The Effects of Cultural Difference on Firm’s Cross-border
M&A Performance -- Evidence from China
Master Thesis
Dual Award in Advanced International Business Management and Marketing (Newcastle University Business School)
&
Dual Award in Advanced International Business and Management (Faculty of Economics and Business, University of Groningen)
Name: Wang Chaojun
Student Number: B1000184 (Newcastle) S2259796 (Groningen) Supervisors: Dr. I. Kalinic
Table of Contens
List of Tables ... 4
Acknowledgements ... 5
Abstract ... 6
Chapter 1 Introduction ... 7
Chapter 2 Literature Review ... 11
2.1 Motivations of Cross-border M&A in Chinese Firms ... 11
2.1.1 Market-Seeking ... 11
2.1.2 Resource-Seeking ... 12
2.1.3 Diversification ... 12
2.1.4 Synergy Realization ... 13
2.2 Culture Difference in Cross-border M&A ... 14
2.2.1 Negative Effects of Cultural Difference in M&A ... 15
2.2.2 Positive Effects of Cultural Difference in M&A ... 16
2.3 Cross-cultural Management in Cross-border M&A ... 17
2.3.1 Level of Integration ... 17
2.3.2 Influences of managers’ departure in Cross-border M&A ... 18
2.4 Chinese Unique Context and the Development of Main Hypotheses ... 20
2.4.1 Cross-cultural Management Talent of Chinese Firms ... 20
2.4.2 Development of Main Hypotheses ... 20
2.5 Other Determinants and the Development of Secondary Hypotheses ... 21
2.5.1 Relative Size ... 21 2.5.2 Industry Relatedness ... 22 2.5.3 Government Involvement ... 23 2.6 Summary of Hypotheses ... 25 Chapter 3 Methodology ... 26 3.1 Data Source ... 26 3.2 Sample Selection ... 26
3.2.1 Dependent Variable ... 28
3.2.2 Independent Variable ... 29
3.2.3 Moderating Variable ... 30
3.2.4 Control Variables ... 30
3.3 Method of Analysis ... 33
Chapter 4 Empirical Results ... 34
4.1 Means, Standard Deviation and Correlation Coefficients ... 34
4.2 Results from Regression Analysis ... 35
Chapter 5 Discussion ... 38
5.1 Discussion of Main Hypotheses ... 38
5.2 Discussion of Secondary Hypotheses ... 39
Chapter 6 Conclusions and Limitations ... 42
Reference ... 44
List of Tables
Table 1 Summary of Hypotheses ... 25
Table2 Descriptive statistics for selected 102 cross-border M&A deals ... 27
Table 3: Measurements of Variables ... 32
Table 4: Descriptive Statistics ... 34
Table 5: Results from Regression Analysis ... 36
Acknowledgements
I would like to thank those persons who have been supporting and been giving advises for me. First, I would like to express my sincere appreciation and gratitude to my supervisors Dr. I. Kalinic and Prof. J. Leopold for their valuable feedback and guidance. Second, I would like to thanks Miss. T. Bi for her supports during this research. Last but not least, I would like to thank my family and friends.
Abstract
It is widely accepted that cultural difference is an essential element to influence firm’s M&A performance. Nevertheless, how this effect works in Chinese firms did not receive enough attention. In this paper, I explore the relationship between cultural difference and Chinese firms’ overseas M&A performances, introducing the cross-cultural management as a moderating factor to further capture this interconnection. Three control variables (government involvement, relative size, industry relatedness) are also introduced to influence Chinese firms’ cross-border M&A performances. In order to test the hypotheses, I collect financial data of 102 Chinese firms’ cross-border M&A activities in the period of 2005 to 2009. The results show that cultural difference is negatively related to firm’s cross-border M&A performance, and this negative effect become larger when employing Chinese firms’ cross-cultural management as a moderator. The results also reveal that the relative size between target and acquiring firms is positively connected with M&A performance, while government involvement and industry relatedness are shown to be unrelated with firms’ M&A performances.
Key words:
Chapter 1 Introduction
In recent decades, cross-border merger and acquisition (M&A) has become one of the most popular modes for firms to enter into international markets. There are many motivations for firms to take cross-border M&A activities. The primary reason, according to Porter (1985), is to increase firm’s competitive advantage by integrating two business units into a combination unit.
However, previous studies on M&A were mainly focusing on developed nations, such as United States, United Kingdom, Germany and so on, while developing countries did not receive enough attention. It can be regarded as a research gap for this field. These years, increasingly number of firms that come from developing or emerging economies have involved in cross-border merger and acquisition activities, especially Chinese firms. Thus, it is necessary for researchers to pay more attention on cross-border M&A activities of Chinese firms. In order to fulfill this research gap, this paper mainly focuses on cross-border M&A performances of Chinese companies.
executives to investigate why the failure rate of cross-border M&As remains high for Chinese firms.
Previously, a lot of researches explored the success and failure factors for M&A activities. Cultural difference between target and acquiring firms can be regarded as an important factor, which largely influences firms’ M&A performances (Cartwright and Cooper, 1993; Chatterjee et al., 1992; Child et al., 2001; Datta, 1991; Hurt and Hurt, 2005; Larsson and Lubatkin, 2001; Olie, 1994; Teerikangas and Very, 2006; Weber, 1996; Weber et al., 1996). Many scholars even argue that cultural difference, during the post-M&A stage, is more important than strategic fit to cross-border M&A’s success (Cartwright and Cooper, 1993; Chatterjee et al., 1992; Weber, 1996; Weber et al., 1996). However, cultural difference can be considered as a double-edged in overseas M&A activities, both positive and negative outcomes exist, hence it is hardly to achieve a consistent result. From positive perspective, according to resource-based view, cultural difference provides an access to new organizational routines for acquiring firms, and helps acquiring firms to achieve competitive advantages (Morosini et al., 1998; Porter, 1985). The greater cultural difference between target and acquiring firms, the greater potential synergy benefits will be achieved, and finally bring positive effects on cross-border M&As performance. On the contrary, other researchers argue that cultural difference has negative impact on post-M&A’s integration, because it hinders synergy realization between target and acquiring firms. More specifically, cultural difference between two firms brings barriers for firms’ integrating and causes conflicts among employees, which further lead to lower cross-border M&A performance (Cartwright and Cooper, 1993; Chatterjee et al., 1992; Weber, 1996; Weber et al., 1996).
outcomes. A lot of scholars argue that there are other factors playing moderating roles to impact the relationship between cultural difference and cross-border M&A performance, such as firms’ capabilities of cross-cultural management (Davy et al., 1988; Walter, 1995; Stahl et al., 2004). As indicated by Faulker et al. (2002) and Krishnan et al. (2004), managers undervalue people element and cultural acculturation are the main reasons that result in M&A failure. Thus, we can see that cross-cultural management is also an essential factor when explains the relationship between cultural difference and M&A performance. In this paper, I employ cross-cultural management as a moderating factor between cultural difference and M&A performance. In addition, other elements that related to M&A performances, including government involvement, relative size and industry relatedness, also cannot be ignored (Kitching, 1967; Kusewitt, 1985; Ramaswamy and Waegelein, 2003; Datta, 1991; Lubatkin, 1983; Salter and Weinhold, 1979). Based on above-mentioned considerations. The following research questions are formulated:
Main Research Question:
What is the effect of cultural difference on Chinese firms’ cross-border M&A performance, negative or positive? After considering the moderating role of cross-cultural management.
Secondary Research Questions:
What is the effect of government involvement on Chinese firms’ cross-border M&A performances?
What is the effect of relative size between target and acquiring firms on Chinese firms’ cross-border M&A performances?
Chapter 2 Literature Review
This chapter gives an overview about relevant literature concerning: 1) motivations of cross-border M&A in Chinese firms; 2) the positive and negative effects of cultural difference in cross-border M&A; 3) the moderating role of cross-cultural management in cross-border M&A; 4) Chinese unique context; 5) other determinants of cross-border M&A performance. The literature reviewed in every sub-section of this chapter can be served as a foundation for the hypothesis development. And then, we develop four hypotheses in section 2.5 and summaries all the hypotheses in section 2.6.
2.1 Motivations of Cross-border M&A in Chinese Firms
Over the past decades, cross-border M&A (CBM&A) has been a popular international business strategy for firms, and it also becomes a crucial mode of entry into foreign markets (UNCTAD, 2000). The report of UNCTAD (2006) also stresses that outward investment (e.g. CBM&A) offers an additional avenue for developing economies to link up to global markets and production systems. There are numerous benefits for firms to take CBM&A activities, if they can manage M&As successfully. However, more than 50% of M&A activities were reported unsuccessful (The Economist, 1999; and Child et al., 2001). Why a lot of managers still pursue this international business strategy, even though the failure rate remains high? Many literatures have discussed the motivations and advantages of cross-border M&A activities (Aw & Chatterjee, 2004; Conn et al., 2001; Francoeur, 2005; Gregory and McCorriston, 2005; Moeller and Schlingemann, 2005). I summary some motivations, they are a) market-seeking; b) resource-seeking; c) diversification; d) synergy realization. In the following, I will present them one by one.
2.1.1 Market-Seeking
developing countries’ companies in their process of internationalization. There are 51% of responses referring market seeking as the most significant motivation for FDI (UNCTAD, 2006). Martin et al. (1998) suggest that cross-border M&A can be treated as an approach for firms accessing new markets and increasing their market shares. Moreover, cross-border M&A is also suggested as the fastest mode for international expansion (UNTCAD, 2000). It is because cross-border M&A allows the acquiring firm entering into a foreign market via its target firm.
2.1.2 Resource-Seeking
The UNCTAD (2006) global survey points out that resource seeking is another major motivation for investing overseas. Firms’ resources not only include tangible resources, but also involve intangible resources. Obtaining tangible resources (e.g. natural resource) is very important for firms from resource-poor nations, such as China and India, because the security of supply of raw materials is deemed essential for firms’ rapid development and expansion. Based on resource-based view (RBV) (Barney, 1991; Baum and Oliver, 1991; Eisenhardt and Schoonhoven, 1996; etc.) and organizational learning views (Barkema and Vermeulen, 1998), the intangible resources, such as technology, skill, human resources, are other motivations for cross-border M&As. Firms will probably face a lot of difficulties when they operate business in different nations, because different nations have different cultures and customer preferences. Thus, knowing how to meet diverse customers’ requirements, in the other word, know-how is extremely important but difficult for corporations. Numerous Chinese firms lack this kind of capability. Acquiring an existing foreign company offers an opportunity for the acquiring firm to access to the tacit knowledge, which embedded in routine of the target firm, which could lower risk of investing overseas.
2.1.3 Diversification
in M&A studies. Benefits of diversification are mainly reflected in two aspects. First, it provides an approach to reduce costs and risks when firms access to another new foreign markets (Boateng and Glaister, 2003; Porter and Fuller, 1986). For example, nowadays, a large number of multinational corporations outsource their manufacturing departments to China and India, where the cost of labor is relative low, comparing with many developed countries. Second, global diversification increases flexibility for firms to actively react to a rapid changing international business environment. For instance, due to diverse tax rate of different countries, multinational corporations have flexibility to lower their total tax rates by operating in different nations. Although diversified corporations tend to be more complex than purely domestic corporations, and the complexity may leads to information asymmetry between headquarters and divisional managers (Harris et al, 1982), still a large numbers of empirical studies verify that the portfolio diversification can reduce firm’s operational risk (Errunza, 1977; Denis, 2002).
2.1.4 Synergy Realization
2.2 Culture Difference in Cross-border M&A
It is necessary to claim the importance of cultural dimension, before analyzing how cultural difference effects on cross-border M&A. Hofstede (1980) defines the culture that “culture as the collective programming of the mind which distinguishes the members of one group of people from another.” Moreover, Hofstede (1980) employs four cultural dimensions to measure national cultural distance between nations, which includes power distance, uncertainty avoidance, masculinity/femininity and individualism. Following this approach, researches can measure national cultural difference between nations. Although there are other approaches for measuring cultural difference between nations, Hofstede’ (1980) cultural dimensions are recognized as the most common way in analyzing national cultural difference. A large proportion of researches on the relationship between cultural difference and M&A performance based on Hofstede’ (1980) culture dimension. For example, Kogut and Singh (1988) estimates national cultural distance as a composite index based on the deviation from each of Hofstede’s (1980) cultural dimension. Therefore, in this paper, I also use cultural dimension to measure cultural distance between nations.
negative effects. In the following, I will present both views on this topic.
2.2.1 Negative Effects of Cultural Difference in M&A
From the negative perspective, researchers primarily suggest that culture differences have negative impacts upon integration and hinder synergy realization during post-merger and acquisition period (Cartwright and Cooper, 1993; Chatterjee et al., 1992; Weber, 1996; Weber et al., 1996). Cartwright and Cooper (1993) argue that the expected financial benefits are often unachieved, due to cultural conflicts. Weber (1996) indicates that great cultural differences between target firm and acquiring firm hinder integration, and then resulting in negative effects on M&A performance. Bjorkman et al. (2007) point out that difference in cultural values result in lower levels of acculturation. In addition, Stahl and Voigt (2008) claim that culture differences will create barriers to human integration. Similarly, some other studies show that heterogeneity generates tensions mattering to overall financial and integrative performances (Kanter and Corn, 1994; Jemison and Sitkin, 1986). For example, employees who use different languages are more likely to misunderstand each other. Thus, it is understandable that language barriers usually lead to communication problems between acquired and acquiring firms.
share different cultures. Likewise, according to Lodorfos and Boateng (2006), “cultural similarity serves as a force that brings members of the organization together and generates a sense of cohesion and resulting in synergy realization.” In contrast, culture differences can easily lead to “culture clash” between target and acquiring corporations. To conclude, culture difference can be regarded as a primary obstacle to achieve expected benefits from cross-border M&As.
2.2.2 Positive Effects of Cultural Difference in M&A
Despite, many M&A studies point out the potential problems in the integration process, due to culture difference, still a lot of scholars hold the view that cultural differences between target and acquiring firms can be regarded as a positive effect on M&As performance (Chakrabarti et al., 2009). This perspective is mainly grounded from the assumption that differences between merged firms can generate opportunities for synergies and learning (Harrison et al., 1991; Vermeulen and Barkema, 2001). Based on resource-based view (RVB), firms’ sustainable competitive advantages are primarily based on the application of the bundle of valuable resources, such as technology, human and financial resources (Barney, 1986, 1991; Rumelt, 1984; Wernerfelt, 1984). Cross-border M&A provides an opportunity for firms to access to the inimitable, rare and potential valuable resources, which are embedded in different cultures and institutional environments (Larsson and Finkelstein, 1999). Some scholars also indicate that learning and adopting another organizational routine may help firms to break rigidities, which promote acquiring firm’s innovation and learning capabilities (Barkema and Vermeulen, 1998). This is because organizational routines are concerned as firms’ competitive advantages, which constrained by national culture (Hofstede et al., 1990; Kogut and Singh, 1988). Thus, in conclusion, the greater national cultural differences between two nations, the greater potential advantages will be achieved in cross-border M&A (Hofstede, 1980).
organization. Although the integrating is predicted bringing synergy benefits for the target and acquiring firms, culture difference also brings the risk of integration between two business units. Thus, it is hardly to achieve a consistent result.
2.3 Cross-cultural Management in Cross-border M&A
Previous discussion shows that culture difference has both positive and negative effects on cross-border M&A performance. In this sub-section, a more important but difficult task has to be considered: how to diminish those negative effects bring from cultural differences, at the same time, expand potential benefits of cultural diversification within M&As? We believe that the capacity of cross-cultural management is concerned as an important moderating factor, which could moderate effects of cultural difference in M&A performance. According to previous studies, the influence of cross-cultural management is mainly reflected on two aspects, 1) the level of integration; 2) managers’ departure. In the following, I will present them one by one.
2.3.1 Level of Integration
However, other M&A studies report a contradictory result. They argue that high level of combination leads to more fights, and thus results in poor performance, rather than benefits for firms (Stahl and Voigt, 2008). Marks and Mirvis (1985) indicate that an intensive combination is more likely to bring extra disruptions for firms that initially take different organizational routines, and further results in a down performance in M&A. Moreover, the high level of integration damages autonomy of managers in acquired firms, and the loss of autonomy will increase conflicts between two top management teams, finally lower performance in both firms. We also have to consider the conflict between human resource, which undermines synergy realization between target and acquiring firms.
Hofstede (1993) points out that management practices are diversified around the world, due to national cultural differences. There is no best practice or strategy for international mergers and acquisitions. Both over-integration and under-integration have negative effects on cross-border M&As (Child et al., 2001). Thus, I believe that setting an adequate level of integration is crucial for the success of M&A.
2.3.2 Influences of managers’ departure in Cross-border M&A
However, a large number of studies show that managers’ departure rate is much higher in acquired firms comparing with normal firms. More specifically, there are around 25% of top managers resigned during the first year after acquiring activities (Walsh, 1988). The high rate of top managers’ departure will hinder M&A performance. There are some reasons to explain this phenomenon. First, from social psychological perspective, trust rises among people who have similar values (Tajfel, 1981; Turner, 1982). In order words, people who share the same or similar cultures are easily to develop trust. Thus, it is difficult for managers who come from acquiring firms to develop trust with employees that from target firms. Second, a large proportion of studies show that M&A generates great disruption of top manager teams between target and acquiring firms (Buono and Eakin, 1985). Because the preexisting power and control structures in the target firm are changed by the top manages from acquiring firms.
to Samsung (Korea electronic producer) (Deng, 2010).
2.4 Chinese Unique Context and the
Development
of Main Hypotheses Previous section reviews the relationship between cultural difference and cross-border M&A performance, and also explains the role of cross-cultural management in this relationship. In this subsection, I will first introduce the unique Chinese context, and then develop two main hypotheses that guide the whole paper.2.4.1 Cross-cultural Management Talent of Chinese Firms
As discussed previously, post-acquisition integration is a key element that determines final outcomes of cross-border M&As. While a large number of Chinese firms lack of international operating experience and have huge management gap with western firms. Deng (2010) argues that weak combinative capabilities, cultural conflicts and problematic strategy execution are main reasons result in Chinese M&As’ failures.
Numerous Chinese firms have realized that they lack cross-cultural management capability, thus a large proportion of Chinese firms alter their integration and management strategy. For example, Geely (Chinese auto manufacturer) decides to keep a passive strategy in integration, after taking over Volvo (Swedish auto manufacture), because Geely does not have enough management talent to integrate Volvo. Thus, the passive strategy may be the best strategy in such situation (China Daily Mail, 2012). Xiao and Sun (2005) argues that in China, stated-owned firms usually apply a bureaucratic management system, and they usually pay more in the bidding stage compared with their competitors. Thus, lack of cross-cultural management experience and capability lead cultural difference to show negative effects on Chinese firms’ cross-border M&As performance.
2.4.2 Development of Main Hypotheses
negative effects on cross-border M&As performance From positive perspective, cultural difference provides an access to a new organizational routine and helps firms to achieve potential synergy benefits, and further increases firm’s competitive advantages (Morosini et al, 1998). In contrast, other researchers argue that cultural differences bring barriers to integration and cause conflicts among employees, which lead to lower cross-border performance. Further, we also introduce the cross-cultural management as a moderating role to influence the relationship between cultural difference and M&A performance. Considering the fact that numerous Chinese firms lack of cross-cultural management experience and capability in cross-border M&As, we expect a negative effect of cultural difference on the M&A performance. Thus, main hypotheses are formulated as following:
Hypothesis 1: Cultural difference has negative impact on Chinese firms’ cross-border M&A performances.
Hypothesis 2: Chinese firms’ cross-cultural management increases the negative effect of cultural difference on firms’ cross-border M&A performances.
2.5 Other Determinants and the Development of Secondary Hypotheses Previous section presents how cultural difference and cross-cultural management impact on cross-border M&A performance. However, other factors such as relative size, industry relatedness and government involvement would also influence cross-border M&A performance. In this subsection, I am going to explain these factors, and at the end of each subsection, a hypothesis will be formulated.
2.5.1 Relative Size
that when acquiring firm is much larger than its target, acquiring firm commonly would overlook the requirements and suggestions from target firm, which generates conflicts between acquiring and target firms. Thus, the relative large size between target and acquiring firms may easily lead to conflicts, and then lower firms’ performance.
In contrast, other researchers argue that the greater relative size between target and acquiring firms, the more positive effects on firms’ post-M&A performance. For instance, Kitching (1967) explains, relatively large acquisition would bring a greater combination potential, and then benefiting to firms’ post-M&A performance.
Based on previous studies, we can see that relative size between target and acquiring firms has mixed effects on firms’ post-M&A performances. Some researches suggest that the greater relative size between target and acquiring firms, the lower post-M&As performance will be achieved. In contrast, other studies show that the greater relative size between target and acquiring firms has positive effects on firms’ post-M&A performance. Furthermore, some studies argue that both excessively small and large relative size should be avoided in mergers and acquisitions (Kusewitt, 1985). In this paper, considered most Chinese firms lack of cross-border M&As experience comparing with the firms that come from western countries. Thus the greater relative size between target and acquiring firms may bring more negative effects on firms’ post-M&A performances, rather than positive effects. Therefore, hypothesis 3 is formulated as following:
Hypothesis 3: The relative size between Chinese firms and their target firms has negative impact on Chinese firms’ cross-border M&A performances.
2.5.2 Industry Relatedness
and Weinhold, 1979; Singh and Montgomery, 1987; etc.). They believe that industry relatedness between target and acquiring firms improves performance of M&A in post-acquisition period (Salter and Weinhold, 1979; Lubatkin, 1983; Datta, 1991). Similarly, Singh and Montgomery (1987) argue that higher related between target and acquiring firms can achieve higher benefits, compared with unrelated target and acquiring firms. Therefore, we expect a positive relationship between industry relatedness and cross-border M&A performance. And the hypothesis 4 is formulated as following:
Hypothesis 4: The industry relatedness between Chinese firms and their target firms has positive impact on Chinese firms cross-border M&As performance.
2.5.3 Government Involvement
Like many developing and transition economies, Chinese government actively involves in Chinese firms’ cross-border M&As, and it has crucial impact on Chinese cross-border M&As performance (Child and Rodrigues, 2005; Peng, 2000). Some scholars argue that Chinese government involves in Chinese firms’ cross-border M&A by two main approaches. The first approach is ownership. Many Chinese firms that participated in cross-border M&A activities are partly or wholly owned by stated (Lau, et al., 2007). Second approach is regulation. For example, in the year of 1999, just two year before China joint WTO, Chinese government set a “go global” policy and encourages its firms to expand business internationally. From then on, the value of Chinese cross-border M&A increased dramatically, and reached 73.2 U.S. billion in 2008 (Williamson and Raman, 2011).
target firm’s requirements.
However, government involvement just like a double-edged sword, it can also bring negative effects on cross-border M&A performance. First of all, the involvement of government increases political sensitiveness and public worries, which lead to many cross-border M&As failure. This is because the host countries’ governments reject the M&As for some national security reasons. For example, U.S. president Barack Obama banned Sany Group Co. (Chinese Machinery Manufacturer) to acquire an American wind farm for security issues. Moreover, in 2004, MinMetal (a Chinese state-owned company) provided a formal bid for the largest Canadian mining company (Noranda). However, the bid failed in the announcement stage, because Canadian government considers some national resource security reasons. Second, many Chinese firms are partly or wholly owned by state, thus political motivations play more important roles than financial motivations when they decide to take international M&As. However, the minority shareholders of those firms are more interested in financial benefits rather than political purposes. Thus, the different interests between government and minority shareholders will cause principal-principal conflicts (Chen and Young, 2010), which may further lead to poor corporate governance (Su et al., 2008). Clearly, poor corporate governance has negative impacts upon post-acquisition integration and management, and thus lowers Chinese firms’ cross-border M&As performance.
Based on the above discussion, we can see that government involvement provides strong financial supports for Chinese firms in pre-acquisition stage. However, the involvement of Chinese government also declines corporate governance capability, which leads to negative impacts on post-acquisition integration and performance. Therefore, the hypothesis 5 is formulated as following:
2.6 Summary of Hypotheses
Based on the foregoing literature review, 5 hypotheses are developed. Table 1 summarizes all the hypotheses in this paper.
Table 1 Summary of Hypotheses
Hypothesis 1 Cultural difference has negative impact on Chinese firms’ cross-border M&A performances.
Hypothesis 2 Chinese firms’ cross-cultural management increases the negative effect of cultural difference on firms’ cross-border M&A
performances.
Hypothesis 3 The relative size between Chinese firms and their target firms has negative impact on Chinese firms’ cross-border M&A performances. Hypothesis 4 The industry relatedness between Chinese firms and their target
firms has positive impact on Chinese firms cross-border M&As performance.
Chapter 3 Methodology
After developing hypotheses that guide this research, this chapter presents data, sample and method used. Starting with the introducing of data source as well as the sample selection, further, I discuss the measurements of variables. Finally, analysis approach is described.
3.1 Data Source
In this paper, two main databases are employed to collect data, which are Zephyr Database2 and Orbis Database3. Zephyr database provides some detailed information about cross-border M&As, such as deal announcement and complete date, deal value, countries of target and acquiring firms, industry and deal value and so on. Orbis database is also employed to collect more detailed data about target and acquiring firms. In addition, some firms’ annual reports are checked in order to make sure the collected data is available and reliable.
3.2 Sample Selection
In order to eliminate alternative influences, I employ five control criteria in determining the sample: 1) the acquiring firm must be a Chinese firm and must be located in Mainland China; 2) the target firm should be a foreign company; 3) the type of deal should be merger or acquisition; 4) all these cross-border M&As are completed from January 1, 2005 to December 31, 2009; 5) firms such as banks or insurance companies are excluded. Controlling these conditions, there are 102 firms are satisfied in Zephyr database.
2 Zephyr is the most comprehensive database with integrated, detailed company information. It is updated
hourly. It contains information on M&A, IPO, private equity and venture capital deals and rumours (Bureau van dijk website, 2012).
3 Orbis database contains comprehensive information on companies worldwide. The information includes key
Table 2 reports the detailed information about the 102 cross-border M&As. Sample cross-border M&As happened in 23 countries during the period of 01/01/2005 to 31/12/2009. Within these deals, Hong Kong and Australia’s firms are favorite targets for Chinese firms to make international M&As, which account for almost 40% of total deals. Additionally, among the 102 deals, there are 60 deals are operated by Chinese state-owned firms and 42 deals are operated by Chinese private firms.
Table2 Descriptive statistics for selected 102 cross-border M&A deals
Country of Target Firms Number Percentage
Hong Kong 20 19,61% Australia 19 18,63% Singapore 9 8,82% United Kingdom 8 7,84% Germany 6 5,88% Netherlands 6 5,88% United States 6 5,88% Canada 5 4,90% France 3 2,94% Italy 3 2,94% Belgium 2 1,96% Japan 2 1,96% Pakistan 2 1,96% Russia 2 1,96% Brazil 1 0,98% Colombia 1 0,98% Egypt 1 0,98% India 1 0,98% Portugal 1 0,98% Saudi Arabia 1 0,98% Sweden 1 0,98% Taiwan 1 0,98% Thailand 1 0,98% Sum 102 100%
3.2 Variables and Measurements
This sub-section introduces one dependent variable (firm’s post-acquisition performance), one independent variable (cultural distance between target and acquiring firms), one moderating variable (the ability of firms’ cross-cultural management/international operating experience), three control variables (government involvement, relative size and industry relatedness) and their measurements.
3.2.1 Dependent Variable
Firm’s post-acquisition performance is the dependent variable in this research. It measures as the percentage rate of growth in firms’ sales (calculated in U.S. dollars) after two years period from the cross-border M&A completed. I use sales growth for measuring M&A performance mainly due to two reasons. First, Woo et al. (1992) and Morosini et al. (1998) suggest that the growth of sales is a superior alternative for performance measurements. And it has been frequently employed to measure post-M&A performance (Chatterjee et al., 1992; Singh and Montgomery, 1987). Second, the data of firms’ sales is easy to obtain in Zephyr and Orbis Databases.
3.2.2 Independent Variable
In this paper, the independent variable is national cultural distance between target and acquiring firms. I employ Kogut and Singh’s (1988) indices4 to measure the national cultural distance between target and acquiring firms. Kogut and Singh (1988) define national cultural distance as “the degree to which the cultural norms in one country differ from these norms to another country.” Based on this definition, a lot of researches create similar formulations to measure national cultural distances between two nations. Among them, Kogut and Singh’ (1988) formulation is the most common approach to measure the cultural distance between nations. Therefore, in this paper, I employ Kogut and Singh’s (1988) approach to measure the cultural distances between target countries and China, and meanwhile, use Hofstede’s (1980) four cultural dimensions scores. Following is the formulate to measure cultural distance between nations:
CD
j=
1
4
(I
ij− I
ic)
2V
i i=1 4∑
Where:stands for the cultural distance from country j to China.
stands for the Hofstede’s score for the cultural dimension i at country j. c stands for China.
Vi refers to the variance of the index of the dimension i
Although Hofstede’s cultural dimension scores have some limitations, it is still the
4 Note that Kogut and Singh’s (1988) indices are based on Hofstede’s (1980) four cultural dimensions scores,
which include power distance, uncertainty avoidance, masculinity versus femininity and individualism versus collectivism.
CDj
best-known sociologist of cultural anthropologist in the context of applications for understanding international business now. Moreover, a large number of business studies apply his work to measure cultural distances between different nations. As Morosini et al. (1998) indicate, “Employing Hofstede’s cultural dimensions scores can avoid the issue of retrospective evaluation of national culture.” Thus, I believe that applying Hofstede’s cultural dimensions scores to measure national cultural distance is appropriate.
3.2.3 Moderating Variable
The cross-cultural management capability of the acquiring country can be treated as a moderating factor in this paper. Since it plays an essential role in moderating impacts of cultural difference on Chinese firms’ cross-border M&A performances. Firm’s international operating experience reflects this cross-cultural management capability to large extent. Thus, I employ the international experience of acquiring firms as a proxy to measure the ability of cross-cultural management. Barkerma et al. (1996) suggest that the level of international experience can be measured by two indicators: 1), the number of foreign expansions had undertaken; 2), the number of previous expansions of the firm in the same host country. Ronen and Shenkar (1985) point out that firms are expected to benefit more from previous experiences in the same country, rather than from experiences in the other countries. Thus, we believe the second indicator of international experience is a more appropriate proxy that reflects a firm’s cross-cultural management ability. In this paper, I employ the number of previous expansions of the firm in the same host country as an indicator for firms’ international experience. Additionally, I measure this indicator as the logarithm of the number of previous acquiring firms have merged or acquired in the same country. Moreover, it is constrained to be greater that -1.
3.2.4 Control Variables
has impact upon post-acquisition performance (Kitching, 1967; Kusewitt, 1985). More specifically, Kusewitt (1985) examines the relationship between long-term financial performance and acquiring firms, and finds that relative size between target and acquiring firms is significantly statistically correlated to acquisition performance. Similarly, Kitching (1967) argues that differences in size between acquiring and target firms influence acquisition performance. And this study also suggests that the larger acquisitions would have a larger combination potential, especially in the case of related acquisitions. Likewise, Ramaswamy and Waegelein (2003) argue that firms’ post-acquisition performance is negatively related to target firm’s size, and larger relative target firm’s size is, the lower post-acquisition performance will be. Therefore, controlling the relative firm size between target and acquiring firms is important to investigate in firms’ post-acquisition performance. In this paper, relative size between target and acquiring firms will be employed as a control variable. The measurement of relative size is the natural logarithms of the total assets of acquiring firms dividing the natural logarithm of total assets of target firms.
Chinese government influences a large number of firms’ cross-border M&A activities. In this paper, I employ government involvement as one of control variables. The measurement of government relatedness is as follows: if Chinese central or local governments hold over 50% shares of the acquiring firm, the government involvement accounts for score 1. In contrast, if the state-owned shares lower than 50%, the acquiring firm can be viewed as a private firm, and the government involvement will account for score 0.
Table 3: Measurements of Variables Dependent Variable Measurements Firm’s post-acquisition
performance
The percentage rate of growth in firms’ sales after two years period from the cross-border M&A completed.
Independent Variable Measurements
` Employ Kogut and Singh’s approach and use Hofstede’s four cultural dimensions scores.
Moderating Variable Measurements Firm’s cross-cultural
management capability
Logarithm of the number of previous acquiring firms have merged or acquired in the same country, and it is constrained to be greater that -1.
Control Variables Measurements
Relative size Natural logarithms of the total assets of acquiring firms divide the natural logarithm of total assets of target firms.
Industry relatedness If the target firm and acquiring firm operate in the same or related industry, the industry relatedness accounts for score 1. If they operate in a different or unrelated industry, the industry relatedness accounts for score 0. Government involvement If the state-owned shares higher than 50%, the
involvement account for score 0.
3.3 Method of Analysis
In this paper, regression analysis is employed to test hypotheses. The regression model I estimate is:
Performance =f (CD, RS, IR, GI, NS) Where:
Performance = percentage growth in sales after two years from the cross-border M&As completed
CD = Cultural distance score between the country of target firm and China RS = Control variable for relative size between the target and acquiring firms
IR = Control variable for industry relatedness between the target and acquiring firms GI = Control variable for government involvement in the acquiring firms
Chapter 4 Empirical Results
In this chapter, empirical results include 1) means, standard deviation and correlation coefficients and 2) results from regression analysis are presented.
4.1 Means, Standard Deviation and Correlation Coefficients
Table 4 displays the means, standard deviation, and correlation coefficients of the variables, which based on 102 Chinese cross-border M&As during 01/01/2005 to 31/12/2009. As we see from Table 4, Chinese firms normally experienced sales growth after two years later from cross-border M&As completed. Firms that have government background account for 59% of all samples. It reflects that the Chinese government plays an essential role in Chinese firms’ cross-border M&A activities. Table 4 also shows that the average figure of relative size between target and acquiring firms is 1.16. Moreover, the industry relatedness is 83% averagely, which indicates that Chinese firms prefer to merger or acquire the firms that come from related industry, rather than unrelated industries.
Table 4: Descriptive Statistics
Variable Mean SD SA CD GI RS IR NS SA 1,42 0,51 1,00 CD 2,44 1,64 - 0,25** 1,00 GI 0,59 0,50 0,42 0,28** 1,00 RS 1,16 0.11 0,31** 0,09 - 0,23* 1,00 IR 0,83 0,39 0,10 0,08 0,06 - 0,13 1,00 NS -0,44 0,80 0,05 - 0,63*** - 0,32** - 0,12 - 0,38* 1,00 Key:
SA = percentage growth in sales after two years later from the cross-border M&As completed CD = Cultural distance scores between the country of target firm with China
RS = Control variable for relative size between the target and acquiring firms IR = Control variable for industry relatedness between the target and acquiring firms GI = Control variable for government involvement in the acquiring firms
** Indicates significance at the 5% level P < 0.05 * Indicates significance at the 10% level p < 0.10
Table 4 also reports the preliminary indications of the data patterns. First, there is a significant and negative relationship between cultural distance and firms’ sales growth (r = -0.25). The table also reports a positive and significant correlation between relative size and firms’ sales growth (r = 0.31). However, other control variables including government involvement and industry relatedness are shown unrelated to firms’ sales growth, which contradict our predications.
4.2 Results from Regression Analysis
Table 5 exhibits four regression models that design to test the hypotheses formulated previously. The first model is used to test hypothesis 3, 4 and 5. We can see in the first model, a positive and significant (𝛽 = 0.281; p < 0.05) relation is found between relative size and firms’ cross-border M&A performance. This positive correlation rejects hypothesis 3, which expects a negative relationship between relative size and M&A performance. Further, model 1 also shows that both government involvement and industry relatedness are unrelated to firms’ sales growth, since no significant relationship is found. Therefore, hypothesis 4 (the industry relatedness between Chinese firms and their target firms has positive impact on Chinese firms cross-border M&As performance) and hypothesis 5 (the involvement of Chinese government has negative impact on Chinese firms’ cross-border M&As performance) are rejected.
Table 5: Results from Regression Analysis
Variables Model 1 Model 2 Model 3 Model 4
GI - 0,136 (-1,039) - 0,114 (-0,888) - 0,162 (-1,276) - 0,179 (-1,543) RZ 0,281** (2,166) 0,304** (2,398) 0,122 (0,900) - 0,037 (0,291) IR 0,003 (0,027) 0,017 (0,134) - 0,028 (0,220) 0,025 (0,212) CD - 0,300** (-2,435) - 0,463** (-3,401) - 0,733*** (-2,296) Moderator NS - 0.380** (-2,611) - 0,076 (-0,399) Interaction effect CD × NS - 0,757** (-3,301) Key:
SA = percentage growth in sales after two years later from the cross-border M&As completed.
CD = Cultural distance scores between the country of target firm with China. RS = Control variable for relative size between the target and acquiring firms.
IR = Control variable for industry relatedness between the target and acquiring firms.
GI = Control variable for government involvement in the acquiring firms.
NS = Moderate variable for number of previous expansion of the firm in the same host country.
*** Indicates significance at the 1% level, p < 0.01. ** Indicates significance at the 5% level P < 0.05. * Indicates significance at the 10% level p < 0.10. Note: Figures reported in brackets are the t-statistics.
cultural difference and M&A performance are negatively and significantly connected (𝛽 = -0.463; p < 0.05). The results from model 3 support the hypothesis 2, which expect that Chinese firms’ cross-cultural management increase the negative effect of cultural difference on firms’ cross-border M&A performances.
Chapter 5 Discussion
Chapter 4 reports the results in this paper and tests the hypotheses. This chapter gives detailed explanations of results.
5.1 Discussion of Main Hypotheses
The main research question of this paper is “What is the effect of cultural difference on Chinese firms’ cross-border M&A performance, negative or positive? After considering the moderating role of cross-cultural management.” In order to answer this question, we developed two main hypotheses to investigate the relationship between cultural difference and Chinese firms’ cross-border M&A performance. The results of regression analysis suggest that cultural difference matters to Chinese firms’ cross-border M&A performance. The results also show that cultural difference has negative and significant impacts on Chinese firms’ cross-border M&As outcomes. Since we expect a negative relationship between cultural difference and M&A performance, thus the hypothesis 1 has been accepted. Our results are consistent with the findings of Cartwright and Cooper (1993), Chatterjee et al. (1992), Weber (1996) and Weber et al’s. (1996), while contradict findings of Morosini et al. (1998)5.
There are several reasons to explain why cultural difference has negative effects on Chinese firms’ cross-border M&A performance. First, cultural difference causes conflicts between two organizations. Those conflicts hinder synergy realizations, and lead to original financial expectations unachieved (Cartwright and Cooper, 1993). Second, cultural difference lower trust of employees between target and acquiring firms, which have negative effects on M&As performance (Levicki and Bunker, 1995; Sitkin and Roth, 1993). Third, considering the unique Chinese context, managers lack of cross-cultural management capability may increase cultural conflicts between
5 Morosini et al. (1998) suggest that greater cultural difference between target and acquiring firms brings more
Chinese firms and host country.
Hypothesis 2, which predicts that Chinese firms’ cross-cultural management increases the negative effect of cultural difference on firms’ cross-border M&A performances, has been accepted. Some reasons can be used to explain this result. First, Su et al. (2008) argue that government involvement generates goal incongruence between majority owner of firm (the Chinese government) and the minority shareholders. Such conflicts will lead to poor corporate governance. Thus, Chinese firms’ cross-cultural management does not make use of the potential benefits bring from cultural difference. The second explanation is that firms’ diversification decreases the quality of cross-cultural management. Operating business diversified increases difficulty of management. It makes acquiring firm concentrate less on the process of integration with target firm. Thus, firms’ diversification may decrease the quality of cross-cultural management. Furthermore, Harries et al. (1982) argue that firms’ diversified operating generates information asymmetry between headquarters and divisional managers. Obviously, the information asymmetry between target and acquiring firms has negative effects on firms’ performance. Therefore, in Chinese unique context, firms’ cross-cultural management increases the negative relationship between cultural difference and cross-border M&A performance.
5.2 Discussion of Secondary Hypotheses
industry relatedness and government involvement on Chinese firms’ cross-border M&A performance.
Based on results of this paper, hypothesis 3, which predicts the relative size between Chinese firms and their target firms has negative impact on Chinese firms’ cross-border M&A performances, has been rejected. The results show that relative size has positive effects on Chinese firms’ cross-border M&A performance, which means the larger relative size between target and acquiring firms, the better performance that cross-border M&A would achieve. There are several explanations for this result. First, the complexity of integrating large corporations may make expected synergies from the combination unit more uncertain, thus lower the M&A performance. Second, large deals are probably difficult to be successful, because the complexity may raise some integration problems, and the huge costs may increase risk of financial distress for acquiring firms. On the other hand, small target firms are normally less complex and less expensive, which are easier for merging.
Hypothesis 4, which predicts the industry relatedness between Chinese firms and their target firms has positive impact on Chinese firms cross-border M&As performance, has been rejected. The results indicate that industry relatedness shows no significant effects on Chinese firms’ post-M&A performance. We suppose it is mainly because the high rate of industry relatedness in our samples. 83% of our samples are come from same or similar industry, thus the effect of industry relatedness is difficult to be found in the analysis.
Chapter 6 Conclusions and Limitations
Globalization makes global economy closely linking together. Increasing number of Chinese firms take cross-border M&As to expand business internationally. Although cross-border M&As provides numerous benefits to acquiring firms, the failure rate remains high. It is reported that more than 50% of M&As do not achieve their initial expectations. Therefore, to find out the determinants of Chinese firm’s cross-border M&As performance is meaningful.
Cultural difference between China and target countries is regarded as an essential factor that impact upon Chinese firms’ overseas M&As. In this paper, I examine the relationship between cultural difference and Chinese firms’ cross-border M&As performance, and introduce a moderator (firms’ cross-cultural management capabilities) to further capture this interconnection. I also explore the relationships between M&A performance and other determinants, such as relative size, industry relatedness and government involvement.
The results show that cultural difference and cross-border M&A performance are negatively related, and this negative effect become larger after combining the impact of cross-cultural management. This is probably because Chinese managers lack of cross-cultural management capability, they do not make use of potential benefits brings from cultural difference, but increases conflicts between target firm and acquiring firm. We also find a positive relationship between relative size and M&A performance, since small firms are less complex and less likely to raise integration problems within the combination. However, we do not find relationship between M&A performance and industry relatedness as well as government involvement, which is mainly due to some measurement limitations.
study may generate biases of results and cannot be generalized to the broader community based on this study.
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