Cross‐border acquisitions and host country competitiveness

• Published date: 01 October 2018
• Author: Erin Oldford,Isaac Otchere
• Date: 01 October 2018
• DOI: http://doi.org/10.1111/jbfa.12342

DOI: 10.1111/jbfa.12342

Cross-border acquisitions and host country

competitiveness

Isaac Otchere1Erin Oldford2

1SprottSchool of Business, Carleton University

2Facultyof Business Administration, Memorial

Universityof Newfoundland

Correspondence

IsaacOtchere, Sprott School of Business,

CarletonUniversity.

Email:Isaac.Otchere@carleton.ca

JELClassification: G14, G34

Abstract

We investigate the competitive effects of cross-border takeovers

and find that following the acquisitions, the competitiveness of

cross-border targets improves. The results for industry rivals, how-

ever, are mixed.Rivals of targets of cross-border acquisitions expe-

rience improvements in their competitive position in the long term,

while at the same time, their growth and market share suffer.These

acquisitions lead to a shifting of market share from rivals to cross-

border targets, which is suggestive of increased industry concen-

tration. Cross-border acquisitions also enhance the host country's

financial market development, and lead to increases in innovationin

the host country. Overall,our results cast some doubts on the often

pessimistic view of foreign takeovers held by some politicians that

these deals are bad for the host country.

KEYWORDS

competitiveness, cross-border, mergers and acquisitions, takeovers

1INTRODUCTION

Cross-border acquirers are typically multinational enterprises (MNEs) involved in world-wide operations, and their

presence in the host country can destabilize the competitive balance and industry dynamics, and actually hurt indus-

try counterparts because these acquisitions can enhance the competitive position of the target within the industry.

Cross-border mergers and acquisitions (M&A) could thus have positive effects on the target firms while generating

negative effects on the target firm's rivals. An alternative outcome is that the potential for technological diffusion

resulting from the acquisition and/or the presence of a more efficient competitor in the industry can spur efficien-

cies across the industry.From this perspective, cross-border acquisitions may improve intra-industry competitiveness.

Existing literature on cross-border acquisitions shows that the market'sresponse to the announcement of the bid, rel-

ative to domestic acquisitions, is mixed. Some studies report positive announcement returns (e.g., Chari, Ouimet, &

Tesar, 2009), other studies report negative returns (e.g., Danbolt, 1995), while another group of studies report insignif-

icant abnormal returns (e.g., Campa & Hernando, 2004). Studies investigating the post-acquisition performance also

report mixed evidence, with some studies reporting improved performance for the firms in the long run (e.g., Old-

ford & Otchere, 2016), and others reporting underperformance (e.g., Gugler, Mueller, Yurtoglu, & Zulehner, 2003).

There is little research on whether cross-border acquisitions hinder or promote firm-level competitiveness in the host

country. Evenmore so, little research has been done on the impact of cross-border acquisitions on the host-country's

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2018 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/jbfa JBus Fin Acc. 2018;45:1260–1292.

OTCHER E ANDOLDFORD 1261

FIGURE 1 Number and value of M&A transactions in Canada, 1985–2010

competitiveness.This line of inquiry is important in light of the anecdotal evidence that cross-border acquisitions nega-

tively affect host country's competitiveness. Weinvestigate how cross-border acquisitions impact host country'scom-

petitive landscape using both firm- and macro-leveldata from Canada.

Canada has experienced a significant increase in the number and value of both domestic and cross-border acqui-

sitions from 1985 to 2010 (see Figure 1). These acquisitions have involved high-profile targets of such firms as Sea-

grams, MacMillan Bloedel, Inco, Dofasco, and Stelco, and some of these firmswere established over a century ago. The

surge in cross-border acquisitions involving some of the iconic Canadian companies is often met with resistance, with

opponents arguing that cross-border acquisitions result in a hollowing out of corporate Canada, in addition to a range

of negative outcomes, including alleged harmful effects on competition. The opponents of cross-border acquisitions

assert that these transactions are motivated by anti-competitive goals and, therefore, harm competition in the host

country.For example, the TorontoStar (2008) argues: “picture an economy in which a bunch of small Canadian firms try

to compete with more and more foreign titans.” Governmentsof many countries, including Canada, restrict the right of

foreign firms to acquire domestic firms, or restrict foreign acquisitions to certain industries, with the aim of promoting

the competitivenessof ‘national champions’ (Horn & Persson, 2001). The increase in the number of cross-border acqui-

sitions and the contentious debate among politicians and influential business leaders presents an interesting setting to

investigate how cross-border takeoversimpact the host country's competitiveness.

We test two hypotheses, namely, competitive and information hypotheses,formulated by Otchere and Ip (2006).

The competitive balance hypothesis posits that rival firms in an industry compete with each other,share similar charac-

teristics, and sometimes work with each other, and therefore, cross-border acquisitions, where the bidder is involved

in world-scale production, can alter the competitive balance and industry dynamics (Otchere& Ip, 2006) in favor of the

target firms. The acqusitions can negatively affect industry counterparts, as they can enhance the competitive posi-

tion of the target within the industry following acquisition. The information hypothesis posits that, given the potential

for technological diffusion and/or‘a kick-in-the-arm effect’, cross-border acquisitions can enhance the compeitiveness

of the target firm's rivals. The presence of the foreign bidder and the potential to lose market share to the acquired

competitor could motivate the rivals of targets of cross-border acquisition to become more competitive and efficient.

In addition, cross-border acquisitions are associated with technology transfer, diffusion, and spillover effects, which

can enhance the competitiveness of firms in the industry and the host country and promote economic growth. Both

the competitive balance and information hypotheses predict that cross-border acquisitions will have positive effects on

the target firms, while the competitive balance hypothesis predicts negative effects on the target firms’ rivals, and the

information hypothesis predicts positive effects of cross-border acquisitions on the rivals of targets of cross-border

1262 OTCHER E ANDOLDFORD

aqcquisition. While changes in a firm's competitiveness can manifest in a number of ways (including changes in prof-

itability or efficiency), it is possible that some aspect of a firm becomes more competitive, while another becomes less

competitive; hence, the competitive balance and information hypothesesmay not be mutually exclusive.

Consistent with the information hypothesis, we find that cross-border acquisitions enhance the competitiveness of

target firms. The improvement in profitability, growth, productivity, efficiency, and market share experiencedby tar-

gets of cross-border acquisitions are better than those of domestic acquisitions. The impact of cross-border acquisi-

tions on the competitiveness of the rivals, however, is mixed. Rivals of cross-border acquisitions experiencesignifi-

cant improvementsin profitability, productivity, and efficiency but a reduction in growth. We attribute this to changing

intra-industry competitiveness, as the cross-border targets experience higher growth than their rival. Complement-

ing this observation, we find that the market share of the rivals of cross-border targets decreases significantly.These

results provideevidence that rivals react to cross-border acquisition of their industry counterparts with improvements

in their own profitability,productivity, and efficiency, as proposed bythe information hypothesis, while at the same time,

their growth and marketshare suffer as a result of competitive rebalancing in the industry, as posited by the competitive

balance hypothesis.

Wealso investigate the impact of the bidder's pre-acquisition competitiveness on the post-acquisition performance

of the targets and their rivals and find that the competitiveness of the bidders is positively associated with changes in

both the target and rivals’ competitiveness following acquisition, although the rivals suffer loss of marketshare follow-

ing the entry of the bidder.We perform additional tests of the market's pricing of the expected competitive effects of

cross-border acquisitions (and for comparativepurposes, domestic acquisitions) among targets and rivals. We find that

both cross-border and domestic acquisition targets earn significantly positiveabnormal returns, though the magnitude

of returns is higher among cross-border targets. Rivals of targets of cross-border acquisitions earn positive abnormal

returnsaround the acquisition announcement date, whereas domestic rivals earn insignificant abnormal returns. Rivals

that experience positive abnormal returns at announcement date are typically smaller firms with lower marketshare,

suggesting that the market views cross-border acquisition as a threat to larger rival firms with higher market share,

consistent with Ferrier,Smith and Grimm's (1999) dethronement hypothesis.

Finally, we investigatethe relationship between aggregate M&A activities and measures of host country competi-

tiveness. We first examinethe determinants of mergers and acquisitions and find that Canada's regulatory quality and

education are significant predictors of aggregate M&A activities. However,cross-border acquisitions seem to be more

sensitive to measures of national competitiveness, as the number of transactions is positively associated with mea-

sures of infrastructuredevelopment, innovation, financial market development, and market size, results which are con-

sistent with those of Navaretti, Venables, and Barry (2004), suggesting that the country's competitiveness positively

affects the frequency of cross-border acquisitions. We also examinethe influence of cross-border acquisition intensity

on host nation's competiveness and find that the frequency of cross-border transactions is associated with improve-

ments in financial market development, increases in market size, and improvement in innovation,whereas domestic

transactionsare associated only with increases in the size of the local market. Overall, our results on host country com-

petitiveness highlight an important effect of cross-border acquisitions that is often lost in the discourse on the impact

of foreign acquisitions on local firms’ and host country's competitiveness.

Our study makes contributions in a number of ways. Existing research documents long-run underperformance of

cross-border acquisitions in Canada (Andre, Kooli, & L'Her, 2004), for a European sample (Danbolt, 1995), US firms

(Seth, Song, & Pettit, 2002), Japanese targets (Nitsch, Beamish, & Makino, 1996), and a Portugese sample (Almeida,

2003). Studies on the competitive effects of cross-border acquisitions are, however,few. Akhigbe and Martin (2000)

examinethe effects of successful foreign acquisitions on domestic competitors of US targets and Otchere and Ip (2006)

examine the intra-industry effects of completed and cancelled cross-border acquisitions for a sample of Australian

firms in the context of the acquisition probability hypothesis.These authors, however, do not examine the competitive

effects of cross-border acquisitions on host country's competitiveness. Thus, our study increases our knowledge of

the impact of cross-border acquisitions on the host countries. In addition, our paper provides out-of-sample evidence

on the effects of cross-border acquisition on industry rivals. In discussing event studies and long-run stock market

studies, Fama (1998) argues that it is useful to study such events out of sample. Given that the level of stock market