Institutional determinants of ownership positions of foreign acquirers in Africa

• Author: Leon Faifman,Kaitlyn DeGhetto,Heather Parola,Bruce T. Lamont,Kimberly M. Ellis,Sangbum Ro,R. Michael Holmes
• Published date: 01 May 2018
• DOI: http://doi.org/10.1002/gsj.1168
• Date: 01 May 2018

RESEARCH ARTICLE

Institutional determinants of ownership positions

of foreign acquirers in Africa

Kimberly M. Ellis

1

| Bruce T. Lamont

2

| R. Michael Holmes Jr.

2

| Sangbum Ro

3

|

Leon Faifman

1

| Kaitlyn DeGhetto

4

| Heather Parola

5

1

Management Programs Department, College of

Business, Florida Atlantic University, Boca Raton,

Florida

2

Management Department, College of Business,

Florida State University, Tallahassee, Florida

3

Department of Management, John H. Sykes

College of Business, University of Tampa,

Tampa, Florida

4

College of Business Administration, University

of Colorado, Colorado Springs, Colorado Springs,

Colorado

5

Schroeder Family School of Business

Administration, University of Evansville,

Evansville, Indiana

Correspondence

Kimberly M. Ellis. Management Programs

Department, College of Business, Florida Atlantic

University, 777 Glades Road, Boca Raton, FL

33431.

Email: kellis15@fau.edu

Research summary: Using unique features of the African

context and blending institutional, hostage, and transac-

tion cost theories, we address gaps in our understanding

of institutional determinants of ownership position in

cross-border acquisitions (CBAs) in emerging countries.

We focus on two traditional institutional determinants:

Informal and formal institutional distances between the

two firms’home countries and two determinants that are

particularly acute in the African context: the colonial ties

between and fractionalization of the two firms’home

countries. We find colonial ties and uncertainty avoidance

distance, an indicator of informal institutional distance,

are negatively related to ownership position. Conversely,

we show that formal institutional distance and the host

country’s fractionalization positively influence ownership

levels, but the latter effect is weakened when acquirers

come from more fractionalized home countries.

Managerial summary: We examine the effects of four

institutional factors that influence organizational decision-

making in the African context: (a) its colonial history,

(b) differences in informal cultural norms, (c) differences

in formal regulatory structures, and (d) ethnic and linguis-

tic diversity within a country on the percentage of equity

ownership that foreign acquirers hold in African target

firms. Results indicate that this equity position is lower

when colonial ties and greater differences in uncertainty

avoidance exist between the acquirer’s home country and

the target African country. Conversely, foreign acquirers’

K. M. Ellis and B. T. Lamont contributed equally.

[Correction added on February 23, 2018, after first online publication: author R. Michael Holmes Jr. was misnamed R.

Michael Holmes in a previous version of this article.]

Received: 30 November 2015 Revised: 27 March 2017 Accepted: 6 April 2017

DOI: 10.1002/gsj.1168

Copyright © 2017 Strategic Management Society

242 wileyonlinelibrary.com/journal/gsj Global Strategy Journal. 2018;8:242–274.

equity ownership positions are higher when there are

greater formal regulatory differences between the two

countries and the host country is more ethnically and lin-

guistically diverse, though the latter effect is reduced when

the acquirer is from a home country that is also diverse.

KEYWORDS

African context, blended theory, cross-border

acquisitions, institutional determinants, ownership

position

1|INTRODUCTION

The ownership position acquirers take in target firms is one of the key decisions in cross-border

acquisitions (CBAs). An acquirer’s ownership stake in a target firm reflects its extent of control

(shared vs. full) and level of resource commitment (e.g., M. D. Chari & Chang, 2009; Zhou & Yu,

2010). Shared ownership reduces the importance of information asymmetry and encourages coopera-

tion between the two firms, but has higher governance costs and discourages acquirers from investing

in the target (M. D. Chari & Chang, 2009; Chen & Hennart, 2004; Jakobsen & Meyer, 2008). Full

ownership involves larger resource commitments and higher target search and assessment costs, but

permits greater strategic control for the acquirer, facilitates more complete knowledge and resource

sharing between the two firms (especially from the acquirer to the target), and lowers most transac-

tion costs (M.D. Chari & Chang, 2009; Chen, 2008; Chen & Hennart, 2004). Shared and full owner-

ship positions, therefore, have different benefits and costs with related trade-offs, making factors that

determine the level of ownership acquirers take in target firms an important area of study.

It is important to study the determinants of ownership positions in CBAs because the tradeoffs

are more significant in these acquisitions compared to domestic ones. In CBAs, institutional differ-

ences between the two firms’home countries accentuate information asymmetries, make cooperation

and knowledge transfer more problematic, increase the risks and uncertainties associated with the

acquisition (M. D. Chari & Chang, 2009; Chen & Hennart, 2004; Zhou & Yu, 2010), and contribute

to other issues associated with the liability of foreignness (Kogut & Singh, 1988; Kostova & Zaheer,

1999). Therefore, institutional differences may play important roles in the tradeoffs between differ-

ent ownership positions in the context of CBAs. Not surprisingly then, a growing literature has

begun to identify institutional determinants of ownership position in CBAs, in an effort to explain

why and when firms choose partial versus complete ownership (Arslan & Wang, 2015; M. D.

Chari & Chang, 2009; Chen, 2008; Chen & Hennart, 2004; Contractor, Lahiri, Elango, & Kundu,

2014; De Beule, Elia, & Piscitello, 2014; Kedia & Bilgili, 2015; Lahiri, Elango, & Kundu, 2014;

Malhotra & Gaur, 2014; Malhotra, Sivakumar, & Zhu, 2011).

Recent work, however, suggests CBAs in emerging markets may differ from CBAs in developed

countries in important ways. The low levels of formal institutional development, reflected in codi-

fied rules, political systems, and regulatory frameworks (e.g., North, 1990), in emerging markets ele-

vates uncertainty for the acquirer, making CBAs riskier and shared ownership more common than

in developed countries (Zhou & Yu, 2010). Weak formal institutions also make it difficult for both

ELLIS ET AL.243

firms to properly assess the target’s value (Jakobsen & Meyer, 2008), increasing partner selection

costs. Lastly, target firms in emerging markets tend to possess weaker resource endowments com-

pared to targets in developed markets (A. Chari, Ouimet, & Tesar, 2010; Deng, 2009; Meyer, Estrin,

Bhaumik, & Peng, 2009), thereby increasing the resource investment costs to the foreign acquirer.

Further, recent studies reveal that the heightened uncertainty and costs in emerging markets are

exacerbated by formal and informal institutional distances between the acquiring and target firms’

home countries. These studies suggest that, despite the general preference for partial ownership in

emerging markets, formal institutional distance may magnify market uncertainties associated with

low institutional development and may require market-specific investments thereby elevating trans-

action costs for the acquirer such that full ownership becomes preferred (e.g., Contractor et al.,

2014; De Beule et al., 2014; Kedia & Bilgili, 2015). Conversely, some research indicates that infor-

mal institutional distance, reflecting differences in non-codified cultural beliefs, norms, and shared

values between countries, reinforces the general tendency for shared ownership in emerging markets

(Contractor et al., 2014). Therefore, although both shared and full ownership appear to be motivated

by the heightened uncertainties and costs in emerging markets, why one type of distance is better

addressed with shared ownership while the other is associated with full ownership remains imper-

fectly understood. It may be, for example, that informal institutional distance creates different uncer-

tainties than formal institutional distance does, especially in emerging markets where selection costs

and resource investment costs are greater. Thus, more theory needs to be developed to capture and

better understand these peculiarities of emerging markets.

Addressing these issues, our study focuses on the acquisition of African firms by foreign firms.

We use unique features of the African context and a blend of institutional, hostage,

1

and transaction

cost theories to identify and address current gaps in our understanding of the institutional determi-

nants of foreign firms’ownership positions in target firms located in emerging markets. To juxta-

pose our study with previous research, we focus on two traditional institutional predictors of

ownership positions in CBAs: formal and informal institutional distance between the acquiring and

target firms’home countries. We also focus on two additional institutional predictors: colonial ties

between and fractionalization of the two firms’home countries. Colonial ties between two countries

reflect the history of antagonism and cooperation among individuals and firms from those countries

(Acemoglu, Johnson, & Robinson, 2001; Jack, Westwood, Srinivas, & Sardar, 2011). Fractionaliza-

tion captures the sociopolitical fragmentation due to ethnic and linguistic diversity within a particu-

lar country (Alesina, Devleeschauwer, Easterly, Kurlat, & Wacziarg, 2003; Luiz, 2015; Zoogah,

Peng, & Woldu, 2015). Like colonial rule, high within-country fractionalization among different

sociopolitical groups is a central feature of the African context (George, Corbishley, Khayesi,

Haas, & Tihanyi, 2016; Jackson, 2015; Michalopoulos & Papaioannou, 2015). We use these addi-

tional factors from the African context to help clarify and document two very different types of insti-

tutional determinants of ownership position in emerging market CBAs.

Our theory, graphically depicted in Figure 1, suggests that the four aforementioned institutional

factors shape the selection and relational cost advantages of partial ownership and the resource

investment and transfer benefits of full ownership through two different and largely orthogonal theo-

retical mechanisms. Following the seminal work of Chen and Hennart (2004), we use hostage theory

to suggest that partial ownership helps address partner selection and relational costs. And, following

conventional explanations of internalization in CBAs (Contractor et al., 2014; Malhotra et al., 2011;

1

Hostage theory (Chen & Hennart, 2004) is a mix of signaling and contracting cost theories. Shared ownership offers signaling advan-

tages in reducing partner selection uncertainty and search costs before the deal as well as providing incentives for cooperation and

reduced contracting costs after the deal is complete. We contend that both costs are amplified in emerging markets.

244 ELLIS ET AL.