59) -1,03* (0,59) -0,96 (0,59) -1,16* (0,60) Host WGI 0,40 (0,30) 0,13 (0,32) 0,29 (0,31) 0,36 (0,30) 0,38 (0,30) 0,63 (0,33) Host PDI 0,27 (0,20) 0,35* (0,21) 0,31 (0,21) 0,30 (0,20) 0,24 (0,20) 0,35* (0,21) Host UAI -0,09 (0,18) -0,12 (0,19) -0,07 (0,19) -0,08 (0,19) -0,03 (0,19) -0,05 (0,19) Host IND 0,16 (0,16) 0,16 (0,17) 0,17 (0,16) 0,17 (0,16) 0,17 (0,16) 0,20 (0,17) Home WGI -0,82** (0,32) -1,11*** (0,41) Home PDI -0,01 (0,01) 0,01 (0,01) Home IND 0,01 (0,01) 0,01 (0,01) Home UAI -0,01* (0,01) -0,02** (0,01) N 224 224 224 224 224 224 Nagelkerke R square ,109 ,146 ,119 ,114 ,125 ,174 Chi-square 18,887*** 25,696*** 20,591*** 19,788*** 21,707*** 30,857*** * p < ,10; ** p < ,05; *** p < ,01

Table 3. Summary of results

Expected relationship with dependent variable

Results

H1. Home country formal institutions Positive Significant, not supported

H2a. Power distance Positive Not significant

H2b. Uncertainty avoidance Positive Significant, not supported

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26

Robustness Analysis

As a test of robustness, this paper performed several additional tests. The home country institutions are currently coded in a binary variable, such that 0 – weak institutions and 1 – strong institutions. This variable has been derived from taking the aggregate scores of the WGIs.

In this robustness analysis, these factors will not be put into a binary variable, but initially their raw aggregate scores will be taken per country. Secondly, the 6 WGIs will be tested separately. By doing this, there can be tested whether or not the results significantly change compared to the binary approach and which of the 6 factors are most relevant. The outcome of this robustness analysis shows no significant changes. For the first test, where the aggregate WGI factors per country were taken, the results show a significant negative relation, with a β slightly lower than the original outcome of home country institutions as a binary variable. For the second test, where each of the 6 WGIs have been put into the analysis, there are again no significant changes. It does point out that government effectiveness and the rule of law are found to be significant at a significance level of ,01 and ,05. The results also show that, even though home country institutions as a binary variable has a negative β, government

effectiveness seems to have a positive relationship with the percentage of ownership in a cross-border acquisition, implying that whenever government effectiveness is high, firms sooner opt for a full cross-border acquisition. The rule of law on the other hand, has a

negative relationship with the dependent variable. The above conducted tests do point out that even though the aggregate WGI per country has a negative β, consistent with the original outcome, the second test’s results differ per factor, with government effectiveness having a positive β and therefore indicating a positive relationship with the dependent variable.

Thirdly, Chikhouni et al. (2017:39) state that MNEs from emerging markets (EMNEs) show different internationalisation behaviour compared to DMNEs. Therefore, as the third test of robustness, the EMNEs (that is, the weak home institutional countries) will be tested

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27

DISCUSSION

This paper examined the effect home country institutions have on the cross-border acquisitions of firms and in particular, whether home country institutions influenced the undertaking of a partial or full cross-border acquisition. The home country institutions consist of the formal institutions, which has been made measurable by means of the WGI. Moreover, it consists of the informal institutions, which has been made measurable by means of the cultural dimensions of Hofstede. This paper proposed that both formal and informal home country institutions have a positive effect on the dependent variable. That is, the stronger the formal institutions are and the higher the scores on the cultural dimensions are, the more likely a firm is undertaking a full cross-border acquisition. A high score on the cultural dimensions however, does not imply that a certain culture is better than another, it simply implies that one country leans more towards a certain dimension than another country.

According to the results, home country formal institutions are negatively related to the decision of undertaking a partial or full cross-border acquisition. That is, the stronger the home country formal institutions are, the less likely firms appear to acquire a full stake in a foreign firm. This result implies that the hypothesised relation of H1 is found to be significant, but in the opposite direction. The fact that the results do not correspond with the theory, could be confirmed by Arslan and Larimo (2012:321), who state that ‘’the lack of studies

differentiating between full and partial acquisition in the past explains the variance in findings of studies addressing establishment and ownership mode choices of MNEs’’. This

contradiction could have several reasons.

Firstly, the general assumption in literature, as can be read in the theory section, is that the level of formal home country institutions is positively related to the dependent variable. However, current IB literature does not extensively cover acquisition behaviour of firms from weak institutional countries and this is confirmed by Chikhouni et al. (2017:32) who state that ‘’much of what we know about the internationalisation of MNEs (e.g. entry mode and

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28 from strong institutional countries. According to Hitt et al. (2000), emerging market firms have different motivations to go to developed countries than vice versa. They continue to mention that reasons for firms to undertake a cross-border acquisition to strong institutional countries could be acquisition of knowledge, learning new skills and capabilities, learning new technical and managerial capabilities and gain knowledge of markets and building relationships. The fact that nearly 68 percent of the cross-border acquisitions conducted by firms from weak institutions, took place in stronger institutional countries, could be a reason why H1 is not supported, as the perspective of the emerging market firms is

under-investigated in international business research. Because firms from weak institutional countries expanding to strong institutional countries have different motivations than vice versa, the area of the emerging market firms should be extended . It is only in their latest research that Chikhouni et al. (2017:39) ‘’demonstrate that EMNEs make different acquisition ownership decisions than DMNEs, suggesting that EMNEs internationalize for different reasons and face different challenges than their DMNE counterparts’’.

Secondly, it is not only the home country environment that influences the decision of

undertaking a partial or full acquisition. As many studies already investigated (e.g. Meyer et al. (2009); Chikhouni et al. (2017)), the host country also plays a significant role, as firms need to adapt to the local circumstances. In this paper, host country’s formal and informal institutions are included as control variables and the host country’s power distance is found to be significant. As this control variable is the distance between home and host country’s power distance, this finding implies that the greater the difference in power distance between the home and host country is, the more likely firms opt for a full cross-border acquisition. So even though home country formal institutions play a significant role in the decision of

undertaking a partial or full cross-border acquisition, host country’s power distance also plays a role and this is partly confirmed by Chikhouni et al. (2017). Their research mentions that the developed countries (in this paper referred to as strong institutions) are less likely to opt for a full acquisition when the physic distance between home and host country increases.

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29 institutions) relatively more high-tech firms are located, and as high-tech firms are found to sooner opt for a partial acquisition, this could explain why in strong institutions, the outcome implies that firms from these countries sooner opt for a partial acquisition.

With regards to uncertainty avoidance, the results point out that the higher a home country’s uncertainty avoidance behaviour, the less likely a firm is about to undertake a full acquisition. This hypothesised relationship is again found to be significant, but in the opposite direction. Even though the coefficient indicates a small negative effect, this result contradicts the hypothesis and the transaction cost theory. This paper assumed that once firms with a high UAI opt for an equity mode of entry and in particular, a cross-border acquisition, they aim to acquire 100 percent of the target in order to obtain full control and reduce the uncertainty, following Bremer et al. (2015). Nevertheless, a possible reason for the results being

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30

CONCLUSION

Research in the field of international business has already pointed out the importance of host country institutions on the international behaviour of MNEs and to a limited degree

investigated the importance of home country institutions on MNE’s international behaviour. The aim of this paper was to emphasise the role of the home country institutions on the behaviour of MNE’s cross-border acquisitions and to figure out to what extent the home country institutions influence MNE’s cross-border behaviour. The results have indicated that the strength of the formal institutions plays a significant role, together with the UAI of a home country.

Even though the hypothesised relationships were not supported, some were found to be significant and therefore, this research has several contributions to the literature. Firstly, the results emphasise the importance home country’s formal institutions play in the international behaviour of MNEs. In the literature, this is often underestimated and under-investigated. Even though this is not the only factor that influences MNE’s behaviour, this paper reveals that where a firm ‘grew up’ in terms of formal institutions and perception of uncertainty avoidance, plays a role in the decision of undertaking a partial or full acquisition. In other words, decisions of MNE’s cross-border acquisitions are not only based on external risk, firm’s experience or host country environment, but are also based, consciously or

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31

LIMITATIONS AND FUTURE RESEARCH

There are several limitations to this paper. Firstly, in terms of informal institutions, this paper assessed home countries based on three cultural dimensions of Hofstede (power distance, uncertainty avoidance and individualism). However, because of the globalisation, there are several MNEs that are led by managers from a country other than the MNE’s home country. The critical strategic decisions are often made by the firm’s top management team and the decisions and policy of the firm could be a reflection of the top management’s characteristics and not of the employees or the firm’s identity. In other words, the nationality of the leader has not been taken into account, which could lead to a flaw in this research. Secondly, in this paper, the sample that was taken had to be a representation of firms all over the world. This was succeeded to some degree. However, as the continent of Africa has little data on countries in general and specifically on firms within these countries, only South-Africa was included in the sample, leading to an underrepresentation of countries in Africa. Thirdly, the plan was initially to include the size of the target firm as a control variable as well. However, due to the unavailability of information is the databases used, this control variable had to be taken out. Fourthly, as stated in the theory section, sometimes formal institutions of the host country restrict full ownership in a cross-border acquisition, where a partial acquisition remains as the only option (Delios and Beamish, 1999; Meyer et al., 2009). This would mean that an acquirer does not have the liberty to choose between a partial or full acquisition. The limitation here is that this paper has not investigated whether this is the case in one of the host countries in the sample. Lastly, even though this paper explicitly explains the reasons for choosing the

Hofstede cultural dimensions, one could argue that the assessment of the informal institutions by means of the Hofstede dimensions is outdated. Therefore, as an opportunity for future research, one could redo this study, but with a different measurement for the informal institutions.

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32 enhance the understanding of the changes in institutions over time. Moreover, from a

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APPENDIX I – Overview Sample Formal Institutions

Overview of the 16 selected countries in the sample. In the last column, the means per country are given (0 is lowest possible score – 5 is highest possible score). The mean implies that the upper 8 countries are labelled having strong institutions, as their governance quality is relatively high. The last 8 countries are labelled having weak institutions, where governance quality is relatively low

V&A Political stability Government effectivenessRegulation quality Rule of law Control of corruption Mean

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APPENDIX II - Overview Sample Informal Institutions

Overview of the 16 selected countries in the sample. Each country was given a score based on the Hofstede 6-D model. A low score implies having low power distance, whereas a high score implies that there is high power distance.

Overview of the 16 selected countries in the sample. Each country was given a score based on the Hofstede 6-D model. A low score implies a low level of individualism, whereas a high score implies that there is a high level of individualism.

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43 Overview of the 16 selected countries in the

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APPENDIX III - Abbreviations

1. Partial vs. full stake = Firms either opt for a partial or full cross-border acquisition 2. Home WGI = home country institutions, based on the 6 WGIs

3. Home PDI = home country power distance 4. Home IND = home country individualism

5. Home UAI = Home country uncertainty avoidance

6. Size acquirer = size of the acquirer in terms of the total net. assets 7. Industry acquirer = the industry the acquirer is active in

8. Host WGI = host country institutions, based on the 6 WGIs

9. Host PDI = difference between home and host country power distance 10. Host IND = difference between home and host country individualism

Home country institutions and cross-border acquisitions: