The macroeconomic determinants of Romanian cross-border mergers and acquisitions.

• Author: Jurcau, Anca-Sabina

1. INTRODUCTION

   In a global economy and a competitive market environment, companies try to develop their activity using different strategies. Thereby, companies can expand abroad and access foreign markets either by establishing a new firm (Greenfield investment) or by purchasing an already existing firm or merging with it (cross-border mergers and acquisitions). These strategies represent the two entry modes of Foreign Direct Investments (FDI) in an economy.

   Over the last two decades, the volume of FDI has known a massive increase, being considered to have a major role in the process of economic growth. Reaching a historic high of 1,979 billion $ in 2007, global FDI has declined in the next two years (WIR, 2009), maintaining however at a high value. Cross-border M&A constitute the most important entry mode of FDI, representing 52% of them in 2007. In Romania, cross-border M&A have significantly increased in volume, from 229 million $ in 1995 to 5,394 million $ in 2006, in which year they represented 46% of FDI.

   Although there is a vast empirical literature on the macroeconomic determinants of aggregate FDI, a few number of studies examined the specific determinants of cross-border M&A entry mode. Furthermore, the data used by these last studies are mainly gathered from developed countries. In Romania's case, from the research we have conducted until present, no such analysis was performed. Only Birsan & Buiga's (2008) study examined the main factors determining the FDI evolution, without distinguishing though between entry modes, FDI through M&A or Greenfield investment.

   Consequently, the aim of this study is to analyze the macroeconomic and financial determinants of cross-border M&A using a Romanian database over the period 1995-2008. The remainder of the paper is organized as follows. In the next section we realize a short presentation of the relevant literature. The data and the methodology used in our analysis are discussed in the following section. The next part of the paper contains the results and the final section concludes.

2. LITERATURE REVIEW

   The literature on the determinants that influence cross-border M&A, as a mode of entry into a foreign market, analyses three categories of factors: (1) firm-level factors such as multinational experience, local experience, product diversity and international strategy; (2) industry-level factors such as technological intensity, advertising intensity and sales force intensity; and (3) country- level factors such as market size and growth in the host country, cultural differences between the home and host countries, and the specific culture of the acquiring firm's home country (Neto et al., 2008). As it has been stated before, relatively few studies have focused on analyzing the macroeconomic determinants of cross border M&A at country level. The most recent studies focused on this topic include those realized by Rossi & Volpin (2004), Globerman & Shapiro (2005), di Giovanni (2005), Aminiam et al. (2005), Kamaly (2007) and Neto et al. (2008).

   Based on a large panel data sample of cross-border M&A transactions, the study conducted by di Giovanni (2005) examines the main macroeconomic and financial determinants that explain the flow of international M&A. The results suggest that financial variables as stock market capitalization and credit provided to the private sector strongly influence the cross-border M&A volume. Aminiam et al. (2005) have also developed a gravitational model to analyze the macroeconomic determinants of all M&A between Europe and Asia. The authors identified some factors underlying the activity of M&A, such as the degree of openness, the exchange rates and, just as di Giovanni (2005), the financial deepness measured by ratio of stock market capitalization to GDP.

   Contrary to the results obtained by di Giovanni (2005) and Aminiam et al. (2005) that show a positive correlation between stock market capitalization and M&A volume, the study realized by Kamaly (2007) on M&A in developing countries demonstrated a negative correlation between these two variables. Furthermore, the...