The Roles of Chinese CEOs in Managing Individualistic Cultures in Cross‐border Mergers and Acquisitions

• Author: Hong Zhu,Qi Zhu,Zhiwen Ding
• Date: 01 May 2020
• Published date: 01 May 2020
• DOI: http://doi.org/10.1111/joms.12556

© 2020 Society for the Advancement of Management Studies and John Wiley & Sons, Ltd.

The Roles of Chinese CEOs in Managing

Individualistic Cultures in Cross-border Mergers and

Acquisitions

Hong Zhua, Qi Zhub and Zhiwen Dingc

aPeking University HSBC Business School; bHong Kong Polytechnic University; cLianhe Credit Investment

Consulting Co., Ltd

ABSTRACT The individualism-collectivism culture represents an important and well-researched

distinction across cultures. Yet research is less clear about how the different levels of individu-

alistic cultures in host countries affect the success of an increasingly important firm strategy –

cross-border mergers and acquisitions (CBMAs). This study addresses this key research question

in the context of Chinese firms’ CBMAs, as Chinese firms are increasingly acquiring targets

outside of China in the New Normal global business landscape. This study further theorizes and

tests how the Chinese acquirer CEOs’ characteristics moderate the wealth creation relationship.

In an analysis of 404 Chinese firms’ CBMAs, we found that an individualistic culture in the host

country is negatively associated with Chinese acquirers’ CBMA wealth creation. We also dem-

onstrate that Chinese CEOs’ exposure to foreign culture and female gender weaken that nega-

tive relationship, while CEO duality strengthens this negative relationship. Our research thus

suggests that culture in host countries can negatively affect acquirers’ CBMA performance, but

CEOs may be able to manage the effects of the culture to increase their CBMA performance.

Keywords: China, cross-border mergers and acquisitions, culture, CEOs, CEO duality, gender

INTRODUCTION

National culture has been a key research topic since the earliest days of international

business and strategy research (Hitt et al., 2006; Hofstede, 1991; Kirkman et al., 2006,

2017; Kogut and Singh, 1988). In particular, the important cultural dimension of individ-

ualism-collectivism represents a key distinction across cultures (Earley and Gibson, 1998;

Hui and Triandis, 1986; Triandis, 1995; Triandis and Gelfand, 1998). Researchers have

Journal of Man agement Studi es 57:3 May 2020

doi:10. 1111/j oms .12 55 6

Address for reprints: Qi Zhu, Hong Kong Polytechnic University, Department of Management and Marketing,

Faculty of Business, Hung Hom, Hong Kong (qi-thomas.zhu@polyu.edu.hk).

The Roles of Chinese CEOs in Managing Individualistic Cultures 665

© 2020 Society for the Advancement of Management Studies and John Wiley & Sons, Ltd.

established differences across a number of organizational practices such as leadership

and motivations between individualism and collectivism cultures (Adler and Gundersen,

2007; Earley and Gibson, 1998; Kirkman et al., 2006, 2017). However, less is known

about whether and how individualism culture affects the value creation of fir ms operat-

ing across cultures (Ahlstrom and Bruton, 2009; Singh, 2007).

It is very important to address this research question in the New Normal era when

cross-border mergers and acquisitions (CBMAs) have become the most important

international strategy for established firms to compete in the global market (Brattström

et al., 2019; Hitt, Keats and DeMarie, 1998; Tarba et al., 2019; World Investment

Report, 2000). Acquirers and targets with differing cultures and organizational practices

need to integrate with each other and create new value (Haleblian et al., 2009; King

et al., 2004; Lebedev et al., 2015; Zhu and Zhu, 2016). Prior research suggests that the

targets’ willingness and efforts toward trust and cooperation with acquirers are the key

for acquirers to gain new value from CBMAs (Cannella and Hambrick, 1993; Capron

and Guillén, 2009), which can be affected by culture in host countries (Capron and

Guillén, 2009; Earley and Gibson, 1998; Morosini et al., 1998). Thus our study aims

to examine the effects of the key individualism-collectivism cultural dimension in host

countries1

on acquirers’ CBMA value creation defined as acquirers’ post-CBMA perfor-

mance changes in Tobin’s Q.

We further consider the boundary conditions of the baseline model to provide a

more complete and fine-grained theory. On the basis of the effects of individualism-

collectivism culture in host countries on CBMA value creation, we take into account

of the profound impact of proactive acquirer CEO’s roles in explaining CBMA value

creation (Earley and Gibson, 1998; Kirkman et al., 2006, 2017). Upper echelon theory

and acquisition research suggest that acquirer CEOs are often key decision makers in

the post-acquisition combined firm and yet differ substantially in their characteristics,

which could result in various influences on CBMAs and, subsequently, different financial

outcomes of CBMAs (Hambrick and Mason, 1984; Quigley and Graffin, 2017; Quigley

and Hambrick., 2015). On the basis of prior studies, we highlight three acquirer CEO

characteristics that have been studied extensively as the moderators. These three CEO

characteristics are exposure to foreign culture, gender, and CEO duality.

In a sample of 404 Chinese listed firms’ CBMAs between 1 January 2001 and

31 December 2015, an endogeneity-corrected two-stage Heckman model was used to

test our hypotheses. We found that a more individualistic culture in host countries is

negatively related to post-acquisition performance of Chinese acquirers. We contribute

to the knowledge of whether and how individualism or collectivism adds value to firms

operating across cultures in CBMAs in the New Normal era of the past one and a half

decades (Etzioni, 2017). This paper also contributes to show that the negative effects of

individualism in CBMAs can be mitigated if acquirer CEOs have the exposure to foreign

culture and are females, and yet acquirer CEO duality may amplify the negative effects.

Thus our study has further important theoretical and practical implications for Chinese

acquirers’ CBMA value creation in the New Normal era when CBMAs have been in-

creasingly becoming one of the most important international strategies for Chinese firms

to grow and create value in the global market (Bruton et al., 2015b; Tomizawa et al.,

2020; Wang and Miao, 2016).

666 H. Zhu et al.

© 2020 Society for the Advancement of Management Studies and John Wiley & Sons, Ltd.

LITERATURE REVIEW

National Culture and CBMA Wealth Creation

Since firms have been increasingly expanding outside of their national borders in re-

sponse to the globalization in the 21st century (Tarba et al., 2019; Wang and Miao, 2016),

one of the key challenges these firms have encountered is how to manage the culture in

host countries, of which the firms may lack sufficient knowledge (Ahlstrom and Bruton,

2009; Hitt et al., 2006). Corporate executives often attribute international expansion

failures to cultural distance (e.g., Hastings, 1999; Reus and Lamont, 2009), though prior

research and findings have called this attribution into question (Morosini et al., 1998).

Indeed scholars have recently directed an increasing amount of attention toward cul-

ture’s impact on international expansion, and particularly on CBMAs, which are the

quickest and most popular strategy for firms to establish their global presence (Stahl

and Voigt, 2008; Zhu and Zhu, 2016). CBMAs are making cultural issues more salient

in the more globalized New Normal era, as the CBMAs’ post-acquisition integration to

create value often requires in-depth interactions with the acquired target managers and

employees who are imprinted with the culture in host countries (Tarba et al., 2019). The

acquirers may encounter a liability of foreignness.

However, how cultural distance affects CBMA wealth creation is not clear (Chakrabarti

et al., 2009; Ghemawat, 2001; Hennart and Larimo, 1998; Kogut and Singh, 1988;

Reus and Lamont, 2009; Shimizu et al., 2004; Stahl and Voigt, 2008). One major meta-

analysis suggests that the relationship between cultural distance and post-acquisition per-

formance may not exist (Stahl and Voigt, 2008). Kogut and Singh (1988) conducted an

early study on cultural distance in CBMAs and found that cultural distance affects firms’

choice of CBMAs as the entry mode. Furthermore, as corporate executives complained,

research found that cultural distance greatly increases the complexity, ambiguities and

difficulties in post-acquisition communications, coordination and management and thus

dramatically impedes effective integration and wealth creation (Reus and Lamont, 2009).

However, despite these negative effects, different cultures could add value to the acquir-

ers by providing new resources and capabilities that are not available in the acquirers’

home countries (Morosini et al., 1998). In addition to these two dominant and yet oppo-

site perspectives, some studies do not find support for the existence of this relationship

(Barkema et al., 1996; Stahl and Voigt, 2008).

Nevertheless, prior research has significantly advanced our understandings of the ef-

fects of cultural distance on CBMAs and has broadly achieved the consensus that culture

does impact international strategies and their outcomes (Porter, 2001). Research also

suggests that we need to take into account the unique characteristics of international

strategies in order to clarify the roles of culture in the international strategies. In CBMAs,

whether acquirers can gain value from their acquired foreign targets heavily depends on

the cooperative perceptions and behaviours of the acquired targets, which are shaped

by their surrounding culture (Huang et al., 2017; Leung et al., 2005). Therefore, in this

paper we redirect attention from cultural distance to specific cultural values in host coun-

tries in CBMAs.