MASTER THESIS
DIFFERENCES IN THE ACQUISITION BEHAVIOR BETWEEN STATE-OWNED ENTERPRISES AND BUSINESS GROUP AFFILIATED FIRMS:
EMPIRICAL EVIDENCE FROM INDIA
Armin Barvar S3066673 21.06.2017
MSc IB&M
Faculty of Economics and Business University of Groningen
Supervisor: Dr. S.R. Gubbi 2nd Supervisor: Dr. M. Astarlioglu
2 Abstract
Cross-border acquisitions by firms from emerging economies have risen strongly in the past years and have targeted both developing and developed economies. While the acquisition behavior of Western multinational enterprises has been extensively investigated by prior research, it is yet unclear to which extent different ownership types influence the acquisition behavior of such firms. This study investigates differences between state-owned enterprises and business group affiliated firms in cross-border acquisitions. Using cross-tabulation and Pearson Chi-squared tests on a sample of 338 cross-border acquisitions by Indian firms over the period 2000 to 2010, several differences were methodologically acknowledged. The results indicate that state-owned enterprises are more likely to have market-seeking motives in cross-border acquisitions, and are primarily targeting developing economies similar to their home-market. In contrast, business group affiliated firms are more likely to have strategic asset-seeking motives, mainly targeting advanced economies due to the availability of advanced resources.
3 Table of Content
Abstract ... 2
1. Introduction ... 4
2. Theory and Hypotheses ... 7
2.1 General Foreign Direct Investment Theory ... 7
2.2 Outward FDI from Emerging Market Firms ... 9
2.4 Ownership Types in Emerging Economies ... 12
3. Methodology ... 19
3.1 Empirical Context: India ... 19
3.2 Data Source and Sample ... 21
3.3 Dependent Variable ... 21 3.4 Independent Variable ... 22 3.5 Measures ... 24 4. Results ... 24 4.1 Descriptive Statistics ... 24 4.2 Hypothesis Testing ... 26
5. Discussion and Conclusion ... 31
5.1 Implications ... 34
5.2 Limitations and Future Research Avenues ... 34
References ... 36
4 1. Introduction
In the last years, rapidly globalizing firms from emerging economies have attracted significant attention (Khanna & Palepu, 2002; Elango & Pattnick, 2007). As the number as well as the influence and importance of these Emerging Multinational Corporations (EMNCs) has risen, the understanding of their international strategies has become a major focus in international business research in the recent years (Gupta, Govindarajan & Wang, 2008). Outward foreign direct investments (FDIs) by EMNCs increased from $91 billion in 2000 to $400 billion in 2015. This immense expansion can also be seen in the proportion of EMNCs in global FDI flows, which increased from 7,82% to 27,16% in the same period of time (UNCTAD, 2016). The increased relevance and importance of foreign investments by EMNCs is further reflected by the growing momentum of research conducted in this field (Mathews, 2006; Luo & Zhang, 2016).
5 strategies, and risk tolerances for EMNCs during the internationalization process, compared to traditional MNEs (Wright, Filatotchev, Hoskisson & Peng, 2005; Kedia, Gaffney & Clampit, 2012). Hence, EMNCs may have different intentions to engage in FDIs than MNEs.
When investigating FDI motives, it is important to consider the ownership structure of firms because it can affect the acquisition behavior. In emerging economies, the two most important ownership types are state-owned enterprises (SOEs) and business group (BG) affiliated firms. Due to the distinct firm natures and characteristics, both firm types may have different motivations to engage in acquisitions abroad.
6 makes BG affiliation a strongly influencing factor on the FDI behavior of EMNCs (Chari, 2013).
Because of the substantial differences in the nature and the characteristics of SOEs and BG affiliated firms, it is likely that the acquisition behavior will be distinct. While there has already been extensive prior research about FDI motives of MNEs, surprisingly little is known so far about the distinct differences between SOEs and BG affiliated firms. It is important to understand such distinctions to enhance our knowledge about acquisitions of EMNCs. Because of that, the aim of this study is to identify what motives drive SOEs and BG affiliated firms from emerging economies to engage in CBAs and which target countries are preferred depending on the motive. Therefore, the resulting research question of this study is: What are
the differences in the acquisition behavior between SOEs and BG affiliated firms from emerging economies?
Using a sample of 338 CBAs by Indian firms from the manufacturing sector over the period 2000 to 2010, the research question of this study was investigated by testing several hypotheses on acquisitions. This study employed cross-tabulation and Pearson Chi-squared tests based on the categorical structure of the data. It was methodologically acknowledged that SOEs are more likely to have market-seeking motives in CBAs, primarily targeting developing economies similar to their home-market. In contrast, BG affiliated firms are more likely to have strategic asset-seeking motives, mainly targeting advanced economies.
7 SOE, which makes India the adequate research setting for the purpose of this study (Khanna & Palepu, 1997; Choudhury & Khanna, 2014).
The findings advance our knowledge about the acquisition behavior of the two dominant ownership types of emerging market firms. As the global expansion and the internationalization process of such firms is continuously progressing, the findings contribute to our understanding of the underlying motives and targets. Furthermore, this study points out the differences between both firm types. By investigating the influence of ownership types on the acquisition motives as well as the association between motives and target countries of EMNCs, this study contributes to the growing momentum of research on emerging markets.
This paper is structured as follows: First, the general FDI theory will be outlined to provide the theoretical concepts used in this study. Then, the special characteristics of emerging markets will be discussed regarding the distinct acquisition behavior of both ownership types. The relevant literature in this field will be described and hypotheses developed. After that, the sources for the sample as well as the data collection process will be pointed out. In the following part, cross-tabulation and Pearson Chi-squared tests based on the categorical structure of the data will be employed. In section five, the results will be discussed in more detail. This study will conclude by outlining implications of the results and by mentioning limitations as well as avenues for future research.
2. Theory and Hypotheses
2.1 General Foreign Direct Investment Theory
8 should possess an internally transferable ownership advantage in case they want to pursue international diversification strategies. According to these theories, the possession of such valuable resources and capabilities can generate competitive advantage over local firms in the host-market. Furthermore, it can also offset the costs of operating abroad (Hymer, 1976; Buckley & Casson, 1976; Dunning, 1988).
Dunning (1988) proposed that these ownership (O) advantages combined with location (L) and internalization (I) advantages determine the multinationality as well as the FDI intensity of firms (OLI). Ownership advantages, also known as firm-specific advantages, are property rights and intangible asset advantages, such as for example new product and process technologies and strong brand names (Dunning & Lundan, 2008). Location advantages, also known as country-specific advantages, consist of a country´s endowment of natural resources, labor, and pool of customers, as well as less tangible advantages such as investment incentives and disincentives, tariff and nontariff barriers, and institutions (Dunning & Lundan, 2008). Internalization advantages describe that MNEs need to be more efficient in exploiting their firm-specific advantages in a host-country through own operations, rather than renting it out to local firms (Dunning & Lundan, 2008).
According to Dunning (1988), there are four primary motives for MNEs to engage in FDIs. It is important to distinguish the distinctive intents, because contrasting motives for FDIs reflect different strategic orientations and fulfill diverse competitive and growth objectives (Cui et al., 2014). The four main motives are (1) natural resource-seeking, (2) market-seeking, (3) efficiency-seeking and (4) strategic asset-seeking.
9 capita income and market growth are often in the focus. The third, (3) efficiency-seeking is often followed market-seeking, because efficiency is gained through global synergy by integrating operations in multiple foreign markets (Dunning & Lundan, 2008). Broadly speaking, the first three types natural resource-seeking, market-seeking, and efficiency-seeking contribute to the global competitiveness of firms from emerging economies, however they are not sufficient to catch up with global leaders who are in possession of superior strategic assets (Cui et al., 2014). The fourth type (4) strategic asset-seeking is distinct from the other types, because it aims to transform the core competency and competitive position of the acquiring firm (Makino, Lau & Yeh, 2002; Dunning & Lundan, 2008; Cui et al., 2014). This type of FDI usually involves the acquisition of knowledge-based resources outside of the firm’s boundaries, such as technology, brands, and managerial know-how (Cui et al., 2014). In addition to that, by integrating and exploiting acquired strategic assets to create firm-specific advantages, the process enables companies to experimental learning (Zahra, Nielsen & Bogner, 1999). Furthermore, the intention of strategic asset-seeking is to renew firms core-competences and markets by enabling radical improvements to its current knowledge base and competitive position (Cui et al., 2014). Those FDIs often form the foundation for a competitive catch-up strategy, by aggressive and long-term oriented competitive actions (Luo & Tung, 2007).
2.2 Outward FDI from Emerging Market Firms
10 shortage of resources, and inadequate infrastructures (Buckley et al., 2007; Sheth, 2011; Ghauri, Hadjikhani & Elg, 2012).
This may cause different motivations, strategies, and risk tolerances for EMNCs during the internationalization process, compared to traditional MNEs (Wright et al., 2005; Kedia et al., 2012). EMNCs rely on home-country specific advantages (e.g. low labor cost, capital, or government policy) while engaging in FDIs. Traditional MNEs rely more on firm-specific advantages, such as assets that lead to competitive advantages. The home-country specific advantages, which are generally not available for MNEs, enable EMNCs to withstand the international competition (Rugman, 2009).
However, existing FDI theories such as the OLI framework (Dunning, 1988) contain enough elements to explain the internationalization of a majority of emerging market firms. Nevertheless, it is essential to modify and strengthen the OLI paradigm so that it can explain unique aspects of emerging market firms internationalization (Dunning, 2006; Luo & Tung, 2007). Dunning & Lundan (2008) acknowledged the importance of institutions as a driver of FDI in host-countries. Because of that, the OLI framework was expanded by an additional institutional dimension. By drawing upon North’s (1990) contribution on institutions, the authors attempted to advance the understanding of MNEs nowadays, from which many come from emerging markets.
11 theoretical model of this study. Natural resource-seeking CBAs may be used by EMNCs to secure a steady flow of raw materials (e.g. oil, minerals, etc.) and energy sources which are harder to find in the home-market (Buckley et al., 2007). Securing natural resources necessary for the production is equally important for both SOEs and BG affiliated firms. Because this type of CBA motivation plays the same role for both types of EMNC ownership, natural resource-seeking CBAs will be excluded as well from this study. Hence, the focus will be on the remaining two types of CBAs motivations, market-seeking and strategic asset-seeking.
12 overhead costs and improves efficiency of operations (Gubbi, 2015). Due to their home-market experience in operating in emerging markets, EMNC are in a better position to leverage the cross-market resource asymmetries between the developing and the developed countries (Madhok & Keyhani, 2012).
Strategic asset-seeking CBAs are also relevant in the context of emerging markets. Previous studies have shown, that economic and institutional advancement of a market is strongly related with the availability of superior resources and capabilities. Because of that, EMNCs enter advanced country markets in search of knowledge-based assets that are hard to find in the home-market (Gubbi, Aulakh, Ray, Sarkar & Chittoor, 2010). Furthermore, EMNCs use CBAs as a springboard to acquire strategic-assets necessary for the successful competition with global rivals. This behavior is often characterized by proactively acquiring or buying assets from traditional MNEs. In this way, EMNC want to overcome their latecomer disadvantage in the global stage and compensate their competitive weakness. Acquiring assets in developed markets, enables firms to overcome their shortage of important strategic assets in a relatively short period of time (Luo & Tung, 2007). Because of that, strategic asset-seeking CBAs of firms from emerging economies reflect strategic objectives to transform the own core-competences to catch-up and globally compete with market leaders in the long run (Cui et al., 2014). Due to the importance and relevance of market-seeking and strategic asset-seeking acquisition motives in the context of emerging markets, only these two types will be taken into account.
2.4 Ownership Types in Emerging Economies
13 of SOEs (Cui & Jiang, 2012) both types are taken into account. SOEs which are assets of home-country governments used to pursue national economic and/or political goals play an important role in emerging markets (Cui & Jiang, 2012). Firms affiliated to BGs are especially prevalent in the context of emerging economies (Chang & Hong, 2000). BGs are a collection of legally independent firms, where all members are linked by multiple ties such as ownership (i.e. interlocking directors), economic means (i.e. inter-firm transactions), and social relations (i.e. family) through which they jointly agree upon mutual goals (Leff, 1978; Granovetter, 1995; Khanna & Rivkin, 2001; Yiu, Bruton & Lu, 2005; Yiu et al., 2007).
In order to investigate distinct acquisition motivations of EMNCs, it is important to know the differences between these two ownership types. In the following, the two predominant ownership types will be compared in more detail.
State-owned Enterprises in Emerging Economies
Although SOEs may differ from country to country, some of the characteristics are generally equal. SOEs are 100 percent owned by central and/or local governments and run by government appointed officials (OECD, 2009). In the context of emerging economies, governments make use of SOEs to pursue economic and/or political goals. Political goals are mainly of social nature, e.g. to reduce unemployment rate and increase social welfare (Cui & Jiang, 2012).
14 governments (Luo et al., 2010). The support of the home-country government differentiates SOEs from other firms in their FDI strategy (Cui & Jiang, 2012). Managers of SOEs may factor in further governmental support in case of unexpected adverse circumstances while making strategic choices. This leads to a different risk perception of SOEs while engaging in FDIs compared to firms in private ownership (Buckley et al., 2007).
However, when investing overseas this affiliation can evoke a perception of the host-country as political actors but not as a usual business entity (Globerman & Shapiro, 2009). Because of that, SOEs may face challenges concerning institutional processes in host-countries, when investing abroad (Peng, Wang & Jiang, 2008). Furthermore, governments can introduce complicated administrative procedures with the intention to control the strategies and activities of SOEs. Those government interventions may cause inefficiencies and less freedom of choice (Huang et al., 2017). This may even lead to an exertion of regulatory restrictions on investments by SOEs to direct outward FDI in line with national interests (Luo et al., 2010).
15 The distinct characteristics of SOEs influence the acquisition decisions made by such firms. By operating abroad, SOEs can reap the fruits of international expansion as a legitimate business while at the same time completing mandates assigned by their respective home-country government (Luo & Tung, 2007; Morck, et al., 2008; Cui & Jiang, 2012). SOEs, such as e.g. India´s Bharat Heavy Electrical Ltd., are likely to successfully leverage their competitive strengths within their area of expertise abroad. Therefore, the focus is often on only a few foreign markets with appropriate environments (Luo & Tung, 2007; Gubbi, 2015). As mentioned earlier, SOEs highly benefit from the linkages with the government to secure preferential access to financial capital and domestic R&D resources, such as e.g. universities and research laboratories (Cui et al., 2014). Therefore, SOEs have less urgency to seek strategic assets abroad. Hence, SOEs are more likely to pursue market-seeking motives when acquiring assets abroad (Luo et al., 2010; Chen, Sun, Tang & Wu, 2011). Emerging market governments are promoting outward investments of SOEs by policy reforms. Because of a more and more intensive foreign competition in their home-market, EMNCs are looking to expand in overseas to enhance their global competitiveness. Such market-seeking investments will grow in importance as EMNCs home-markets are becoming more and more competitive (Hattari & Rajan, 2010). Due to the governmental promotion of such outward investments, it is likely to SOEs also follow this strategy. Accordingly, the following hypothesis was formulated:
Hypothesis 1: In cross-border acquisitions, SOEs are more likely to have market-seeking motives than strategic-asset seeking motives.
16 because they are familiar with such markets due to their own home-market experience and their familiarity with those institutional environments (Meyer et al., 2009). By exploiting the revenue productivity of their scaled-down technology and capital goods adapted to developing country situations, developing economies are of great importance (Kumar, 1996). EMNCs can exploit their ownership advantages of such experiences and their ability to service unique market segments, such as low cost and affordable products (Cuervo-Cazurra & Genc, 2008; Guillén & García-Canal, 2009). By engaging market-seeking CBAs, EMNCs seek to gain access to such niche market segments. Therefore, SOEs are in general better equipped to enhance their market reach on similar markets, i.e. developing economies (Gubbi, 2015). Furthermore, emerging economies offer many opportunities and hence a huge profit potential which encourages SOEs to further expand in such markets (Luo & Tung, 2007). Therefore, the following hypothesis was formulated:
Hypothesis 2: In market-seeking cross-border acquisitions, SOEs are more likely to target developing economies.
Business Groups in Emerging Economies
17 better than stand-alone firms (Chang & Hong, 2000; Khanna & Rivkin, 2001; Chacar & Vissa, 2005; Douma, George & Kabir, 2006; Carney, Gedajlovic, Heugens, Van Essen & Van Oosterhout, 2011). In fact, most EMNCs that have successfully internationalized in the recent years are BG affiliates (UNCTAD, 2010).
Because of the typically weak institutional environment in emerging economies, BGs emerged to support their affiliates to overcome this lack. By granting access to resources and capabilities of the collective, firms can operate more efficiently (Khanna & Palepu, 1997). Due to the lack of strong institutions in most emerging economies, efficient market-based exchanges are hindered. Furthermore, the weak institutional environment also leads to higher risks due to the higher degree of uncertainty in terms of the economic and political system. BGs fill this gap by enabling member firms to conduct business in an adequate way (Gaur, Kumar & Singh, 2014).
18 (Mahmood, Zhu & Zajac, 2011). BGs provide affiliated firms a spectrum of internal resources which they can exploit for their own purposes. Possible advantages are reduced transaction costs by sharing of information, inputs, skills, technologies, etc. for mutual advantages (Chang & Hong 2000; Chang et al., 2006). In an environment of weak capital institutions, internal group capital can support and encourage affiliated firms to engage in FDIs (Khanna & Palepu, 2000). Capital available within BGs can therefore be one of the most important antecedents of FDI by affiliated firms.
The value-creating potential of BG strongly depends on the ability to acquire important resources to generate necessary capabilities. Therefore, it is crucially important for BGs to be able to develop strengths in market-based capabilities, to sustain competitiveness in new environments (Yiu et al., 2005). Amit & Schoemaker (1993) define strategic assets as firm-specific resources and capabilities which are specialized and difficult to trade and imitate, scarce and appropriable. According to the resource-based view (RBV), resources need to be valuable, rare, imperfectly imitable and imperfectly substitutable. Those strategic assets can then lead to a competitive advantage, because competitors lack these resources (Barney, 1991). Assets necessary to achieve competitive advantages may however not only be gained within the domestic market. Due to the not fully developed markets in emerging economies, foreign acquisitions are necessary to acquire unique capabilities and resources within the BG (Yiu et al., 2005). Therefore, it is likely that BGs engage in CBAs to acquire technology-based resources and skills in advanced countries that are either superior or not available in the domestic market. By transferring such strategic asset within the BG, firms help other affiliates to develop capabilities which are important in the competition with both international and domestic competitors (Yiu et al., 2005). Therefore, the following hypothesis was formulated:
19 Strategic asset-seeking FDIs pursue long term strategic objectives, especially to sustain or advance the global competitiveness. Targets in host-countries are unique, intangible and organizationally embedded assets, such as advanced technology, brand assets, and managerial know-how (Cui et al., 2014). Due to the limited availability of such advanced strategic assets in their home-market, EMNCs need to seek for them abroad. Most advanced assets tend to be concentrated in advanced economies, because economic and institutional advancement of a market is strongly related with the availability of superior resources and capabilities. Therefore, EMNCs enter advanced economies in search of knowledge-based assets that are hard to find in the home-market (Makino et al., 2002; Gubbi et al., 2010). When BG affiliated firms engage in strategic asset-seeking CBAs, it is likely that the intent is to acquire resources which are not yet available in the portfolio of their respective BG (Yiu et al., 2005). Resources available in the home-market of BGs are likely to be already integrated and available for affiliated firms. Most strategic resources still required for BGs are likely to be concentrated in advanced economies, therefore the following hypothesis was derived:
Hypothesis 4: In strategic asset-seeking cross-border acquisitions, BG affiliated firms are more likely to target advanced economies.
3. Methodology
3.1 Empirical Context: India
20 India recorded the highest number of CBAs amongst all the emerging economies in the first decade of the century. As the second largest emerging economy after China, India provides an appropriate setting for studying outward FDI by way of acquisitions. In addition to that, only few countries have an economy which allows direct competition between SOEs and firms in private ownership on a large scale (Ramaswamy, 2001). India´s business environment has always been characterized by the existence of BGs, which play a major role within the economy and dominate most industries (Khanna & Palepu, 1997; Pattnaik, Chang & Shin, 2013). Furthermore, SOEs continue to play a significant role after the liberalization in the Indian economy and are highly successful (Shleifer & Vishny, 1997; Puffer & McCarthy, 2003; Chakrabarti, Megginson & Yadav, 2008). This study will consider Indian firms from the manufacturing sector, because this sector enjoys cheap and skilled labor force which leads to competitive prices for goods produced (Lakshmanan, Chinngaihlian & Rajesh, 2007). For these reasons, CBAs by Indian SOEs and BG affiliated firms from the manufacturing sector provide a perfect context to test the hypotheses that have been formulated.
Figure 1: Outward FDI and cross-border deals by Indian firms between 2000 - 2010. (Source: UNCTAD) -5 000,0 10 000,0 15 000,0 20 000,0 25 000,0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 B y va lue ($ m il li on)
21 3.2 Data Source and Sample
Because of scarce information available about CBAs prior to 2000, the starting point of the period for this study was set to January 1, 2000. All “completed” CBAs by publicly traded and incorporated firms in India affiliated to BGs and in state-ownership operating in the manufacturing sector over the period starting January 2000 and ending on December 2010 were scrutinized. Because the focus of this study will be on indigenous firms, FDIs engaged by the subsidiaries of foreign parents will be excluded. Data required for the analysis were collected via two databases, ORBIS (Zephyr) and Prowess. The ORBIS database, which is maintained by the BureauVan Dijk, complies financial data on most listed companies worldwide. The Prowess database, maintained by the Center for Monitoring of Indian economy (CMIE), contains relevant information about the Indian economy and firms operating in India. By combining these two set, data could be gathered to fulfill the requirements of this study. As additional source of data, the announcements on Bombay Stock Exchange were used to collect information about the motivations for CBAs. These announcements were used as a proxy for quantifying the acquisition motive, market-seeking or strategic asset-seeking. Company annual reports were used as a supporting source of information, to verify provided information and possibly add any missing data, if available. The final sample consisted of 338 CBAs by Indian SOEs and BG affiliated firms.
3.3 Dependent Variable
22 variables. For the second set relating to the target countries, the classifications developing and advanced were used as dependent variables.
3.4 Independent Variable
For both sets of hypotheses, the ownership status of the firms, i.e. state-owned and BG affiliated, is used as the independent variable. To develop the measures, detailed announcements released by the principal actors soon after the acquisition was announced were systematically analyzed. Such information is published via corporate announcements on the respective stock exchanges, media releases, interviews by the top management of the focal company, and company annual reports. The textual information will be manually analyzed and coded according to the following procedure. In order to glean vital information contained in textual material, the technique of content analysis was applied. According to Morris (1994), “content analysis is a research technique used to objectively and systematically make inferences about the intentions, attitudes, and values of individuals by identifying specified characteristics in textual messages” (p. 903). The text was coded for the presence or absence of a particular motivation stated in the media releases. The source for this information was the direct announcement made on the BSE by the focal firm. In some cases where no rationale was provided, other media reports immediately following the acquisition announcement were highlighted. The reliability of the defined motives is ensured through the independent classification from two additional coders. Each of the independent coders classified 20 percent of the sample. After that, a comparison of the three independent analyses was made to establish a common understanding of the motives market-seeking and strategic asset-seeking. In the next step, disagreements about motives were discussed to attain a greater clarity of the categories and a joint understanding. The coding procedure was as follows.
23 acquisition will’, ‘we believe’, ‘is being acquired mainly to’, ‘this acquisition is aimed at’, and so on. After that, it will be specifically looked for phrases signaling market. The corresponding variable, market-seeking, was assigned a value of ‘1’ if the analyzed text explicitly mentioned terms such as ‘new’, ‘additional’, ‘enhance’, ‘improve’, ‘expand’ in terms of overall market size. Otherwise, the variable was assigned a value of ‘0’.
24 3.5 Measures
In this study, traditional measures will be used for all variables. According to the classification of the International Monetary Fund, 39 economies will be classified as advanced economies. A complete list of the countries can be found in Appendix A. Therefore, investments in these countries are classified as foreign investments in advanced countries. Foreign investments elsewhere will be classified as foreign investments in developing countries (IMF, 2016). According to the Centre for Monitoring Indian Economy (CMIE), Indian firms are classified as members of BGs or as independent firms, i.e. not affiliated to BG (Chari, 2013). Firms can only be member of one BG. The CMIE classification has been independently verified and extensively used in prior research (Khanna & Palepu, 2000; Chari, 2013).
4. Results
4.1 Descriptive Statistics
25 In terms of the ownership status of the acquiring firms, the findings showed that out of 338 CBAs by Indian firms, 311 were engaged by BGs affiliated firms and 27 by SOEs. These results clearly suggest that the proportion of acquisitions made by BG affiliated firms was higher in the sample firms as compared to SOEs.
Table 1 provides details about the country class of the targeted economies. The data was analyzed to investigate the country class. The findings show that in a sample of 338 CBAs, 222 (65%) CBAs were conducted in advanced economies as compared to 116 (34%) that were operated in developing economies. These findings suggest that CBAs made by Indian firms in the sample are mainly aimed at advanced economies.
Table 1: Country Class of the Targeted Economies
Class Frequency Percent Cumulative Percent
Developing 116 34.3 34.3
Advanced 222 65.7 100.0
Total 338 100.0
In terms of the motives for CBAs, the findings suggest that there was almost equal consideration of strategic assets-seeking and market-seeking motives. In the sample of 338 CBAs, 50.3 percent were identified as market-seeking and 49.7 percent as strategic asset-seeking. These results clearly indicate that there was almost equal consideration of both strategic asset seeking and market seeking CBAs motives among the sample firms. Table 2 presents the frequency distribution of CBAs motives for SOE and BG affiliated firms.
Table 2: CBA Motives of the Firms
Motives Frequency Percent Cumulative Percent
Strategic asset-seeking 168 49.7 49.7
Market-seeking 170 50.3 100.0
26 4.2 Hypothesis Testing
In order to find the differences in the CBA behavior between SOEs and BG affiliated firms from emerging economies, two sets of hypotheses were developed. The first set of hypotheses (H1 & H3) relates to the underlying CBA motives of SOEs and BG affiliated firms. The second set of hypotheses (H2 & H4) relates to the targeted economies in market-seeking CBAs by SOEs and strategic asset-seeking CBAs by BG affiliated firms. To test the hypotheses in relation to the acquisition motives, the data obtained from 338 CBAs was analyzed using cross-tabulation with Pearson Chi-squared statistics to investigate the association between ownership of the firms and CBA motives, i.e. strategic asset-seeking and market-seeking. The Pearson Chi-squared test is viable for identifying associations among two or more variables with categorical values (Huizingh, 2007). Because both independent and dependent variables are categorical variables, the non-parametric Chi-squared test is appropriate for the data of this study. By applying the Chi-squared test, the assumptions of the data are not violated. It is used to identify the relationship among two categorical variables. Results obtained from cross-tabulation between ownership status of firms and CBA motives are shown in Tables 3 and 4.
27 results for the association between SOEs and market-seeking motives. The findings show that the Chi-square value is [χ2 (1, N = 338) = 8.865], with p < 0.05. A significance value of p less than .05 indicates highly significant association between the ownership status of SOE and market-seeking motives at 5 percent level of significance.
Hypothesis 3 proposed that in CBAs, BG affiliated firms are more likely to have strategic asset-seeking motives than market-seeking motives. Results from the cross-tabulation of BG affiliated firms and strategic asset-seeking motives are provided in Table 3. The findings show that out of 311 CBAs made by BG affiliated firms, 162 show strategic asset-seeking motives as compared to 149 with market-seeking motives. In terms of percentages, the findings suggest that 47.9 percent of the BG affiliated firms have market seeking motives and 52.1 percent have strategic asset-seeking motives. These results indicate that slightly more CBAs by BG affiliated firms are driven by strategic asset-seeking motives, and therefore provide support for Hypothesis 3. The results are shown statistically significant by using Chi-squared statistics. Table 4 presents the results for the CBA motives in relation to ownership status. The findings reveal that the Chi-square value is [χ2 (1, N = 338) =8.865], with p < 0.05. A significance value of p less than .05 indicates highly significant association between BG affiliated firms and strategic asset-seeking CBA motives at 5 percent level of significance.
28 Table 3: Ownership Status and CBA Motive Cross-Tabulation
CBA Motive Total Strategic asset-seeking Market-seeking Status BG affiliated Count 162 149 311 % within Status 52.1% 47.9% 100.0% SOE Count 6 21 27 % within Status 22.2% 77.8% 100.0% Total Count 168 170 338 % within Status 49.7% 50.3% 100.0%
Table 4: Chi-Squared Tests for Ownership Status and CBA Motive Value df Asymp. Sig.
(2-sided) Exact Sig. (2-sided) Exact Sig. (1-sided) Pearson Chi-Square 8.865a 1 .003 Continuity Correctionb 7.711 1 .005 Likelihood Ratio 9.358 1 .002
Fisher's Exact Test .004 .002
Linear-by-Linear
Association 8.839 1 .003
N of Valid Cases 338
a. 0 cells (0.0%) have expected count less than 5. The minimum expected count is 13.42. b. Computed only for a 2x2 table
29 Hypothesis 2 proposed that in market-seeking CBAs, SOEs are more likely to target developing economies. Results from cross-tabulation of ownership status and target country are shown in Table 5. Overall, out of the 27 CBAs by SOEs in the sample, 25 were targeted at developing economies and 2 targeted advanced economies. In percentages, 92.6 percent were targeting developing economies as compared to 7.4 percent that targeted advanced economies. As shown in Table 3, 21 CBAs of SOEs were driven by market-seeking motives. Table 6 shows, that these 21 CBAs were targeting developing countries. The findings indicate, that SOEs are more likely to target developing countries in market-seeking CBAs. These findings provide support for Hypothesis 2. The results of Chi-squared analysis as shown in Table 7 also indicate that there is a significant association between market-seeking acquisition motives, SOE ownership status and developing economies targeted in CBAs. The findings reveal that the Chi-square value is [χ2 (1, N = 21) = 20.314], with p < 0.001. A significance value of p less than .001 indicates highly significant association between market-seeking motive, ownership status of SOE firms and targeting developing economies in CBA at 1 percent level of significance.
30 affiliated ownership status and advanced economy targeted in CBAs. The findings revealed that Chi-squared statistics value is [χ2 (1, N = 162) = 13.942], with p < 0.001. A significance value of p less than .001 indicates highly significant association between CBA motives of strategic asset-seeking, ownership statuses of BG affiliated firms and advanced economy targeted in acquisitions at 1 percent level of significance.
Table 5: Ownership Status and Country Class Cross-tabulation Country class Total Developing Advanced Status BG affiliated Count 91 220 311 % within Status 29.3% 70.7% 100.0% SOE Count 25 2 27 % within Status 92.6% 7.4% 100.0% Total Count 116 222 338 % within Status 34.3% 65.7% 100.0% Table 6: Cross-tabulation for CBA Motives, Ownership Status and Country Class
Status * Country Class Cross-tabulation
CBA Motive Country class Total
Developing Advanced Strategic asset-seeking Status BG affiliated Count 20 142 162 % within Status 12.3% 87.7% 100.0% State-owned Count 4 2 6 % within Status 66.7% 33.3% 100.0% Total Count 24 144 168 % within Status 14.3% 85.7% 100.0% Market-seeking Status
BG affiliated % within Count 71 78 149
31 Table 7: Chi-Squared Tests for CBA Motives, Ownership Status and Country Class
Chi-Squared Tests
CBA Motive Value df Asymp.
Sig. (2-sided) Exact Sig. (2-sided) Exact Sig. (1-sided) Strategic asset-seeking Pearson Chi-Square 13.942a 1 .000 Continuity Correctionb 9.859 1 .002 Likelihood Ratio 9.064 1 .003
Fisher's Exact Test .004 .004
Linear-by-Linear Association 13.859 1 .000 N of Valid Cases 168 Market-seeking Pearson Chi-Square 20.314c 1 .000 Continuity Correctionb 18.260 1 .000 Likelihood Ratio 28.287 1 .000
Fisher's Exact Test .000 .000
Linear-by-Linear
Association 20.194 1 .000
N of Valid Cases 170
a. 1 cells (25.0%) have expected count less than 5. The minimum expected count is .86. b. Computed only for a 2x2 table
c. 0 cells (0.0%) have expected count less than 5. The minimum expected count is 9.64.
In order to test for the robustness of the findings, the Levenes test of variance was applied. The results for the first set of hypotheses relating to the acquisition motives show, that the value of Levene F is 124.717 and the Sig value is 0.000. This proposes that the suggestion about equal variance of the data does not violate any assumptions. For the second set of hypotheses relating to preferred country types, the Levene F value is 51.497 and the Sig value is 0.000 suggesting that the data does not violate any assumptions.
5. Discussion and Conclusion
33 respective BG. These complementary resources can then be exploited by all member firms for mutual benefits. Results of this study reflect the demand of important assets which are not available in their home-market. Such advanced resources are crucial for the further development of all BG member firms. Furthermore, the increasing competition intensity in their home-markets makes such resources additionally important for firms affiliated to BG. Contrary to SOEs which are granted important strategic resources by their governments, BGs need to encourage their affiliated firms to seek for such assets themselves. Therefore, strategic asset-seeking motives are likely to occur for BG affiliated firms when engaging in CBAs.
34 by BG affiliated firms in the study sample 70.7 percent were aimed at advanced economies, mainly targeting Western economies. These were often among others e.g. USA, the United Kingdom and Germany. Firms in these Western economies have developed firm-specific advantages which gives them advantages in the global competition against firms from emerging markets. EMNCs can use their international expansion by means of CBAs as a springboard to acquire strategic resources from advanced economies and therefore reduce their institutional and market constraints in the home-market (Luo & Tung, 2007).
5.1 Implications
Investigating the acquisition behavior of BGs and SOEs from emerging markets is important for both academics and practitioners. By providing results which indicate the distinct influences of ownership types on the acquisition motives as well as the association between motives and target countries of EMNCs, this study contributes to the growing momentum of research on emerging markets. In addition to that, this study has important practical implications for international managers in emerging economies as well as advanced economies. The findings advance our understanding on the acquisition behavior of the two dominant types of organizational forms in many emerging economies, SOEs and BG affiliated firms. As the global expansion and importance of such firms is continuously progressing, the findings help to understand their behavior in this process. Furthermore, this study contributes to the understanding of differences in the motives and target countries. It is therefore necessary, to have distinct ways of dealing with emerging market firms depending on the ownership type.
5.2 Limitations and Future Research Avenues
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40
Appendix A: List of advanced economies according to International Monetary Fund (2016)
- Australia - Luxembourg
- Austria - Macau
- Belgium - Malta
- Canada - Netherlands
- Cyprus - New Zealand
- Czech Republic - Norway
- Denmark - Portugal
- Estonia - Puerto Rico
- Finland - San Marino
- France - Singapore
- Germany - Slovakia
- Greece - Slovenia
- Hong Kong - South Korea
- Iceland - Spain
- Ireland - Sweden
- Israel - Switzerland
- Italy - Taiwan
- Japan - United Kingdom
- Latvia - United States
41 Appendix B: Selected examples of the coding process
Source Content Coding
Bombay Stock exchange, 2007
Welspun India Ltd has ... acquired 76% interest in bath rug major Sorema …. The Board of Welspun and Sorema both believe that this relationship will realize significant synergistic benefits … Stronger brand presence … marketing channels to be used for marketing existing Sorema products. With this new relationship, Welspun will have facilities in India, Mexico, Portugal and in UK. … Sorema's experience and knowledge in marketing high value products … and know-how of Bath Rug business. ... Mr.
Mandawewala … said: "With the acquisition of Sorema, we are … looking at leveraging their know-how through product
development and marketing skills, combined with both Welspun and Christy knowledge thereby creating a platform for growth and strengthen all competitive positions".
Strategic asset- seeking Bombay Stock exchange, Year: 2008
Lupin Ltd ... announced today that it has acquired Hormosan Pharma GmbH (Hormosan), a German Sales and Marketing generics company specialized in the supply of pharmaceutical products for the Central Nervous System (CNS). Dr. Desh Bandhu Gupta, Chairman, Lupin said, "This is in line with our M & A strategy to harness the potential of the leading global pharma markets. This move establishes a bridgehead in Germany and is our first acquisition in the important European market. Hormosan has strengths in the sales and marketing of its products nationwide, together with strong regulatory and pharmacovigilance
capabilities that can strengthen our European know-how. Lupin will be able to add significant value through its strengths in R & D and strong, complementary pipeline leading to major synergies and growth." Strategic asset-seeking Bombay Stock exchange, Year: 2007
Dr Reddys Laboratories Ltd … has announced … to acquire a portion of Dowpharma Small Molecules business associated with its United Kingdom sites in Mirfield and Cambridge. …The acquisition will include the relevant business, customer contracts, associated products, process technology, intellectual property, trademarks as well as the transfer of the facilities at Mirfield and Cambridge in the United Kingdom. … Dr. Reddy's will also have a non-exclusive license to Dow's Pfenex Expression Technology™ for biocatalysis development. Satish Reddy… said "The proprietary chiral and biocatalysis technology at the Cambridge site and the scale up capability in the Mirfield site will add significant value to the Company. This acquisition will also bring strengths in
42
industrial synthesis of complex prostaglandins and carbohydrate chemistry. These newer capabilities will add to our existing R&D and commercial infrastructure to position Dr. Reddy's as a leading provider of Custom Pharmaceutical Services globally."
Bombay Stock exchange, Year: 2007
JSW Steel Ltd has informed BSE that the Company … has acquired 3 separate Companies in Baytown in the state of Texas in USA. This acquisition is to expand its geographical footprint as a part of inorganic growth. …With the acquisition of these 3 Companies JSW would get an entry point into growing and booming Oil & Gas sector in North America, which is driving up the plate and pipe demand. The Company would enhance the income accretive business model for immediate access to customers and markets through product diversification, market diversification and geographical diversification. The Company also gets an opportunity to capture value addition from slabs to high end product namely pipes.
Market-seeking Bombay Stock exchange, Year: 2004
Bharat Forge Ltd (BFL) … announced the acquisition of Federal Forge Inc, USA, … is engaged in the design and manufacture of complex forged steel components for Automotive Industry. …Announcing the acquisition, Mr. B N Kalyani, Chairman & Managing Director, of the Company said, "The Federal Forge acquisition is a significant step towards implementing Bharat Forge's strategy of expanding our global footprint and establishing a manufacturing presence in one of our largest markets - USA". Our strategy is to expand our 'dual shore', manufacturing base through strategically located complementary facilities, around the world. The first step was to establish ourselves in Europe, while the next step was to pursue North America & China. The Federal Forge acquisition will enhance our market presence in the US, give us a strong foothold in the passenger car and light truck market and most importantly a manufacturing base close to some of our largest customers, he added.
43 Appendix C: Target countries in CBAs of sample
Country Frequency Percent Cumulative Percent
United States 69 20.4 20.4 United Kingdom 37 10.9 31.4 Germany 27 8.0 39.3 South Africa 18 5.3 44.7 Australia 11 3.3 47.9 France 11 3.3 51.2 Canada 9 2.7 53.8 Italy 9 2.7 56.5 Egypt 8 2.4 58.9 Singapore 8 2.4 61.2 Argentina 7 2.1 63.3 Spain 7 2.1 65.4 Czech Republic 6 1.8 67.2 Indonesia 6 1.8 68.9 Malaysia 6 1.8 70.7 Brazil 5 1.5 72.2 Netherlands 5 1.5 73.7 Romania 5 1.5 75.1 China 4 1.2 76.3 Israel 4 1.2 77.5 Japan 4 1.2 78.7 Sri Lanka 4 1.2 79.9 Vietnam 4 1.2 81.1 Belgium 3 .9 82.0 Colombia 3 .9 82.8 Mauritius 3 .9 83.7 Myanmar 3 .9 84.6 Mexico 3 .9 85.5 Russian Federation 3 .9 86.4 Sudan 3 .9 87.3 Thailand 3 .9 88.2
United Arab Emirates 3 .9 89.1
