cross border acquisition ownership decision: Evidence from
Indian and Chinese business groups
Master Thesis – Faculty of Economics and Business – University of Groningen MSc IB&M (International Business & Management)
More emerging market companies are acquiring assets abroad, especially in more advanced countries. The ownership type of the foreign subsidiaries thus becomes more important. Given the significant differences in institutional environments between home and host market, investing firms have a need to strike balance among governance mechanisms appropriate for the prevailing institutional condition. Numerous studies analyze cross-border acquisitions (CBAs) in and out of developed markets, and a much smaller number of studies focus on CBAs in and out of emerging markets. What is appropriate for the weaker institutional environment at home may not be appropriate for well-developed host markets. In this study, I aim to investigate the influence of institutional quality on foreign subsidiary ownership structure, by using institution-based view in the context of cross-border acquisitions by emerging market multinational firms. Using the binary logistic regression model on a sample of 264 CBA deals done by 161 Indian and Chinese firms, including 69 business groups (BGs), it is found that firms from weaker institutional environments entering comparatively stronger institutional environments tend to prefer full acquisitions over partial acquisitions. However, the moderating effect of BGs was not significant.
1. INTRODUCTION ... 2
2. LITERATURE REVIEW & HYPOTHESES ... 4
Global CBA trends ... 4
Institution-based view ... 6
Institutional quality and ownership structure ... 7
Institutional influence on subsidiary ownership structure ... 9
Business groups (BGs) ... 11
Moderating effect ... 11
The Conceptual Model ... 13
3. METHODOLOGY ... 13
Sample and Data collection ... 13
Measurement ... 15
Model Estimation ... 18
4. ANALYSIS AND RESULT ... 20
Data Analysis and results ... 20
Robustness test ... 21
5. DISCUSSION AND CONCLUSION ... 22
Discussion and conclusion ... 22
Limitation and Further Research ... 23
6. APPENDIX ... 24
Table 1. Sample Distribution ... 24
Table 2. Variables description ... 24
Table 3. Descriptive statistics and Correlations ... 26
Table 4. Logistic regression estimates………....27
Table 5. List of Business Groups ... 28
2 INTRODUCTION
Institutions shape ownership structure, the structure of legal systems, property rights, corporate governance regulations, and informal institutions (Aguilera & Jackson, 2003). Institutional theory has risen to prominence as a popular and powerful explanation for both individual and organizational actions (Dacin, Goodstein, & Scott, 2002). While a multinational enterprise (MNE) is a single organization that operates in a global environment, they are also comprised of a set of organizations that operate in distinct national environments (Rosenzweig & Singh, 1991). Therefore, when expanding abroad, foreign subsidiaries may seek to adopt structures or processes that reflect the host country's institutional environment in order to gain legitimacy there. However, foreign subsidiaries possess national characteristics regarding legal or cultural aspects and thus experience pressure from the home institution (Rosenzweig & Singh, 1991). Due to the fact that a legal institution is one of the critical components in an institutional environment, and is often specific to a nation (Rosenzweig & Singh, 1991), foreign subsidiaries of MNEs face dual pressure, created by both the host country and home country institutions.
While MNEs either incur extra costs to manage a partially acquired subsidiary abroad, or take more risks to go with full acquisitions, it is still unclear under what circumstances MNEs would choose partial or full acquisitions. Previous research on ownership type distinguished the entry mode (partial or full acquisitions) based on “build” or “buy” decisions (Jakobsen & Meyer, 2008) under factors such as risks or uncertainties created by the institutional environments. From an acquirer’s perspective, a partial acquisition could reduce initial commitment and increase the opportunity to share the environmental uncertainty with the local partners (Contractor, Lahiri, Elango, & Kundu, 2014). Full acquisition, on the other hand, requires more initial commitments and increases the chance of the acquiring firms’ exposure to environmental risks and uncertainties.
3 countries have become more integrated in the world’s economy. Investments from emerging multinational corporations (EMNCs) have been increasing rapidly, and very often they can be seen in the form of cross-border acquisitions (CBAs) (Gubbi, Aulakh, Ray, Sarkar & Chittoor, 2010; Luo & Tung, 2007). From the perspective of the foreign subsidiary governance, this has important implications for a few reasons. First, in comparison with more advanced economies, the environment in emerging markets is characterized by less developed governments and weaker regulatory infrastructures, suggesting that market regulations, corporate governance and transparency may not be that reliable or mature (Raynard & Marquis, 2015). Secondly, the institutional environment shapes how MNEs make decisions; therefore, the perspective of acquirers coming from emerging countries may be different from those of developed countries. Research suggests that the oversea expansion of EMNCs can be driven by the needs of obtaining new technology, managerial skills and global brands (Tsai & Eisingerich, 2010). In order to obtain the resources from developed markets in a short time, EMNCs tend to pursue a high-commitment mode of entry, in order to quickly catch up with existing global players. Finally, Bhaumik & Selarka (2012) pointed out that in weak institutional environments, concentrated ownership, which simply refers to the case where the majority of shares are held by few owners, is a substitute organization form for legal protection. The types of ownership influence the strategic behavior of the parent firm, and therefore the ownership structures of the subsidiary firm. Related to strategic decision and risk preference, concentrated business forms, such as business groups (BGs) or family businesses, may in turn have an impact on their internationalization behavior (Filatotchev, Stephan & Jindra, 2008; La Porta, Lopez-de-Silanes, Shleifer & Vishny, 1997).
4 relationship between institutional pressures and ownership decision. With this in mind, the following research question is posed:
“Do home and host country differences in institutional quality affect foreign subsidiary ownership structure?” With a follow-up question: “How does the BG’s affiliation with the acquiring firm moderate this relationship? “
The main contributions of this study are twofold. Firstly, this study integrates the international expansion literature with the institutional theory and foreign subsidiary ownership decision. Secondly, this paper contributes to both business groups and acquisition literature from the perspective of emerging countries. While other studies in international business have made comparisons amongst several different entry modes (for example, joint ventures, greenfield investments and acquisitions), this paper focuses on one entry mode – namely, CBAs. The most common form of business in emerging countries is the BG. Accordingly, this study advances the ownership structure perspective to study BG ownership on the firms’ responses to external institutional pressures. In particular, the features of BGs of Indian and Chinese firms are included in this study. In the rest of this paper, the related literature and theory will first be introduced, followed by hypotheses, and then methodology (including data sources, sample selection and measurement of variables). Lastly, empirical results, analysis, discussion, conclusion and limitation will be discussed.
LITERATURE REVIEW & HYPOTHESES Global CBA trends
5 overwhelmed the world in the last quarter, emerging markets were the fastest to recover.
In recent years, EMNCs have used CBAs as the main entry strategy for their FDI. From the latest global investment report by UNCTAD (2015), acquisitions by these EMNCs in developed economies rose from 28% to 47% of their total merger and acquisition (M&A) purchases between 2013 and the beginning of 2015. The CBA trend is stimulated by the fact that many emerging giants are cash rich. Particularly, Chinese and Indian economies grew at nearly double-digit rates over the last few decades (N. Kumar, 2009).
CBAs can be used to access new technology and knowledge in lucrative markets, as well as to expand the market of a firm’s product (Shimizu, Hitt, Vaidyanath & Pisano, 2004). It is the fastest way to enter a new country and to gain a strong position in the target market since firms are acquiring already-established firms and their brand names (Deng & Yang, 2015). This fact may be most obvious in mature markets. Rather than establishing a new brand name in a market where customer loyalty is difficult to alter, it is simply easier to acquire the brand name and the competitive advantage of the company in a mature market with an established position (Buckley & Ghauri, 2002). Without doubt, the pursuit of CBAs comes with challenges. The processes of CBAs are largely similar to those of domestic acquisitions. The challenges of dealing with cross-border risks, such as uncertainty and information asymmetry, are even greater in CBAs, since the acquirer may have to encounter an unbalanced institutional framework. Legal barriers or political and economic risks that arise for both developed and emerging economies are, by definition, of a regulatory nature (Shimizu et al., 2004).
6 Elango & Kundu, 2014). Operating costs are not an issue for the EMNCs; they know an acquirer’s economics can simply be transformed by switching to the low-cost resources (e.g., tangible and intangible resources) and business processes in their home country (N. Kumar, 2009).
Therefore, it is evident that EMNCs has been using CBA as the main entry strategy, however, with different motives in comparison with MNCs from developed economies. The reasons behind different motives when conducting CBAs, which lead to either full or partial acquisition, are influenced by the institutional environments in both home and host countries. Conducting CBAs is a firm behavior, which is shaped by institutional environment. Institutions have impacts on the individual’s decision making by indicating which choice is acceptable and determining which norms and behaviors are socialized into a given economy environment and thus affect organizational behavior (North, 1990; Tonoyan, Strohmeyer, Habib & Perlitz, 2010). Institution-based view
7 Institutions play a vital role for firms, especially the foreign subsidiaries of MNEs. Without the regulations, firms would have to deal with numerous contracts; and therefore deals would arguably remain domestic. Institutions are defined by North (1990) as the “rules of the game, or more formally, [they] are the humanly devised constraints that share human interaction”, while Scott & Christensen (1995) argue that institutions have three "pillars" – the regulative pillar, cognitive and the normative pillar. In short, institutions include both formal (regulatory) and informal (normative and cognitive) categories.
When expanding abroad, MNEs face a strong environmental pressure from the host country’s legal regulations and the pressure from their HQs. The responsiveness of subsidiaries to the local environment may vary between the MNEs of different parent nationalities (Rosenzweig & Singh, 1991). Moreover, firms can be subjected to and encouraged by the regulatory policies of the home country. For example, outward FDI promotion is becoming prominent as a policy priority, especially in emerging countries. According to UNCTAD (2006), emerging countries have implemented a range of measures to facilitate international expansion. One example can be seen from China’s “Go Global” policy in 1999. One major thrust of the policy has been the loosening of controls on outward investment by Chinese firms. Other than home country restrictions, firms are subject to host country regulatory restrictions when entering a foreign market. Therefore, CBA activities are not just affected by firm age, experiences, or a specific industry, but also by country-level determinants, such as the institutional environment. Firms have to compete with other firms, but the context in which they compete is the institutional environment. So far, the prominent literature emphasizes the proposition that “institutions matter”; however, the current study goes a step further and discusses to what degree these formal institutions matter. In the following section, the way formal institutions shape firm behavior and influence ownership structure will be introduced.
Institutional quality and ownership structure
8 Regulation is the fundamental instrument for governing complex and diverse economies. While informal institutions take effect rather slowly, formal institutions take an almost immediate effect (Peng & Chen, 2011).
It is evident that local institutions shape the ownership structure (J. Kumar, 2004; Wright, Filatotchev, Hoskisson & Peng, 2005). The immature development of the formal institutional environment in emerging countries presents a weaker institutional quality, which makes financial exchanges more volatile and risks a lack of protection for investors. Moreover, the absence or only marginal presence of key financial intermediaries such as accounting firms creates information asymmetries within the markets that can be exploited by firms (Raynard & Marquis, 2015). Overall, operating businesses under these conditions implie that MNEs face a relatively volatile environment and rapidly changing risk profiles, as compared to their more developed counterparts. As a way of dealing with problems of underdeveloped market institutions, owners who are not well-protected by the institutions may seek to protect themselves by becoming controllers; thus, concentrated ownership, either through individuals, families, governments or networks, has evolved particularly in emerging countries (Wright et al., 2005).
Taking into account the nature of institutional framework of firm behavior, the decision of ownership structure in CBAs in a foreign subsidiary may vary under different levels of institutional environments (Henisz & Zelner, 2005). The decision of subsidiary ownership structure is made based on a comparison of the risks and benefits of the alternative ownership structures. MNEs compare the costs of uncertainty, the commitments they are willing to invest and the level of control over the subsidiary they want to have. The quality of the institutions between the acquiring and the target countries thus leads to different ownership types in their foreign subsidiaries.
9 environment varies across countries; for example, the government may be more effective, or the regulation may be laid out more clearly and better implemented in some nations (e.g., U.S.A) than in others (e.g., China and India) (Lahiri et al., 2014). With different levels of implementation, enforcement of the regulations, and credibility of the governments, the motives and the form of the foreign subsidiary ownership change. Therefore, the risks and uncertainty caused by an unfamiliar institutional environment often influence the ideal level of ownership structure decision in a foreign acquisition (Yang, 2015).
Institutional influence on subsidiary ownership structure
Institutional differences are especially important for MNEs operating in multiple institutional contexts, since institutions provide information about business partners and their likely behavior and patterns, which reduces information asymmetries (Meyer et al., 2009). The difference is especially salient as determinants of foreign investments undertaken between firms from emerging markets and developed markets (Lebedev, Peng, Xie & Stevens, 2015). In order for a firm to gain legitimacy in the foreign market, it must adopt the business models and structures established as the standard in its host country.
10 simply acquiring to gain completely competencies (Kumar, 2009). A study by Meyer et al. (2009) showed that the need for the local partner might decline with the strengthening of the institutional framework. In other words, partial acquisition might take place more frequently when MNEs from developed markets entering weaker institutional environment.
On the other hand, when emerging countries from a weak institutional environment enter developed markets, where strong institutions make markets highly efficient, a full acquisition may be preferred over a partial acquisition (Luo & Tung, 2007). MNEs emerge in emerging countries, where poorly developed institutions and unsophisticated providers of inputs and intermediate products are the main characters will, strive for their best to gain as much international competitiveness as possible. In order to deal with these institutional voids (e.g., lack of legal protection for property rights, poor enforcement of laws, underdeveloped factor markets, and inefficient market intermediaries), firms in this kind of environment will choose to operate in a more efficient and stronger institutional environment (Luo & Tung, 2007). In spite of the complexities of initiating and managing higher investments, greater commitments and greater internalized control are needed in full acquisitions versus partial acquisitions; a MNE with a weaker institutional background would still prefer the former. Such a choice is likely to ensure efficient learning and adjustment to more complete formal institutions over time. In other words, full acquisitions, compared to partial acquisitions, provide a chance for emerging countries to quickly obtain resources and global recognition from developed markets (Lahiri et al., 2014).
11
Hypothesis 1: In CBAs, the acquiring firms with weaker institutional quality entering a comparatively highly-developed institutional environment are more likely to prefer full acquisitions over partial acquisitions in their foreign subsidiary.
Business groups (BGs)
A striking feature of most emerging economies is linked to the prominent role played by BGs (Chang & Hong, 2000; Garg & Delios, 2007). These confederations of firms go by different names in different countries – for example, jituan in China, “business houses” in India, keiretsu in Japan, and chaebol in South Korea (Khanna & Rivkin, 2001).
A dominant rationale in explaining the presence of business groups in emerging countries is the institutional perspective. The institutional perspective suggests that business groups are thriving in countries with weaker institutional environments due to two main factors – policy inducements and institutional voids (Singh & Gaur, 2009).
In the literature from Khanna & Rivkin (2001), a business group is defined as “a set of firms which, though legally independent, are bound together by a constellation of formal and informal ties and are accustomed to taking coordinated action”. BGs are not just a form of organization, but are also governance mechanisms with both positive and negative consequences (Singh & Gaur, 2009). BGs tend to enjoy a good number of advantages in their home countries, such as using their internally generated capital to grow existing businesses or to enter new ones; they enjoy monopoly power, a good reputation, and they are able to derive benefits through their connections with the government, which are not easily available for non-BGs (Singh & Gaur, 2009).
Moderating effect
12 acquisition entry has a significant impact on long-term firm performance. Therefore, how BGs moderate the relationship of institutional quality on ownership structure will reach this gap.
Group-affiliated companies are legally independent firms, yet they are still under control of their HQs, and also benefit from interfirm cooperation – for example, by having access to interdependent resources (Chang & Hong, 2000). Therefore, business group affiliations may accumulate several firm-specific advantages. For instance, under weak institutional environments, where resource allocations are inefficient, BGs use internal markets to minimize transaction costs and allow resources to be allocated efficiently within the group, and also build up external networks or ties with the government to enhance affiliate profitability (Estrin, Poukliakova & Shapiro, 2009). However, some of these advantages tend to be regionally bounded, since the formation of BGs is associated with the presence of institutional voids (Borda-Reyes, 2012). Although BG-affiliated firms are likely to be less pronounced if they are investing abroad in a strong institutional environment, they still enjoy many advantages – such as sharing a reputation with the BGs simply by being associated with a particular business group – which makes them more reliable for the acquired firm in the host country.
13 to be moderated by BGs. Accordingly, the following hypothesis is proposed:
Hypothesis 2: In CBAs, when acquiring firms come from a BG, with weaker institutional quality entering a comparatively highly developed institutional environment, it is more likely that they prefer full acquisitions over partial acquisitions in their foreign subsidiary.
The Conceptual Model
In order to explain the relationship between variables, a conceptual model, which is visually is represented below (Figure 1).
METHODOLOGY Sample and Data collection
Among developing economies, MNEs from developing Asia have become the world’s largest investing group, accounting for almost one third of the total investments (UNCTAD, 2015). In particular, among all the emerging countries, China and India have been the rising stars in outward foreign direct investments (OFDI). The most common form of concentrated business in India and China, the BGs, plays a dominant role in both countries’ economic growth. BGs tend to benefit a lot from the home country, but the question remains as to what will happen after expanding abroad. Scholars have started exploring whether these home country advantages
Business Groups
H1. H2. Institutional Quality
Difference (from home and host
countries)
14 prevail in the international context. In this study, BGs play a moderating role in the relationship between institutional quality differences and ownership decisions in the foreign subsidiary.
The proposed questions are tested in the context of CBAs by EMNCs from India and China for several reasons. Firstly, there have been some institutional environment changes in both China and India since the late 1980s, which make it an ideal context to examine the impact of institutional quality. Moreover, equity ownership is highly concentrated in India and China. In India, BGs are the dominant economic force; this is evident from the research from Colpan and his colleagues (2010), of the 267 CBA by Indian firms from 2001 to 2006, 65.92 % had group affiliates as the acquirer. The origin of Indian business groups lies in changes in institutional conditions following the consolidation of British rule and flourished due to the regulation distortion as well as institutional voids (Colpan, Hikino & Lincoln, 2010; Kedia, Mukherjee & Lahiri, 2006). In the case of China, BGs are a result of Chinese economic reforms in the mid-1980s. Starting from the 1990s, the Chinese government started to promote BGs in order to absorb new technology and management skills, and to achieve international competitiveness. By 2007, private-owned business groups alone, excluding state-owned business groups, accounted for 45% of a total of 2,856 business groups (Colpan et al., 2010). Therefore, India and china have the suitable settings for this current research.
Once the home countries are set as India and China for this study, a list of publicly listed firms’ deals were obtained from Zephyr. The Zephyr database gives access to information on M&A deals and rumors. Firm-level details were manually collected from the Orbis database, which is produced by the Bureau van Dijk and compiles an extent of companies across the globe. As for country-level variables, since one of the core question is how the institutional environment between India and China and their host markets influences the foreign subsidiary ownership decision, the information on the host countries’ institutional quality from the worldwide governance indicators (WGI) is obtained, as developed by Kaufman et. al. (2006).
15 cross border deals by Indian and Chinese firms. The original data set includes 283 samples announced between January 1st 2000 and December 31st 2010. However, to ensure the quality of the study, deals involving acquiring countries other than India and China were removed. Moreover, an acquirer could have enhanced ownership of a particular target over the years so as to start as a partial acquirer and subsequently become a full acquirer. Such transactions were removed from the study sample to avoid any potential confusion (Contractor, Lahiri, Elango & Kundu, 2014).
The final data set therefore comprised a panel of 264 observations, which consisted of 161 firms and 69 BGs. Of the 264 CBAs in the sample, 185 were full deals (70%) and 79 were partial deals (30%). Specifically, of the 232 deals done by 133 India firms, 166 (72%) were full deals, and 66 (28%) were partial deals. Of all Indian deals, 136 (59%) were done by 58 business groups. 32 were done by 28 Chinese firms, 19 (59%) were full deals and 13 (41%) were partial deals. Of all 32 Chinese deals, 11 (34%) were done by 11 business groups. The number of deals increased after 2005 and peaked at 2007. The number dropped dramatically in 2009 due to financial crisis in 2008, but quickly recovered in 2010. Table 1 in appendix provides details of the sample distribution.
#Insert Table 1 here# Measurement
Dependent variable
The main dependent variable is a dummy variable, choice of acquisition, refers to acquiring country either use full or partial acquisition. Full acquisition is coded as 1 and 0 if otherwise. The boundary between partial and full ownership is set at 95% foreign equity stake, which is in line with previous studies on equity ownership in foreign subsidiaries (Jakobsen & Meyer, 2008).
Independent variable
16 countries worldwide.
In order to assess the role of formal institutions as a determinant of the foreign subsidiary ownership structure, I used a set of institutional indicators developed by Kaufmann and colleagues (2006). These indicators, so called ‘Worldwide Governance Indicators’ (WGI), are constructed based on information from surveys as well as experts worldwide and are obtained from the World Bank. The latest report from the World Bank (2009) shows that the WGI research project covers 212 countries and territories and measuring six dimensions of governance. The six dimensions include Voice and Accountability, Political Stability and Absence of Violence/Terrorism, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption. Governance is defined broadly as “the traditions and institutions by which authority in a country is exercised” (Kaufmann, Kraay & Mastruzzi, 2009). The process of government selection, monitor, implementation of policies, effectiveness and the respect from the citizens are included in the WGI database. Each indicator ranges from -2.5 to +2.5, with higher value representing more advanced institutional environment. In all cases, larger values indicate better institutions. In order to avoid negative values, each indicator were increased by 5. These indicators will be further explained in the methodology section (See variables Table 2).
In order to test if the six World Governance Indicators are measuring the same construct – institutional quality – the scale reliability was determined using Cronbach’s Alpha model of internal consistency. The statistic used in Cronbach’s Alpha measures the correlations between items; the result ranges from 0 (completely unreliable) to 1 (completely reliable). A rule of thumb generally regarded as satisfactory is a statistic result of 0.70, and a result above 0.95 indicates a high degree of consistency between items and low measurement error (Connelly, 2011). A statistic result of Cronbach’s Alpha is 0.98 for the six worldwide governance indicators for this study; therefore, it is assured that the construct is reliable.
17 calculate the quality difference, the score of home countries (India & China) subtract the score of institutional quality of the host countries. Even though the transformation has been done in the previous value calculation, the lower score of India and China subtracting the score of higher institutional quality of the host countries still results a negative value, thus the expected sign for H1 is negative.
Moderator
This study includes one moderator, business group, referring if the firm belongs to a BG or not. BG affiliation is operationalized to a dummy variable, which equals “1” if the acquiring firm is affiliated to a BG, and “0” otherwise.
Indian business groups were identified from Prowess database. The database is produced by the Center for Monitoring Indian Economy (CMIE), which covers a majority of public Indian companies. Chinese business groups are identified according to the rules from the State Administration for Industry and Commerce (SAIC). Only large business groups, qiye jituan not small and private business groups, can be registered, and the core company of a business group, qiye jituan, should have a registered capital of over 50 million RMB plus at least five affiliated companies (SAIC, 2004).
Control variable
In terms of control variables, Firm-specific variable such as acquiring firm’s prior experiences on CBAs is first controlled. Acquiring firms with more experience in CBAs may be bettering at dealing uncertainty and risks from the host country, and hence may prefer full over partial acquisition (Yang, 2015). Cross-border acquisition experience is measured by counting the cumulative number of CBA done by the acquirer before the focal acquisition in this study.
Firm Age is another controlled variables in this study; firm age is measured the number of years
since foundation to the completed date of each deal.
18 CBAs worldwide (Yang, 2015). As a result, the Financial Crisis in year 2008 and all years after 2008 are coded as 1; all the years before 2008 are coded as 0.
Moreover, the influence of home and host country such as Home GDP growth was controlled. It is argued that firms from stronger economic environment have more support and resources and thus enhance their international competitiveness (Deng & Yang, 2015). Home
GDP growth was measured by the annual growth rate of GDP of the acquiring countries to
capture the effect of home country on ownership decision of CBAs (Yang, 2015). Data for this variable was obtained from the World Governance indicators database. I also included country
dummy variables for the home and host country. The target country determinant is coded as 1
when the cross-border deal is done in that host country, and 0 otherwise. The acquiring country determinant is coded as 1 when the acquiring firm comes from India, and 0 when it comes from China. Finally, year dummy variables (with 2000 as the base year) were created to control for fluctuations in macroeconomic conditions over the study period, either toward or against a particular CBA choice (Lahiri, Elango & Kundu, 2014). Table 2 below summarizes the variables, name, index, data definition and source of data.
#Insert Table 2 here# Model Estimation
In order to test each hypothesis, an empirical model is created below.
Ownership structure decision = f(institutional quality difference, financial crisis control, host country determinant, home country determinant, year control, cross-border acquisition experience, home GDP growth, firm age).
The empirical model can be adjusted for testing different hypotheses. For testing Hypothesis 1, it is adjusted below:
19 Where,
FD Full acquisition Deal
IQ Institutional Quality difference
FC Financial Crisis control
AC Acquiring Country dummy
TC Target Country dummy
YC Year Control
CBAE Cross-Border Acquisition Experience
HGDP Home GDP growth
FA Firm Age
For Hypothesis 2, it is an extension of the model: for testing moderating effect of business groups, the model is adjusted below:
𝐹𝐴 = 𝛽!+ β! IQ + β! BG + β! IQ × BG + β! FC + β! AC + β! TA + β! YC + β! CBAE
+ β!HGDP + β!"(F A) + e
Where,
IQ Institutional Quality difference
BG Business Group
IQ× BG Interaction effect between independent variable and moderator
FC Financial Crisis control
AC Acquiring Country dummy
TC Target Country dummy
YC Year Control
CBAE Cross-Border Acquisition Experience
HGDP Home GDP growth
20 ANALYSIS AND RESULT
Data Analysis and Results
In order to test the hypotheses in this study, Pearson’s correlation is used to check the relationship between the variables. Table 3 reports the statistics and correlations of the study variables.
Given the binary nature of the study’s dependent variable, the method of analysis for testing the hypotheses was the binary logistic regression model. What distinguishes a logistic regression model from the linear regression model is that the dependent variable in a logistic regression is binary. This difference is reflected both in the form of the model and the assumptions (Hosmer Jr, Lemeshow & Sturdivant, 2013). While the linear regression model aims to minimize the error, the goal of the logistic regression model is to maximize the likelihood estimates to determine the probability of an experimental unit belonging to a certain category (Lahiri et al., 2014). In this research, the probability is related to the choice of acquisition: partial versus full.
The models were run sequentially to test the hypotheses. Firstly, only the controlled variables and moderator were entered in the regression model (Model 1). Secondly, the independent variable and the moderator were entered (Model 2). Finally, the moderator and the interaction effect were added in the last model (Model 3). All the three models were run with year dummies. The results of the logistic regression analysis models are reported in Table 4.
21 regression coefficient for institutional environment quality (b = -0.777, p < 0.01) in Model 2. Hypothesis 2 proposed that in CBAs, when the acquiring firm is a business-group-affiliated firm, it strengthens the relationship between dual institutional pressures and foreign ownership structure decision. This hypothesis is rejected with a positive but statistically non-significant loading (b = 0.451, ns), suggesting that no conclusion can be drawn for the effect of whether the acquiring firm is a business-group-affiliated firm or not on the ownership decision. Taken together, the findings lend support to one hypothesis and do not support the other. Additionally, the regression was run individually on Chinese and Indian firms. The results from these regressions opposed each other – this will be explained further in the discussion section.
#Insert Table 3 here# #Insert Table 4 here# Robustness test
In this study, the boundary between partial and full acquisition was set at a 95% cut-off, which simplifies the fact that ownership structures are continuous. To further test the robustness of this research, in order to check if the findings held up well enough under different cutoff points, the entire logistic regression analysis was rerun by recoding the dependent variable using 65% and 50% as the cut-off points (Chen, 2008).
22 DISCUSSION AND CONCLUSION
Discussion and conclusion
Institutional environment is studied as a phenomenon within the field of international business, which affects international entry mode (full and partial acquisition in this research). The following section presents a discussion on the findings of the empirical analysis. Furthermore, This section will be concluded with recommendations for further research, limitations, and recommendations for managerial practice.
A stream of literature has specifically concentrated on the issue of institutional environment and its effect on ownership decision in the foreign subsidiary. However, the majority of these studies look at this issue from the perspective of MNEs from developed countries investing in developing countries.
This research paper aims to address the research question regarding whether differences in formal institutional environments influence CBA ownership decision in the foreign subsidiary, and how this relationship is moderated by whether the acquisition comes from business groups or not. Since the previous literature on BGs is largely dominated by the research of domestic effects on group affiliation and the survival or the performance of the firm, this paper thus not only contributes to the international expansion literature with the institutional theory and foreign subsidiary ownership decisions, but also investigates how BGs select their mode of entry.
23 it was when the two countries were both in the test (the main effect is significant but the moderating effect is not significant). However, the result on only Chinese firms shows the exact opposite result (the main effect is not significant but the moderating effect is significant). Since the sample size of Indian firms is larger than that of Chinese firms, the effect of Indian firms is stronger.
This paper has implications for managers and policy makers. Managers from EMNCs encounter greater obstacles when investing abroad, and the critical decision of opting full or partial acquisition is shaped by the institutional environments from both home and host countries. Thus, the proposed model in this paper provides managers alternatives when facing similar choices. Practically speaking, this research showed a strong necessity for managers from emerging countries to take a closer look at the role of institutional environment in CBAs. Moreover, this study also showed the importance of formal institution, which might be accessible and relevant for policymakers. The importance of interactions between researchers and policymakers has a huge impact for a country’s economy in the long run.
Limitation and Further Research
24 APPENDIX
Table 1 Sample Distribution (N=264)
India China
Number & percentage of full deals 166 (72%) 19 (59%) Number & percentage of partial deals 66 (28%) 13 (41%) Number & percentage of deals by BGs 136 (59%) 11 (34%)
Total number of deals 232 32
Table 2. Variables description
Variable Name Index Data Definition Data Source
Dependent variable Foreign subsidiary ownership type Full acquisition (=1) Partial acquisition (= 0)
The boundary between partial and full ownership at 95% foreign equity stake. Data from Jakobsen & Meyer, 2007; Gaur & Lu, 2007 Independent variable Institutional quality (the aggregate of the six dimensions)
Each indicator ranges from approximately -2.5 to 2.5.
The six dimensions capture perceptions of the extent to which a country's citizens are able to participate in selecting their government; the likelihood of political instability; the quality of public services, the quality of policy formulation and
25 Moderator
Business Groups Business group (=1) Non business group (=0)
Prowess Control variables Cross-border acquisition experience
The cumulative number of CBA done by the acquirer before the focal acquisition
Zephyr
Firm Age The number of years since foundation to the deal completed date
Orbis
Home GDP growth rate
Annual growth rate of GDP of the country
World Bank Financial crisis
control
Deals in 2008 (=1) Deals before or after 2008 (=0)
Zephyr
Acquiring country control
Acquirers from India (=1)
Acquirers from China (=0)
Zephyr
Target Country control
Deals take place in that target country (=1) Deals do not take place in that target country (=0)
Zephyr
Year Dummy variable
If the completed date of the deal is in that specific year (=1); (=0) if it is in other time period
26 Table 3
Descriptive statistics and Correlations
27 Table 4.
Logistic regression estimates of the likelihood of full versus partial acquisition
Variable Model 1 Model 2 Model 3
b Wald Exp(b) b Wald Exp(b) b Wald Exp(b)
Control variables
Acquiring Country 1.475** 3.923 4.373 1.708** 4.774 5.519 1.726** 4.635 5.618
HomeGDP growth rate(log) 1.360 0.809 3.896 0.972 0.391 2.643 1.020 0.419 2.773
Firm Age -0.011 2.697 0.989 -0.011* 2.893 0.989 -0.010 2.158 0.990 CBA experiences 0.090 2.166 1.094 0.135** 4.104 1.145 0.145** 4.562 1.156 Financial Crisis 0.055 0.012 1.057 0.263 0.260 1.301 0.294 0.320 1.342 Independent variable Institutional environment quality -0.775*** 13.221 0.461 -1.042*** 10.361 0.353 Moderator Business Group -2.46 0.667 0.782 -2.223 0.529 0.800 0.342 0.335 1.408 Interaction variables Institutional environment quality × Business Group
0.451 1.249 1.570
Model Chi-square 14.29 28.63** 29.89**
df 15 16 17
Correctly Classified (%) 70.7 71.5 71.1
Cox and Snell R2 0.053 0.103 0.107
Nagelkerke R2 0.075 0.146 0.152
N=264. All model were run with year dummies (2000-2010) (not shown above). * p <0.10.
28 Table 5.
List of Business Groups
Indian Business Groups
Alok Group Elecon Group Jubilant Bhartia Group RPG Enterprises Group Amtek Group Elgi Group Kalyani (Bharat Forge) Group Sakthi Group
Asian Paints Group ESSEL GROUP Larsen & Toubro Group SB&T International Group Aurobindo Pharma
Group Excel Industries Group Lupin Group Sun Pharmaceutical Group Avantha Group Gammon India
Group
Mahindra & Mahindra
Group Suzlon Group
Bangur B.D. Group Gitanjali Gems Group Marico Group TATA Group Batliboi Group
Glenmark Pharmaceuticals Group
Midea GROUP Thermax Group
Bharat Vijay Mills
Group Godrej Group
Murugappa Chettiar
Group Torrent Group
Birla Aditya Group HCL GROUP Om Prakash Jindal Group UB GROUP Birla K.K. Group Himadri Group Parekh Group Wadia (Bombay
Dyeing) Group COSMO Group Himatsingka Group Pipe Group Welspun group Dabur Group Hinduja (Ashok Leyland) Group Piramal Ajay Group Williamson Magor Group Dr. Reddy's Group Iyengar Group Raheja Rajan Group Wockhardt Group
Eicher group Jain Pipe Group Raymond Group Zydus Cadila Group
29 Chinese Business Groups
ASE Group Lenovo
BOE Technology Group Rastar Group
Changhong group SANY GROUP
FUYAI GROUP Youngor Group
HAIER GROUP Zhaowei Group
30 REFERENCES
Aguilera, Ruth V., Jackson, Gregory. 2003 The cross-national diversity of corporate governance: Dimensions and determinants. Academy of management Review, 28 (3), 447-465
Bell, R. G., Moore, C. B., & Filatotchev, I. 2012. Strategic and institutional effects on foreign IPO performance: Examining the impact of country of origin, corporate governance, and host country effects. Journal of Business Venturing, 27(2): 197-216.
Buckley, P. J., & Ghauri, P. N. 2002. International mergers and acquisitions: A reader Cengage
Learning EMEA.
Chang, S. J., & Hong, J. 2000. Economic performance of group-affiliated companies in korea: Intragroup resource sharing and internal business transactions. Academy of Management
Journal, 43(3): 429-448.
Cogman, D., Jaslowitzer, P., & Steffen Rapp, M. Why emerging-market companies acquire abroad.
http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/why-emerging-market-companies-acquire-abroad 06.Nov.2016.
Colpan, A. M., Hikino, T., & Lincoln, J. R. 2010. The oxford handbook of business
groupsOxford University Press.
Contractor, F. J., Lahiri, S., Elango, B., & Kundu, S. K. 2014. Institutional, cultural and industry related determinants of ownership choices in emerging market FDI acquisitions. International
31 Cuervo‐Cazurra, A. 2011. Global strategy and global business environment: The direct and indirect influences of the home country on a firm's global strategy. Global Strategy Journal, 1(3‐4): 382-386.
Deng, P., & Yang, M. 2015. Cross-border mergers and acquisitions by emerging market firms: A comparative investigation. International Business Review, 24(1): 157-172.
Garg, M., & Delios, A. 2007. Survival of the foreign subsidiaries of TMNCs: The influence of business group affiliation. Journal of International Management, 13(3): 278-295.
Henisz, W. J., & Zelner, B. A. 2005. Legitimacy, interest group pressures, and change in emergent institutions: The case of foreign investors and host country governments. Academy of
Management Review, 30(2): 361-382.
Hosmer Jr, D. W., Lemeshow, S., & Sturdivant, R. X. 2013. Applied logistic regressionJohn Wiley & Sons.
Kaufmann, D., Kraay, A., & Mastruzzi, M. 2009. Governance matters VIII: Aggregate and individual governance indicators, 1996-2008. World bank policy research working paper (4978). Kedia, B. L., Mukherjee, D., & Lahiri, S. 2006. Indian business groups: Evolution and transformation. Asia Pacific Journal of Management, 23(4): 559-577.
Khanna, T., & Rivkin, J. W. 2001. Estimating the performance effects of business groups in emerging markets. Strategic Management Journal, 22(1): 45-74.
Kumar, N. 2009. How emerging giants are rewriting the rules of M&A. Harvard business
32 Lahiri, S., Elango, B., & Kundu, S. K. 2014. Cross-border acquisition in services: Comparing ownership choice of developed and emerging economy MNEs in India. Journal of World
Business, 49(3): 409-420.
Luo, Y., & Tung, R. L. 2007. International expansion of emerging market enterprises: A springboard perspective. Journal of International Business Studies, 38(4): 481-498.
Peng, M. W., & Chen, H. 2011. Strategic responses to domestic and foreign institutional pressures: The case of the Chinese toy industry. International Studies of Management &
Organization, 41(2): 88-105.
Peng, M. W., & Khoury, T. A. 2009. Unbundling the Institution‐Based view of international business strategy.
Peng, M. W., Sun, S. L., Pinkham, B., & Chen, H. 2009. The institution-based view as a third leg for a strategy tripod. The Academy of Management Perspectives, 23(3): 63-81.
Peng, M. W., Wang, D. Y., & Jiang, Y. 2008. An institution-based view of international business strategy: A focus on emerging economies. Journal of International Business Studies, 39(5): 920-936.
Raynard, M., & Marquis, C. 2015. Institutional strategies in emerging markets.
Reis, N. R., Ferreira, M. P., & Santos, J. C. 2013. Institutional distance and cross-border
mergers and acquisitions completion: A conceptual framework.
33 Scott, W. R., & Christensen, S. 1995. The institutional construction of organizations:
International and longitudinal studiesSage Publications, Inc.
Shimizu, K., Hitt, M. A., Vaidyanath, D., & Pisano, V. 2004. Theoretical foundations of cross-border mergers and acquisitions: A review of current research and recommendations for the future. Journal of International Management, 10(3): 307-353.
Singh, D. A., & Gaur, A. S. 2009. Business group affiliation, firm governance, and firm performance: Evidence from china and India. Corporate Governance: An International Review, 17(4): 411-425.
Tokic, S., & Beyea, G. 2010. Changing regulations for cross‐border M&As. Journal of
Corporate Accounting & Finance, 21(2): 33-43.
UNCTAD. 2015. World investment report.
Wan, W. P., & Hoskisson, R. E. 2003. Home country environments, corporate diversification strategies, and firm performance. Academy of Management Journal, 46(1): 27-45.
Wright, M., Filatotchev, I., Hoskisson, R. E., & Peng, M. W. 2005. Strategy research in emerging economies: Challenging the conventional wisdom*. Journal of management studies, 42(1): 1-33.
