The effect of overseas M&As’ motivations on post-acquisition performance of
EM acquiring firms
University of Groningen Faculty of Economics and Business
1
The effect of overseas M&As’ motivations on post-acquisition performance of EM acquiring firms
Abstracts:
Pro-market reforms of emerging countries increase competition in the domestic market and trigger emerging market (EM) firms enter global markets. In contrast to MNCs from developed country, emerging market MNCs adopt overseas M&As not only to transfer or exploit firm-specific advantages, but also to acquire necessary strategic assets in host countries to develop their competitive ownership advantage. I collect 109 Chinese overseas M&A deals to analyze whether motivation affects post-acquisition performance. According to event study and the linear regression analysis, I find both resource- and asset-seeking overseas M&As increase shareholder value of acquiring firms. Target firms located in developed countries are beneficial to improve shareholder wealth. However, the moderating effect of the location of the target firms on the relationship between motivations and post-acquisition performance of EM acquiring firms is not significant.
2
CONTENT
1 Introduction ... 3
2 Literature Review ... 4
2.1 Firms-specific Motivations & Acquisition Performance ... 5
2.2 The Moderating Effect of the Location of Target firms ... 8
3 Methodologies ... 9 3.1 Samples ... 9 3.2 Variables ... 9 3.3 Data Description ... 11 3.4 Analyses ... 13 3.5 Robustness Test ... 16
4 Conclusions and Limitations ... 17
4.1 Conclusions ... 17
4.2 Limitations and Future Research ... 17
3
1 Introduction
The number and size of overseas acquisitions by emerging market (EM) MNCs are now multiplying rapidly. Mergers and acquisitions purchase of emerging economies stood at $120 billion in 2008, accounting for almost 18 per cent of global M&As as against share of just 4 per cent in 1998 (UNCAT D, 2009). Previous literatures suggest that EM MNCs invest in foreign countries not only to exploit but also to develop their competitive ownership advantages or acquire necessary strategic assets in host countries (Almeida, 1996; Chang, 1995; Dunning, 1993. 1995; Frost, 2001; Shan and Song, 1997; Makino, Lau &Yeh, 2002). These studies suggest that firm-specific advantages would arise not only from possession of proprietary assets but also from the firms’ capacity to acquire, or the efficient coordination of the complementary assets owned by other firms in host counties (Dunning, 1995, 1998, 2000). However, the previous studies have come to conflicting conclusionsofthe response of share markets to acquiring firms announcing overseas M&A deals. Gubbi et al. (2010) and Kim (2003) present overseas M&A create value to shareholders of Indian and Korean acquiring firms respectively. While Aybar and Ficici (2009) suggest overseas M&As reduce revenue of large multinational firms.
A growing literature on foreign acquisitions by EM MNCs like China, Korea and Taiwan suggest that these are triggered by a set of multiple firm-specific objectives and motivations of accumulating new technological, marketing, natural resource and skill capabilities (Dunning et al., 1996; Deng, 2004; UNCTA D, 2006; Wang & Boateng, 2007; Pradhan, 2007; Gammeltoft et al., 2010). According to the linkage, leverage, and learning (LLL) model developed by Matthews (2006), these motivations driven by deficiency of latecomers who possess limited ownership advantages with inferior R&D know-how to exploit their overseas investments and global linkages to leverage their existing cost advantage and learn about new sources of competitive advantage. As a result, internationalization may contribute to build ownership advantages rather than merely being an outcome of existing competitive advantages. Of course, parts of the motivations of EM MNCs follow the conventional ownership-location-internalization (OLI) theory, which suggests that the internationalization activities of MNCs as their attempts to expand their ownership advantages (e.g. proprietary access to a superior production technology or a valuable brand) to overseas markets by exploiting location advantages (e.g. locating abroad to access low cost inputs or better serve local markets), and internalizing the efficiency gains from economies of scale and scope by integrating the firm’s activities across borders (Athreye & Kapur, 2009). Most papers merely consider the relation between motivations and location choice (for e.g., Makino, Lau & Yeh, 2002; Buckley et al., 2007; Athreye & Kapur, 2009) and very few examine the impact of motivation on value creation of EM acquiring firms after acquisition.
To fill the gap, the first research question of this paper is that: Do motivations of overseas M&As affect
abnormal returns to shareholders of EM acquiring firms? And another research question is that: Does the location of target firms moderate the relationship between motivations and post-acquisition performance of EM acquiring firms?
4
industries with multiple motivations. So Chinese overseas M&As cases with various purposes would be suitable samples for the study. I principally employ event study to analyze deals and then calculate accumulated abnormal returns (CARs).
Because the Chinese government implemented ‘open-door policy’ in 1979 and China joined into the WTO in 2001, the rapidly increasing number of foreign entrants from advanced market generates fierce competition to endogenous firms in Chinese markets. Endogenous firms realized that they almost do low value-add activities, like assembling. Since Chinese firms purely possess advantages with low labor cost. In order to sustain comparative ownership advantage and superior profits after pro-market reform, Chinese firms need to control core technology and develop innovative capabilities. There are two sources for EM MNCs to acquire ownership advantage: (1) country-specific advantages based on the difference of factor endowments in industry (Rugman & Li, 2007) and (2) firm-specific advantages based on capability structure. A firm’s comparative ownership advantage arises from the complementary combination of the country-level factor endowments in industry and the firm-level comparative capability advantage (Luo & Rui, 2009). As a result, Chinese firms adopt overseas M&As in advanced markets for strategic asset-seeking. Besides,natural resource-seeking of Chinese overseas M&A is still prevalent. To achieve the political goal of the Chinese government, state-owned enterprises exploit oil, metals and gas in cross-border markets. Using event study, I find overseas M&As yield CARs to shareholders of Chinese acquiring firms. Advanced markets with high institutional quality promote CARs in both motivations. But the influence of institutional quality is more significant in relation of asset-seeking and post-acquisition performance.
The remaining sections of this paper are organized as follows. First, in the literature review section, I will determine the relationship between motivations (e.g. market-seeking, resource-seeking and asset-seeking) and shareholders wealth of acquiring firms after acquisition from multiple theoretical perspectives. Meanwhile, I introduce location of the target firms which impacts post-acquisition performance as a moderator. Second, in the methodology section, I will describe samples, main variables, key methods used to analyze data and analysis results. Third, I will summarize the main arguments and limitations.
2 Literature Review
In the category of FDI, Dunning (1993) described firms driven by two main motivations: asset-exploiting motivations (e.g., "Opening new markets," "spreading overheads," "creating production economies," p. 60) and asset-seeking motivations (e.g. "Creating R&D synergies," p. 60). The asset-exploitation perspective views FDI as the transfer or exploitation of firm-specific advantages assumes that, when invest in cross border, firms should possess certain resources (Makino, Lau & Yeh, 2002). This perspective postulates that FDI would occur when firms possess proprietary resources and skills which give rise to a competitive ownership advantage in the host country (Makino, Lau & Yeh, 2002). The theory assumes that, firms should own certain types of proprietary resources to and utilize these advantages to operate abroad to seek markets or low-cost natural resources or labor force. Therefore, resource-/labor force- and market- seeking can be better understood from the asset-exploitation perspective.
5
efficiently coordinate the complementary assets owned by other firms in a host country (Dunning, 1995, 1998, 2000). This alternative form is referred to as strategic asset-seeking, as contrasted to the asset-exploiting (Makino, Lau & Yeh, 2002). A strategic asset-seeking is driven by EM MNCs’ desire to gain access to valuable assets which are available better in the host country where EM MNCs operate than in the EM MNCs’ home country. According to the resource-based theory, a firm’s strategic asset determines its competitive advantage and performance (Barney, 1991). Strategic assets can be defined as ‘‘the set of difficult to trade and imitate, scarce, appropriable and specialized resources and capabilities that give the firm’s competitive ownership advantage’’ (Amit & Schoemaker, 1993, p. 36, emphasis original). It includes reputation, buyer–supplier relationships, tacit knowledge, R&D capability, brand image, and proprietary technologies and etc. (Teece, Pisano, & Shuen, 1997).
The influence of acquisition motivations of EM MNCs on location choice has been fully understood, nevertheless, the effect of motivation of overseas M&As on acquisition performance is less been studied. Therefore, in the following parts of this section, I will analyze the influence of motivations on post-acquisition performance from theoretical perspectives to solve the research question: Do motivations of overseas M&As affect abnormal returns to shareholders of EM acquiring firms? Furthermore, analyze that location of target firms whether moderate the relationship between motivations and post-acquisition performance of EM acquiring firms.
2.1 Firms-specific Motivations & Acquisition Performance
2.1.1RESOURCE-SEEKING &ACQUISITION PERFORMANCE
As security of access to essential natural resources is considered critical to economic growth, state-owned enterprises have been the main tool to take over mining and energy firms in overseas markets (Suma & Kapur, 2009). Since most emerging countries have owned competitive advantages with lower labor cost, governments of emerging countries have mainly enforced overseas M&A to ensure the supply of domestically scarce natural resource inputs (Ye, 1992; Zhan, 1995). Such as China National Petrol Corporation and China National Offshore Oil Corporation are typical firms which aim to achieve political goals of the Chinese government by takeover resource exploitation firms. Besides, India’s Oil and Natural Gas Commission do the similar overseas M&As as Chinese state-owned enterprises do. Generally, natural resource-seeking overseas M&As are implemented by state-owned enterprises which easily build and maintain a friendly relationship with governments. Such network could providerich and trusted sources of timely information that compensate institutional voids that are caused by the uncertainty of the new rules and of consequences of rules implementation (Peng & Luo, 2000). The networking advantage of state-owned enterprises could guarantee M&As smoothly implement with less survey cost. In addition, when these Chinese and Indian firms invest overseas, a high and stable demand from their domestic buyer helps them minimize logistics costs associated with demand fluctuation and inventory management, and consequentially, increases value to acquiring firms (Cui & Jiang, 2009). Meanwhile, in the domestic market, sufficient supplement of natural resources would ensure the stability of the supply price and further give confidence of EM firms to enlarge the scale of production. Consequently, the value of acquiring firm will not be damaged by resource-seeking overseas M&As.
6
Overseas M&A is often adopted to access these resources in a comparatively advantaged country (Makino, Lau & Yeh, 2002), which means acquiring firms would gain natural resource at a lower cost than exploit them in their home country (Dunning, 1993). In addition, Comparing with greenfield investment, takeover resource exploitation firms could immediately access natural resources and shorten internationalization time, because they do not speed time on building factories and installing equipments, and funds on research technology to meets requirements of exploiting local natural resources. As a result, resource-seeking overseas M&A could enhance value creation to shareholders of acquiring firms.
Hypothesis1: Resource-seeking motivationpositively affects the post-acquisition performance of acquiring firms.
2.1.2MARKET-SEEKING
Market-seeking are undertaken by EM MNCs for traditional trade reasons - to access distribution networks, to facilitate the exports of domestic products, and to enhance exports from the host country to other large and rapidly growing markets (Buckley, Clegg, Cross, Liu, Voss & Zheng, 2007). As mentioned before latecomer MNCs normally do not have intrinsic ownership advantages; however, they do have certain competitive advantages to exploit, especially when investing in other emerging and developing countries (Luo & Tung, 2007; Mathews, 2006). Another driver of market-seeking acquisitions is that EM firms develop new markets and build favorable brand image and reputation due to the severe competitive pressure in the home market (Arnold & Quelch, 1998). Besides, EM firms’ outward investment in other developing countries to avoid trade barriers in third markets may be a reason of market-seeking. Nevertheless, considering the size and potential of the Chinese domestic market, Chinese firms are not necessarily pushed by their domestic markets to seek markets overseas; rather, they are pulled by favorable factor conditions in foreign industries (Cui & Jiang, 2009). Brand assets, and marketing and R&D know-how are the most desirable resources attract Chinese firms to invest in foreign countries, and further structural ownership advantages in domestic and overseas markets. Therefore, pure motivation of exploiting new market is not enough to trigger Chinese firms invest in overseas markets. Chinese firms prefer to combine asset-seeking and market-seeking overseas M&A to reduce latecomer disadvantages and increase competitive ownership advantages (Dunning & Lundan, 2008). It means two purposes could coexist in an overseas M&A and asset-seeking play a dominant role. I will develop hypotheses containing asset-seeking and market-seeking in the later part.
2.1.3STRATEGIC ASSET-SEEKING &ACQUISITION PERFORMANCE
7
Overcome latecomer weakness and encourage ownership advantages
For late-coming MNCs who normally control much less strategic assets than global rivals (Hitt, Harrison, & Ireland, 2001), overseas M&A represents an important alternative when the home country does not possess the capability to generate assets (Young, Huang, & McDermott, 1996, p. 297). Strategic asset-seeking occurs among the latecomers with few technological capabilities when they try to reduce the gap by acquiring innovative firms for needed resources (Wesson, 2004). Lack of developed intellectual property rights in emerging countries (Boisot, 2004) frequently restricts indigenous firms to maximize their efforts on R&D. Therefore, EM firms invest in an institutionally more efficient, transparent and encouraging environment, where EM firms could be able to concentrate on building their knowledge base and developing and upgrading their competitive advantages in short time.
For decades the Chinese government failed to establish a long-term and well-organized R&D system, despite its efforts on encouraging and supporting numerous R&D projects at different times. National champions in China still lag far behind MNCs from developed countries (Nolan, 2001). As a result, Chinese firms are short of valuable patents; they typically compete on volume and price and often simply imitate other’s products. In high-tech industries, most Chinese firms merely take on agency business activities (e.g., Helping to sell and distribute foreign firms’ products in the Chinese market) rather than working on high value-added activities (Ling, 2006). In addition, given the pace and magnitude of technological and organizational change required to take advantage of joining the WTO, Chinese firms may not be able to internally develop competitive resources because the internal development of capabilities is time consuming and path-dependent upon the firms’ existing capabilities (Dierickx & Cool, 1989).
Meanwhile, overseas M&A from advanced markets allow EM MNCs to alleviate latecomer deficiencies in other areas such as consumer base, brand recognition (Luo & Tung, 2007). These ready resources, such as knowledge about the environment and new growth opportunities (Srivastava, Shervani, & Fahey, 1998), help reduce the reputation barrier and overcome the dual liabilities of ‘‘foreignness’’ and ‘‘newness’’ in international markets (Cuervo-Cazurra et al., 2007; Guillen, 2002; Vernon, 1979; Zaheer, 1995). This is important for EM firms to upgrade their inferior brand image when they enter advanced markets. Thus acquiring strategic assets via M&A may significantly help Chinese firms earn legitimacy, social support and prestige in the marketplace (Ping Deng, 2009).
Government support will improve acquisition performance
8
Prior IJV experiences confirm overseas M&A increase returns of EM acquiring firms
According to an institutional approach, the prior positive international joint venture (IJV) experiences boost EM firms’ to pursue outward FDI (DiMaggio & Powell, 1991; Nadkarni & Perez, 2007; Zucker, 1987). However, negative IJV experiences shape entrepreneur’s mind and lead to entrepreneurs regard the acquisition as a more effective way to access advanced technology than IJV. As many foreign firms with superior technology are reluctant to transfer their superior technology, IJVs in emerging markets do not appear to build proprietary knowledge of EM firms (Nolan, 2001; Ping Deng, 2009). Foreign partners are concerned about the potential for opportunism by their partners who develop capabilities through alliances that can be used later to compete against them (Buckley, Clegg, & Tan, 2004; Ping Deng, 2009). Indeed, according to a survey covering 2334 Chinese industrial firms, technology transfer is very limited among partners of JVs in China (Guan, Mok, Yam, Chin, & Pun, 2006), and the transferred knowledge tends to diminish in quantity and quality (Buckley et al., 2004).
Besides strategic assets such as R&D capacity, design know-how and brand names are embedded in target firms, which can be accessed almost immediately by takeover of them or their subdivisions (Ping Deng, 2009). As concerning prior experience of IJVs, M&A becomes a logical option to secure brands, tacit knowledge and innovation, which quickly add to the existing cost advantage of EM firms (UNCTAD, 2006) and then shorten the time of internationalization.
Hypothesis2: Asset-seeking motivation positively affects the post-acquisition performance of EM acquiring firms.
2.2 The Moderating Effect of the Location of Target firms
EM firms pursue overseas M&A driven by resource-seeking or asset-seeking tend to choose locations that integrate these motives effectively with greater favorable resources and institutional endowments (Pradhan, 2007).
9
determined by the natural resource endowment of host countries (Buckley and Casson, 1976). Meanwhile, the purpose of the EM acquiring firm is to acquire natural resources with low cost of extraction (Dunning,
1993), hence EM acquiring firm will takethe endowment of cheap unskilled labor into account (UNCTA D,
1998). Basically labor cost and delivered cost (e.g. Transportation and tariffs) are lower in emerging markets than in advanced markets (Makino, Lau & Yeh, 2002). Nonetheless developed countries with high level and quality of physical infrastructure (ports, roads, power, and telecommunication) could ensure the efficiency of production and logistics (Pradhan, 2007). Overall, as for resource-seeking overseas M&A, it is uncertain that which advantage of the host country significantly influences post-acquisition performance. Thus the effect of institutional quality on performance of resource-seeking acquisition is not equally important on the performance of asset-seeking acquisition.
Hypothesis3: The location of the target firms moderates the relationship between motivation and post-acquisition performance.
Hypothesis4: The influence of institutional quality of the host country is more significant to the performance of strategic asset-seeking acquisition than to performance of resource-seeking acquisition.
3 Methodologies
3.1 Samples
I examine completed cross-border M&A transactions between 2001 and 2013 (inclusive). I identify samples, consisted of 109 overseas M&As deals in the Zephyr, with several research criteria: 1) Acquiring firms are registered in Chinese Mainland but target firms are located in other countries. 2) Acquiring firms listed on the Hong Kong Stock Exchange, Shanghai Stock Exchange, and Shenzhen Stock Exchange which are main stock markets of Chinese firms. 3) Deals types are acquisition and merger. 4) Deals involve a range of 20% shares or more of target firm's ownership in the transaction. This threshold for having a controlling stake in a corporation is widely used in previous research (Faccio & Lang, 2002; Moschieri & Campa, 2009). The Zephyr provides basic information about acquisition deals, such as the name of the acquirer and the target firm, the location of the target firm, the date of announcement, and so on. Meanwhile, I collect changes of stock price of acquiring firms from websites of three Stock Exchange respectively. And I gather the detailed information of acquiring and target firms from Orbis and from their financial reports published in companies’ websites.
3.2 Variables
Dependent Variables:
10
methodology to examine the impacts of M&As on shareholder wealth (Brown & Warner, 1985). The event study assumes that the market, on balance, can accurately determine the announced transactions wealth. This approach has emerged as a popular method for measuring the effects of various economically relevant factors on the market value of corporations (Desai, Kroll, &Wright, 2005; Lubatkin & Shrieves, 1986; Wright, Ferris, Hiller, & Kroll, 1995). An advantage of the event study methodology is that it is “able to avoid the problem of holding constant other factors that plague ex post studies of mergers’ effects” (Caves, 1989: 151). I collect daily share prices of 272 continuous return data before, and 11 days on or after the announcement date. Besides, I collect data of broad indexes of three stock markets which is used as a benchmark to determine the expected return in the same periods. Thus, I form a 262 days benchmark and
21 days event window.In the stock market, abnormal returns (AR) are the differences between changes of a
single stock price and the expected return over a set period of time. Following the definition of AR, I computed it by the formula: actual return minus expected return. After that, CARs summarizes percentage
price changes over the21 days event window.
Independent Variables & Moderator
According to previous theoretical analysis and industry classification of target firms, I develop a dummy variable of firm-specific motivation. In regard to the exploitation of scarce natural resource, key sectors of Chinese firms including include minerals, petroleum, timber, fishery and agricultural products (Cai, 1999; Wu and Sia, 2002; Buckley and etc., 2007). In line with North American Industry Classification System (NAICS) 2007, I code 0 when target firms belong to natural resource exploitation and manufacture of primary natural resources products. I expect to take over these firms for resource-seeking. And I code 1 when target firms are the rest of industries, which acquired by Chinese firms for tangible and intangible asset, and then enlarging overseas markets or defend domestic markets (combine asset- and market-seeking).
To test hypothesis 3, which is about the moderate effect of the location (host country) of target firms on the relation of motivation and acquisition performance, I introduce a dummy variable: I coded 1 when target firms are located in OECD (developed countries), and coded 0 when target firms located in non-OECD (developing countries). Since the list of the Organization for Economic Co-operation and Development (OECD) includes almost the world’s most advanced countries. Concerning hypothesis 4, I quote two variables: institutional distance and economic distance as an indicator of institutional quality. Because Scott (1995) claim that institutional framework include regulatory (i.e. Existing laws and rules), cognitive (the widely shared social knowledge and perceptions of what is typical or taken for granted) and normative (social norms, values, and beliefs that define what is appropriate and right for a society member) pillars, offering a wide basis to analyze a country’s institutional environment. Following this, I quote institutional
distance to capture the differences in normative, regulative, and cognitive constructs between China and
11
Control Variables
Following previous studies of M&A, I introduce several control variables of the acquiring firm which effect shareholder wealth by acquiring firms, such as past performance (Haleblian & Finkelstein, 1999; Markides & Ittner, 1994), firm size (Uhlenbruck et al., 2006), and time size (Sapienza, Autio, George, & Zahra, 2006) in models. Past performance of acquiring firms is calculated by 3 year average net profit margins (net profit to sales ratio) prior to the event. Firm size is measured by total asset (million USD) in the year of the announcement. Time size is the gap between founded time and announcement time. In the context of emerging economies, I introduce a dummy variable: business group (0 present acquiring firms belong to a business group), because the business group affiliation affects internationalization and firm performance (Chittoor et al., 2009). Meanwhile, due to specific characteristics of Chinese economy, government control still affects the outflow FDI decision of Chinese firms. I introduce dummy variables: ownership (1 when acquiring firms are private firms and 0 when acquiring firms are other type firms, like state-owned enterprises).
In addition, empirical research has revealed a strong positive relation between the market size of the host country and FDI inflows (Bevan & Estrin, 2004). Markets with large size offers increased opportunities for investors to reach cost effectiveness and to realize economies of scale through local production (Braunerhjelm & Svenson, 1996; Venables, 1999). Hence, large markets and fast growing markets benefit the performance of post-acquisition. Moreover, a fast growing economy provides more profit-making opportunities than those economies that are growing slowly or stagnant. Rapid economic growth in the host economy leads to a high level of aggregate demand for product (Kang & Jiang, 2012). So I control
market size (million USD) and market potential of host countries. I quote GDP Current US$ (2003-2012) from
the World Bank Development Indicator (2012) to measure market size of host countries. And the market potential of host countries is measured by GDP per capita growth (annual %).
3.3 Data Description
Table 1 Sample Description
12 Table 1 (continued)
Industrial and commercial machinery 15 Colombia 1 2010 10 Oil, coal, natural gas and metal exploitation 16 Czech Republic 1 1011 18 Industry Number Nation Number Years Number
Others 4 Denmark 1 2012 13
Primary petroleum, metal and rubber products 5 France 3 2013 3 Other transportation equipment 2 Germany 14 Total 109 Real estate 5 Hong Kong 28
Retail 2 Hungary 1
Securities brokerage services 3 Indonesia 2 Textile mill products 1 Italy 2 Transportation 6 Japan 2 Total 109 Korea Republic Of 2 Kyrgyzstan 1
Target Netherlands 1
Developing country (non-OECD) 53 Norway 1 Developed country (OECD) 56 Russian Federation 1 Singapore 4 Ownership type of acquiring firms South Africa 1 State-owned firms 94 Sweden 1 Private firms 15 Thailand 1
UK 2
USA 7
Virgin Islands (British) 3 Total 109
13
In the past Chinese outbound M&As were concentrated in Asia and the primary purpose is to ensure natural resource supply, such as oil, metals and gas. But now Chinese overseas M&As not only continuously devote in natural resource exploitation in resource-rich locations but also invest in marketing and R&D know-how, and brand assets in developed countries. As a latecomer to the global economy, China has realized that must secure resource supplies quickly and aggressively while much of the world’s best natural resources are already held by MNEs from developed countries, like Australia, Canada (Sun, W. Peng, Ren & Yan, 2012). Meanwhile, China has realized that, on global value chains, MNEs from developed economies usually control high value-added activities, such as those associated with brands, channels, and product designs, but EM MNCs almost do low value-added activities with low profit margin, such as the original equipment manufacturers (Morck, Yeung, & Zhao, 2008). After joining in WTO, Chinese firms confront more fierce competition in domestic and global markets; hence, they urgently need advanced knowledge held by MNEs located in advanced countries, such as German, USA, to improve position in global value chain. Besides, Chinese overseas M&A relatively focus on manufacturing industries where Chinese firms own competitive ownership advantages owing to low labor costs. When Chinese manufacturing firms adopt overseas M&As in developing and developed countries, they could access new markets, secure against potential protectionist barriers, enhance exports, and advanced technology. As a result, overseas M&A become the primary mode of Chinese firm to maintain the leading position in manufacturing industries. In addition, Chinese banks also involve in overseas M&A, but concentrate on developing countries, especially on Hong Kong.
3.4 Analyses
Firstly, I adopt the event study to calculate CARs to solve the first research question: Do motivations of overseas M&As affect abnormal returns to shareholders of EM acquiring firms? Secondly, I analyze correlation among variables, and confirm the relation of institutional quality and institutional and economic distance. Thirdly, I test the moderate effect of location of target firms via the linear regression, as well as address the second research question: Does the location of target firms moderate the relation of motivation and performance of EM acquiring firms.
Table2 Average of CARs
OECD Non-OECD All host countries
CARs Number of deals CARs Number of deals CARs Number of deals All sample 0.047 56 0.020 53 0.034 109 Resource-seeking 0.102 13 0.038 11 0.051 24
Market- & Asset-seeking 0.037 43 0.023 41 0.029 85
14
wealth. In the Table 2, I report the results of CARs based on different sets of location and motivation. Overall, Chinese overseas M&As yield 3.4% CARs to shareholders of the acquiring firm across all events in 21-day event window. Specifically, Chinese overseas M&As with resource-seeking and asset-seeking motivation create 5.1% and 2.9% respectively to shareholders of acquiring firms. It supports hypotheses 1&2: both resource-seeking and asset-seeking overseas M&As enhance post-acquisition performance of acquiring firms. Nevertheless, CARs of resource-seeking M&As is higher than CARs of asset-seeking M&As in samples. One possible explanation is that, due to limited firms’ capability to coordinate the complementary assets,asset-seeking overseas M&As may be confronted problems, such as integrating advanced technology into existing products and developing suitable products to cater new customers’ preferences in overseas markets. In contrast, natural resource could be used immediately by Chinese manufacturing and processing firms that urgently need abundant natural resources to ensure production and satisfy fast increasing demands of Chinese markets. Hence, resource-seeking M&As could create value faster than asset-seeking M&As in Chinese settings. Besides, by comparing CARs in OECD group and in non-OECD group, I find that target firms located in OECD generate higher CARs than target firms located in non-OECD.
I test the correlation of all variables by binary regression. As evidence reported in Table 3, there is a
significant and positive relationship between location and institution (Pearson correlation=0. 458, p < 0.01.) and economic distance (Pearson correlation=0. 552, p < 0.01.). It indicates that developed countries have high institutional quality. The significantly negative relation of location and market potential (Pearson correlation=-0.298, p < 0.01.) demonstrates that the speed of market growth are faster in emerging markets
Table 3
Means, Standard Deviations, and Correlations
15
usually than in advanced markets. Although it matches the characteristic of emerging markets, it is not a considerably impacting factor to acquisition performance in my samples. Additionally, the location of target firms positively and significantly correlates with CARs (Pearson correlation=0.223, p < 0.01.), which prove target firms located in developed countries increase CARs to shareholders of Chinese acquiring firms. Finally, there is a positive and significant association of the moderator (MO*LO) and CARs (Pearson correlation=0.299, p < 0.01.) could be found.
Table 4 Linear regression
Model 1 Model 2 Model 3 Model 4
Control Variables Market potential -.007(.011) -.005(.011) .000 (.011) -.004(.011) Market size .000(.000) .000(.000) .000 (.000) .000(.000) Firm size .000(.000) .000(.000) .000 (.000) .000(.000) Past performance .044(.100) .058(.098) .089 (.097) .107(.098) Time size .000(.000) .000(.000) .000 (.000) .000(.000) Ownership -.042(.051) -.041(.050) -.037 (.049) -.034(.049) Business group -.047(.039) -.046(.038) -.046 (.038) -.045(.038) Independent Variable Motivation (MO) .090(.039)** .074 (.039)* .002(.070) Location (LO) .097 (.044)** .024(.074) Moderator MO*LO .106(.086) Constant .066(.047) -.014(.058) -.099(.069) -.048(.080) Adjusted R2 .044 .039 .035 .041 F-value .350 .975 1.441 1.458 n 109 109 109 109 *p < .10. **p < .05. ***p< .01
16
not statistically influenced by characteristics of acquiring firms (e.g. firm size, ownership, past performance and etc.) and size and growth of host markets.
In the Model 2 I add motivation as an independent variable. The consequence indicates that the motivation is positively and significantly correlated with CARs (ß = 0.090, p < 0.05). It means the positive effect of motivation is more obvious on asset-seeking than on resource-seeking. By integrating previous statistical analysis reported in Table 2: resource-seeking and asset-seeking overseas M&As increase value to shareholders of acquiring firms, hypotheses 1&2 are fully supported.
The Model 3 explores the relation of the location of target firms and CARs. The location of target firms positively and significantly affects the CARs to shareholders (ß = 0.097, p < 0.05). The result presents that overseas M&As benefit to create higher shareholder value of acquiring firms, when firms are located in developed countries. Meanwhile by comprehensively concerning the consequences of correlation analysis- the developed country possesses high institutional qualities, and results of comparing CARs between resource-seeking and asset-seeking: the CARs is higher in asset-seeking acquisition than in resource-seeking, I conclude that developed country with better institutional environment is more beneficial to shareholder wealth of acquiring firms in the asset-seeking acquisition. Therefore the hypothesis 4 is supported.
To find clearer relationships between the location of target firms and CARs with different motivations, I take on an additional analysis. I classify samples into two groups (resource- and asset-seeking M&As), and then carry out linear regression respectively. The results indicate that, in asset-seeking M&As, target firms located in OECD enhance CARs to shareholders of acquiring firms (ß = 0.124, p < 0.05). However, in resource-seeking M&As, the quality of host countries is insignificant associated with CARs (ß = - 0.004, p > 0.1).
For checking hypothesis3: the moderate effect of location of target firms, I introduce interaction variable (MO*LO) into the Model 4. However, the positive influence of MO*LO and CARs is insignificant which means the moderate effect of location of target firms for the post-acquisition performance of acquiring firms is not apparent. Hence the hypothesis 3 is not supported.
3.5 Robustness Test
17
4 Conclusions and Limitations
4.1 Conclusions
After pro-market reform, due to greater and more intense efforts by competitors to imitate and substitute resources that yield superior profits, some of firm resources would not be rare and, thus, competitive advantage of endogenous firms would be damaged, and the sustainability of superior profits would consequently be lower (Brouthers et al., 2008). Specifically, when China joined in the WTO in 2001, China further opened the domestic market to foreign investors in line with the rules of WTO. As a result, lowering prices and liberalization to access the Chinese market causes the increasing number of new entrants and drives fierce competition in Chinese markets. Additionally, merely relying on the low the labor cost Chinese firms hardly maintain leading position in manufacturing industries, because high production efficiency and advanced technology have become key to win in competition. Consequently, as Chari and David (2012) argue that greater investments in R&D and marketing provide an approach to protect against the decline in the sustainability of competitive advantages and superior profits associated with pro-market reforms. Chinese manufacturing firms tend to takeover target firms located in a developed country to access marketing and R&D know-how which is unavailable in the domestic market. Through such investment, Chinese manufacture firms could restructure competitive ownership advantages and overcome latecomers deficiency, and sustain a leading position around the world. Still, Chinese governments force state-owned enterprises to invest in rich natural resource endowment countries to guarantee natural resource supply for fast growing economy needed.
By calculating CARs of each deal, I argue overseas M&As undertaken by Chinese firms create value to shareholders of acquiring firms. It supports the argument of Gu and Reed (2013) that Chinese overseas M&As do not lower shareholder wealth. By CARs comparison and linear regression analysis, I further confirm that both resource- and asset-seeking acquisitions increase shareholder wealth of Chinese acquiring firms. Besides, target firms located in developed country could enhance acquisition performance of acquiring firms. Meanwhile the effect of institutional quality of the host country on acquisition performance is considerable in asset-seeking acquisition. However, the moderate effect of location of target firms is not significant.
4.2 Limitations and Future Research
18
Third, I only control characteristics of acquiring firms and market size and potential of host countries. However, other relative elements also affect the post-acquisition performance, such as Bid Characteristics, and are expected to control in future research. Fourth, similarly I only select one moderator; other moderators (e.g. environmental dynamism, environmental munificence, stages of the industry life cycle, R&D intensity or diversification and etc.) also could be taken into account in future research. Fifth, I only adopt simple regressions analysis, and some hypotheses are proved indirectly. Consequently I suggest more complex and statistical analysis in the following researches.
Reference
A. R. Desai, N. P. Shah and I. B. Powell. (2006). Discrimination of Dairy Industry Isolates of the Lactobacillus casei Group. Journal of Dairy Science. Sep2006, Vol. 89 Issue 9, p3345-3351. 7p.
Alan A. Bevan, and Saul Estrin. (2004). The determinants of foreign direct investment into Europe a transition economies. Journal of Comparative Economics. Dec2004, Vol. 32 Issue 4, p775-787. 13p. Almeida, Paul. 1996, Knowledge Sourcing by Foreign Multinationals: Patent Citation Analysis in the U.S, Semiconductor Industry. Strategic Management Journal, 17: 155-165,
Alvaro Cuervo-Cazurra, Mary Maloney, and Shalini Manrakhan. (2007). Causes of the difficulties in internationalization. Journal of International Business Studies. Sep2007, Vol. 38 Issue 5, p709-725. 17p Amit, R., and Schoemaker, P. J. H. (1993). Strategic assets and organizational rent. Strategic Management Journal, 14(1): 33–46.
Anthony J. Venables. (1999). The international division of industries: Clustering and comparative advantage in a Multi-industry Model. Scandinavian Journal of Economics. 1999, Vol. 101 Issue 4, p495.
Athreye, S. and Kapur, S. (2009). The Internationalization of Chinese and Indian Firms Trends,
Aybar, B. and Ficici, A. (2009). ‘Cross-border acquisitions and firm value: An analysis of emerging-market multinationals’, Journal of International Business Studies, 40, pp. 1317–1338.
Barney, J. B. (1991). Firm resources and sustained competitive advantages. Journal of Management, 17: 99–120.
Berry, H. (2006). Shareholder valuation of foreign investment and expansion. Strategic Management Journal, 27(12): 1123–1140.
Brouthers KD, Brouthers LE, and Werner S. 2008. Resource-based advantages in an international context. Journal of Management 34(2): 189–217.
Brown, S. J. and Warner, J. B. (1985). ‘Using daily stock returns: The case of event studies’, Journal of Financial Economics, 14, pp. 3–31.
19
Buckley, P. J., Cross, A. R., Tan, H., Xin, L., and Voss, H. 2008. Historic and emergent trends in Chinese outward direct investment. Management International Review, 48(6): 715–747.
Buckley, P.J., Clegg, L. J., Cross, A. R., Liu, X., Voss, H., and Zheng, P. (2007). The determinants of Chinese outward foreign direct investment. Journal of International Business Studies, 38, 499–518.
Cai, K.G. (1999) 'Outward foreign direct investment: a novel dimension of China's integration into the regional and global economy', China Quarterly 160 (December): 856-880.
Chen, Q. T., and Li, D. S. (Eds.). (2006). Annual report on the development of China’s large enterprise groups: Cross-border M&A and China’s large enterprise groups. Beijing: China Development Press.
Child, J., and Rodrigues, S. B. (2005). The internationalization of Chinese firms: A case for theoretical extension? Management and Organization Review, 1(3): 381–410.
Chittoor, R., Sarkar, M., Ray, S., and Aulakh, P. S. (2009). Third world copycats to emerging multinationals: Institutional changes and organizational transformation in the Indian pharmaceutical industry. Organization Science, 20(1): 187–205.
David J. Arnold, and John A. Quelch. (1998). New Strategies in Emerging Markets. Sloan Management Review. Fall98, Vol. 40 Issue 1, p7-20. 14p.
Deng, P. (2004). Outward Investment by Chinese MNCs: Motivations and Implications. Business Horizons, 47 (3), 8–16.
Dierickx, I., and Cool, K. (1989). Asset stock accumulation and sustainability of competitive advantage. Management Science, 35(12): 1504–1511.
Dunning, J. H. (1995). Reappraising the eclectic paradigm in an age of alliance capitalism. Journal of International Business Studies, 26(3): 461–491.
Dunning, J. H., and S. M. Lundan (2008). Multinational Enterprises and the Global Economy, Second Edition. Cheltenham: Edward Elgar Publishing
Dunning, J.H. (1998). Location and the Multinational Enterprise: A Neglected Factor? Journal of International Business Studies, 29(1), 45–66.
Dunning, J.H., Hoesel, R.V., and Narula, R. (1996). Explaining the ‘new’ wave of outward FDI from developing countries. MERIT Research Memoranda, No. 1996−013.
Dunning, John H. (1993). Multinational Enterprises and the Clobal Economy.Now York: Addison-Wosley. Dunning, John H. (1995). Re-appraising the Eclectic in an Age of Alliance Capitalism. Journal of International Business Studies, 26(3): 461-491.
Dunning, John H. (1998). Location and the Multinational enterprise: A Neglected Factor? Journal of International Business Studies. 29(1): 45-66.
Dunning, John H. (2000). The Eclectic Paradigm as an Envelope for Economic and Business Theories of MNE Activity, International Business Review, 9(2): 163- 190.
Faccio, M., and Lang, L. H. P. (2002). The ultimate ownership of Western European corporations. Journal of Financial Economics, 65(3): 365–395.
20
lournal. 22(2): 101-123.
Ghemawat, P. (2001). Distance still matters: The hard reality of global expansion. Harvard Business Review, 79(8): 137–147.
Guan, J., Mok, C., Yam, Chin, K., and Pun, K. (2006). Technology transfer and innovation performance: Evidence from Chinese firms. Technological Forecasting & Social Change, 73(6): 666–678.
Gubbi, S.R., Aulakh, P. S., Ray, S., Sarkar, M. B. and Chittoor, R. (2010). Do international acquisitions by emerging-economy firms create shareholder value? The case of Indian firms. Journal of International Business Studies, 41 (3), 397–418.
Guillen, M. F. (2002). Structural inertia, imitation, and foreign expansion: South Korean firms and business groups in China, 1987–95. Academy of Management Journal, 45(3): 509–525.
Haleblian, J., and Finkelstein, S. (1999). The influence of organizational acquisition experience on acquisition performance: A behavioral learning perspective. Administrative Science Quarterly, 44(1): 29–31.
Hitt, M. A., Ahlstrom, D., Dacin, M. T., Levitas, E., and Svobodina, L. (2004). The institutional effects on strategic alliance partner selection transition economies: China vs Russia. Organization Science, 15(2): 173–185.
Huaichuan Rui, and George S. Yip. (2008). Foreign acquisitions by Chinese firms: A strategic intent perspective. Journal of World Business 43 (2008) 213–226
Jeffrey S. Harrison, Michael A. Hitt, Robert E. Hoskisson, and R. Duane Ireland. (2001). Resource complementarity in business combinations: Extending the logic to organizational alliances. Journal of Management. 2001, Vol. 27 Issue 6, p679. 12p.
Jerry Biediger, Tracy Decicco, Timothy Green, Greg Hoffman, David Lei, Karthik Mahadevan, Jane Ojeda, John Slocum and Kyle Ward. (2005). Strategic Action at Lenovo. Organizational Dynamics, Vol. 34, No. 1, pp. 89–102, 2005
Kim, W. S. (2003). ‘Wealth effects of international investments and agency problems for Korean multinational firms’, Journal of International Financial Management and Accounting, 14, pp. 194–217 Lin Cui, and Fuming Jiang. (2009). Behind ownership decision of Chinese outward FDI: Resources and institutions. Asia Pac J Manag (2010) 27:751–774 DOI 10.1007/s10490-009-9136-5
Ling, Z. J. (2006). The Lenovo affairs: The growth of China’s computer giant and its takeover of IBM-PC. Singapore: John Wiley & Sons (Asia) Pte Ltd. [translated by M. Avery].
Lubatkin, Michael, and Ronald E. Shrieves. (1986). Towards Reconciliation of Market Performance Measures to Strategic Management Research. Academy of Management Review. Jul1986, Vol. 11 Issue 3, p497-512. Lulu Gu and W.R. Reed. (2013). Chinese overseas M&A performance and the Go Global policy. Economics of Transition Volume 21(1) 2013, 157–192 DOI: 10.1111/ecot.12007
Luo, Y. and Tung, R. L. (2007). International expansion of emerging market enterprises: a springboard perspective. Journal of International Business Studies, 38 (4), 481−498.
Luo, Y., and Rui, H. (2009). An ambidexterity perspective toward multinational enterprises from emerging economies. Academy of Management Perspectives, 23(4): 49–70.
21
Evidence from US international acquisitions. Journal of International Business Studies, 25(2): 343–366. Matthews, J. A. (2006), ‘Dragon multinationals: new players in 21st century globalization,’ Asia Pacific Journal of Management, 23, 5–27.
Max Boisot, and Agust´ı Canals. (2004). Data, information and knowledge: have we got it right? Journal of Evolutionary Economics. 2004, Vol. 14 Issue 1, p43-67. 25p.
Meon, Pierre Guillanme, Sekkat. Khalid, and Weill, Laurent. (2009). Institutional changes now and benefits tomorrow: how soon is tomorrow? Economics & Politics. Jul2009, Vol. 21 Issue 2, p319-357.
Morck, R., Yeung, B., and Zhao, M. (2008). Perspectives on China’s outward foreign direct investment. Journal of International Business Studies, 39(3): 337–350.
Moschieri, C., and Campa, J. M. (2009). The European M&A industry: A market in the process of construction. Academy of Management Perspectives, 23(4): 71–87.
Murali D.R. Chari and Parthiban David. (2012). Research notes and commentaries sustaining superior performance in an emerging economy: An empirical test in the Indian context. Strategic Management Journal Strat. Mgmt. J., 33: 217–229
Nadkarni, S., and Perez, P. D. (2007). Prior conditions and early international commitment: The mediating role of domestic mindset. Journal of International Business Studies, 38: 160–176.
Nolan, P. (2001). China and the global economy. Basingstoke, UK: Palgrave.
Paul J. DiMaggio and Walter W. Powell. (1983). The iron cage revisited: institutional isomorphism and collective rationality in organizational fields. American Sociological Review. Apr83, Vol. 48 Issue 2, p147-160. 14p.
Peng, Mike W. and Luo, Yadong. (2000). Managerial ties asn firm performance in a transition economy: the nature of a micro-macro link. Academy of Management Journal. Jun2000, Vol. 43 Issue 3, p486-501. 16p. Peter J. Buckley, L. Jeremy Clegg, Adam R. Cross, Xin Liu, Hinrich Voss and PingZheng. (2007). The
Determinants of Chinese Outward Foreign Direct Investment. Journal of International Business Studies, Vol. 38, No. 4,
Peter Wright, Stephen P. Ferris, Janine S. Hiller and Mark Kroll. (1995). Competitiveness through
management of diversity: effects on stock price valuation. Academy of Management Journal. Feb1995, Vol. 38 Issue 1, p272-287. 16p.
Ping Deng. (2009). Why do Chinese firms tend to acquire strategic assets in international expansion? Journal of World Business 44: 74–84
Pontus Braunerhjelm and Roger Svensson. (1996). Host country characteristics and agglomeration in foreign direct investment. Applied Economics. Jul96, Vol. 28 Issue 7, p833-840. 8p. 4 Charts.
Pradhan, J.P. (2007). Strengthening Intellectual Property Rights Globally: Impact on India’s Pharmaceutical Exports. Singapore Economic Review, 52, 233–250.
Rajah, R., Gammeltoft, P. and Jiang, Y. (2010). Home government policies for outward FDI from emerging economies: lessons from Asia. International Journal of Emerging Markets, 5(3/4), 333–357.
22
Robert E. Hoskisson, Lorraine Eden, Chung Ming Lau and Mike Wright. (2000). Strategy in Emerging Economies. The Academy of Management Journal, Vol. 43, No. 3 (Jun., 2000), pp. 249-267
Rugman, A. M., and Li, J. (2007). Will China’s multinationals succeed globally or regionally? European Management Journal, 25(5): 333–343.
Rui, H. and Yip, G.S. (2008). Foreign acquisitions by Chinese firms: A strategic intent perspective. Journal of World Business, 43(2), 213−226.
Sapienza, H. J., Autio, E., George, G., and Zahra, S. A. 2006. A capabilities perspective on the effects of early internationalization on firm survival and growth. Academy of Management Review, 31(4): 914–933. Scott, W. R. 1995. Institutions and organizations. Thousand Oaks, CA: Sage.
Shan, Weijian, and Jaeyong Song. 1997. Foreign Direct Investment and Sourcing of Technological Advantage: Evidence from the Biotechnology industry. Journal of International Business Studies. 28 (2); 267-284. Shige Makino, Chung-Ming Lau, and Rhy-Song Yeh. (2002). Asset-Exploitation Versus Asset-Seeking:
Implications for Location Choice of Foreign Direct Investment from Newly Industrialized Economies. Journal of International Business Studies. 33.3: 403-421
Suma Athreye and Sandeep Kapur (2009). Introduction: The internationalization of Chinese and Indian firms—trends, motivations and strategy. Industrial and Corporate Change, Volume 18, Number 2, pp. 209–221 doi:10.1093/icc/dtp007
Sunny Li Sun, Mike W. Peng, Bing Ren and Daying Yan, 2012. A comparative ownership advantage framework for cross-border M&As: The rise of Chinese and Indian MNEs. Journal of World Business 47: 4–16
Tamara Stucchi. (2012). Emerging market firms acquisitions in advanced markets: Matching strategy with resource-, institution- and industry-based antecedents. European Management Journal (2012) 30, 278– 289 Teece, D., Pisano, G., and Shuen, S. (1997). Dynamic capabilities and strategic management. Strategic Management Journal, 18: 509–533.
Thomas Luedi. (2008). China’s track record in M&A. The McKinsey Quarterly.
Tsang, E. W. K., and Yip, P. S. L. (2007). Economic distance and the survival of foreign direct investments. Academy of Management Journal, 50(5): 1156–1168.
Tsui, A. S., Schoonhoven, C. B., Meyer, M. W., Lau, C. M., and Milkovich, G. T. (2004). Organization and management in the midst of societal transformation: The People’s Republic of China. Organization Science, 15(2): 133–144.
Uhlenbruck, K., Hitt, M. A., and Semadeni, M. (2006). Market value effects of acquisitions involving Internet firms: A resource-based analysis. Strategic Management Journal, 27(10): 899–913.
UNCTAD (2009). World Investment Report 2006: FDI from Developing and Transition Economies: Implications for Development. New York and Geneva: United Nations.
UNCTAD (2006). World Investment Report 2006: FDI from Developing and Transition Economies: Implications for Development. New York and Geneva: United Nations.
23
Vernon, R. 1979. The product cycle hypothesis in a new international environment. Oxford Bulletin of Economics and Statistics, 41(4): 255–267.
Wang, Q. and Boateng, A. (2007). Cross-Border M&As by Chinese Firms: An Analysis of Strategic Motivation and Performance. International Management Review, 3(4), 19–29.
Wesson, T. J. (2004). Foreign direct investment and competitive advantage.Cheltenham, UK: Edward Elgar Publishing
Wu, F. and Sia, Y.H. (2002) 'China's rising investment in Southeast Asia: trends and outlook', Journal of Asian Business 18(2): 41-61.
Yiu, Daphne and Makino, Shige. (2002). The Choice Between Joint Venture and Wholly Owned Subsidiary: An Institutional Perspective. Organization Science. Nov/Dec2002, Vol. 13 Issue 6, p667-683. 17p. 5 Charts. Young Stephen, Chun-Hua Huang, and Michael McDermott. (1996). Internationalization and Competitive Catch-up Processes: Case Study Evidence on Chinese Multinational Enterprises. Management International Review (MIR). 1996, Vol. 36 Issue 4, p295-314. 20p.
Zaheer, S. (1995). Overcoming the liability of foreignness. Academy of Management Journal, 38(2): 341–363.
