Foreign Acquisitions and Target Firms' Performance in China

• Author: Qing Liu,Ruosi Lu,Larry D. Qiu
• Published date: 01 January 2017
• DOI: http://doi.org/10.1111/twec.12428
• Date: 01 January 2017

Foreign Acquisitions and Target Firms’

Performance in China

Qing Liu

1

, Ruosi Lu

2

and Larry D. Qiu

3

1

School of International Trade and Economics, University of International Business and Economics

(UIBE), Beijing, China,

2

School of Public Administration, University of International Business and

Economics (UIBE), Beijing, China and

3

Faculty of Business and Economics, The University of Hong

Kong, Hong Kong

1. INTRODUCTION

CROSS-border mergers and acquisitions (M&As) are important in the globalisation era.

From an economic development point of view, how foreign acquisitions affect the econ-

omy of the target country, especially developing countries, and the performance of the target

firms are of particular interest. In this paper, we explore the effects of foreign acquisitions in

China.

Theories suggest that foreign acquirers can enhance the post-acquisition performance of the

target firms by transferring capital, technologies, managerial expertise and other tangible and

intangible assets to such firms. In particular, in a broader literature of multinational firms and

foreign direct investment (FDI), Markusen (2002) argues that multinationals possess firm-spe-

cific assets that can be transformed to superior technology and know-how in subsidiaries

abroad. Helpman et al. (2004) propose that firms need to overcome a large fixed cost of invest-

ment abroad, and hence, multinationals making FDI must have higher productivity than expor-

ters and other domestic firms. Thus, they can bring better technologies to the subsidiaries

abroad. Yeaple (2003) suggests that multinationals are able to arrange and transfer resources

across countries to make their plants more efficient.

1

Although all these theories are directly

about knowledge transfer from parent firms to subsidiaries, they can be equally applied to

acquirers and targets in the content of foreign acquisitions. The theories imply the following

proposition/hypothesis: foreign acquisitions enhance the performance of the target firms.

However, previous empirical studies provide mixed results.

2

Part of the reasons for the

inconclusiveness is that most studies exclusively focus on target firms in developed countries.

On the one hand, certain studies find that foreign acquisitions positively affect the productiv-

ity of the target firms in various developed countries, such as France (Bertrand and Zit ouna,

2008), United States (Chen, 2011), UK (Griffith, 1999; Conyon et al., 2002; Girma and Gorg,

2007a, 2007b) and Sweden (Karpaty, 2007). On the other hand, several studies also find that

foreign acquisitions do not improve the performance of the target firms in Italy (Benfratello

and Sembenelli, 2006) and Portugal (Almeida, 2007). Harris and Robinson (2002) even find

This study benefits from seminar presentations at Kobe University, Kyoto University, The University of

Hong Kong, and 2014 IEFS China Annual Conference. We are also grateful to the referee and editor for

helpful comments and suggestions.

1

Harris and Robinson (2002) also review the related theories in literature. Although most studies iden-

tify the positive effects of cross-border M&As, several concerns are left unaddressed. Foreign takeover

may reduce the performance of the target firms as foreign multinationals may reallocate the production

of the target firms to other plants in foreign countries.

2

Aitken and Harrison (1999) find that earlier case studies also yield mixed results.

©2016 John Wiley & Sons Ltd

2

The World Economy (2017)

doi: 10.1111/twec.12428

The World Economy

that foreign firms tend to acquire the most productive plants in the UK and observe that the

productivity of these plants decline after the acquisitions.

Only a few studies examine the effects of acquisitions on target firms in non-developed

countries. By conducting a survey among 513 firms, Djankov and Hoekman (2000) examine

publicly traded firms in the Czech Republic, a transition economy, and find that foreign own-

ership leads to improved firm performance.

3

Arnold and Javorcik (2009) examine target firms

in Indonesia and find that foreign acquisition increases the productivity of these firms.

4

Given that foreign acquisitions in developing countries are increasing and have taken a signifi-

cant share, the existing literature is clearly inadequate with regard to investigating the effects of

acquisitions on target firms in developing countries. This paper contributesto the existing literature

by providing further empirical evidence on the effects of foreign acquisitions on firms in develop-

ing countries in general, and China in particular. Focusing on China isboth important and interest-

ing. First, China is the largest developing country in the world. In addition, China is the second

largest recipient of FDI including cross-border M&As in the world and is the largest among devel-

oping countries. Although the share of foreign acquisitions in the total inward FDI of China (about

7.3 per cent between 1990 and 2010) is much lower than the world average (38.9 per cent during

the same period), foreign acquisitionsin the country are rapidly increasing. Figure 1 shows the fre-

quency and value of foreign acquisitions in China from 1990 to 2010. Thus, evidence on the

effects of foreign acquisitions in developing countries excluding China will clearlybe biased.

Second, China is not a typical developing country. On the one hand, like all developing coun-

tries, the GDP per capita of the country is still very low; the average technology and efficiency

of the economy need to be improved; there are still many underdeveloped areas, regions and

sectors. On the other hand, China also shares some features of the developed countries: the large

economy of China provides a large-scale R&D base and advanced technologies for the country;

China is very advanced in some technology frontiers; some areas and cities have already reached

high GDP per capita. Hence, an interesting question is whether the effects of foreign acquisi-

tions in China are similar to those in the developed countries or developing countries, or unique.

Third, although China had strengthened its intellectual property rights (IPR) protection espe-

cially after the WTO accession in 2001, the Chinese government has been continuously criti-

cised by foreign governments and multinationals for not enforcing the laws. Many proposals of

foreign acquisitions in China have not been approved by the government’s antimonopoly

offices.

5

These features of the country have strong implications on the selection of foreign

acquisitions, their choices and the potential effects of these acquisitions on the Chinese econ-

omy. These implications are worth exploring both academically and for policy debates.

3

Salis (2008) focuses on Slovenia, another transition economy, and finds that the acquired firms do not

outperform the domestic firms in terms of productivity improvement. However, Salis only uses one-year

foreign acquisition data (1997) and warns that different post-acquisition productivity changes may occur

in the long run.

4

Although Du and Girma (2009) and Girma et al. (2012) investigate the topic in the Chinese context, they

primarily investigate the effects of foreign equity share rather than those of acquisition. Many studies have

explored the FDI spillovers in developing countries. However, we focus on the effects of foreign acquisi-

tions on the target firms. Blomstrom and Sjoholm (1999) compare the productivity of Indonesian firms with

foreign ownership and those without foreign ownership. Although some firms with foreign ownership are

targets of foreign acquisitions, Blomstrom and Sjoholm only use one-year data (1991), which makes them

unable to analyse the productivity of the target firms before and after the acquisitions.

5

Examples include the bidding of Coca-Cola for Huiyuan, the bidding of the Carlyle Group for

Xugong, the bidding of Nestl

e for Xu Fuji and the bidding of Schneider for NVC lighting.

©2016 John Wiley & Sons Ltd

FOREIGN ACQUISITIONS AND TARGETS’ PERFORMANCE 3