The link between exchange rates and foreign direct investment is one that has caused for much discussion. Blonigen (1997) publishes one of the most influential papers and suggests transferable assets being the most important factor behind this relationship. He argues that when the real value of an acquirer’s currency increases, this acquirer will be able to purchase a foreign target cheap. Due to the nature of transferable assets, foreign acquirers will be able to generate returns from them in other currencies than the one used for the purchase. This bypasses the tradition economist’s view of purchasing power parity. One paramount condition exists in order for this link to hold: segmented markets between acquirers and targets.
We rerun Blonigen’s model to test his theory between integrated markets, as Georgopoulos (2008) suggests possible. Using industry-specific data at the three-digit NAICS 07 level, we empirically test our hypotheses with discrete dependent variable models. Testing for the link between real exchange rates and Swiss cross-border M&As in manufacturing industries in the United States and the United Kingdom for the years 1996-2013, we find no evidence for Blonigen’s firm-specific asset acquisition theory. We confirm that no relationship for low research and development manufacturing industries is evident, in line with Blonigen’s theory, whilst also no correlation is found for high research and development manufacturing industries for the studied country pairs, in the given observation period. Our findings lead us to conclude that the link between exchange rates and acquisition FDI no longer applies for integrated markets.
Moreover, we find evidence in our samples for Harris and Ravencraft’s (1991) theory that M&As in R&D-intensive industries happen more often on a cross-border basis, than on a domestic basis.
Table of Contents
1 INTRODUCTION
2 SWITZERLAND
2.1 R&D-INTENSIVE ECONOMY
2.2 EXPORT LEADERS
2.3 STRONG CURRENCY
3 LITERATURE REVIEW
3.1 THE TRADITIONAL VIEW
3.2 THE CONTEMPORARY VIEWS
3.2.1 ASYMMETRIES AND IMPERFECTIONS IN CAPITAL MARKETS
3.2.2 COSTS AND IMPERFECTIONS IN THE FACTOR MARKETS
3.2.3 COSTS AND IMPERFECTIONS IN THE GOOD MARKETS
3.3 RESEARCH HYPOTHESES
4 DATA AND METHODOLOGY
4.1 SWISS ACQUISITION FDI IN THE US AND UK – AN OVERVIEW
4.2 SAMPLE DESCRIPTION
4.2.1 DEPENDENT VARIABLE
4.2.2 INDEPENDENT VARIABLES
4.2.3 SUMMARY OF SAMPLES
4.3 METHODOLOGY
4.3.1 REGRESSION EQUATIONS
4.3.2 POISSON MODEL
4.3.3 NEGATIVE BINOMINAL MODEL
4.3.4 RANDOM EFFECT NEGATIVE BINOMINAL MODEL
5 RESULTS
5.1 DESCRIPTIVE STATISTICS
5.2 EMPIRICAL RESULTS
5.2.1 SWISS ACQUISITION FDI IN THE US
5.2.2 SWISS ACQUISITION FDI IN THE UK
5.2.3 CONTROL VARIABLES
5.3 SUMMARY OF FINDINGS
5.4 LIMITATIONS AND RECOMMENDATIONS
6 CONCLUSION
Research Objectives & Core Themes
This dissertation examines whether the historical relationship between real exchange rates and cross-border merger and acquisition (M&A) activity persists in today's integrated global markets, specifically focusing on Swiss acquisitions in the US and the UK between 1996 and 2013. The primary research goal is to test the validity of Blonigen's (1997) firm-specific asset acquisition theory within integrated economic environments.
- The link between real exchange rates and foreign direct investment (FDI).
- Impact of R&D-intensive industries on cross-border acquisition frequency.
- Market integration vs. market segmentation in explaining M&A determinants.
- Empirical evaluation using count regression models (Poisson, Negative Binomial).
- Comparison of Swiss-US and Swiss-UK cross-border acquisition dynamics.
Excerpt from the Book
3.2.1 ASYMMETRIES AND IMPERFECTIONS IN CAPITAL MARKETS
Before the change of the millennium, Froot and Stein’s (1991) model was considered the highpoint of the exchange rate and FDI link literature, having proposed the first theoretical explanation for the relationship. Their theory states that a currency advantage allows foreign acquirers to have more internal capital available to them. This relative wealth increase, henceforth permits them to leverage a higher acquisition price for a target company than domestic acquirers. This again increases the foreign acquirer’s chances for the deal and reduces it for the domestic acquirer, leading to an increase in acquisition FDI when a country’s currency is experiencing a low.
Their theory is based on the assumptions that in an acquisition, the acquirer will always be in need of external capital, having to finance some of the funds internally, nevertheless. (Firms find it hard to finance 100 percent of an acquisition externally due to information asymmetries present in the acquisition of a firm and the associated risk. This would be too costly.) Interest rates are assumed to be equal around the world. Assuming the percentage of external finance available in relation to internal funds remains the same, a relative decrease in the target currency allows for a higher purchasing price threshold and increases the chance of the foreign acquirer winning the bidding war for the US target. The US acquirer’s purchasing price threshold doesn’t change, due his wealth being in the form of the domestic currency, the US dollar.
Other scholars have found ambiguous results, running the same regressions as Froot and Stein. Particularly, Stevens (1998), who used Froot and Stein’s identical observation sample, split the data into sub-samples in order to check if the same correlation was still found between exchange rates and numbers of M&As. Their results failed to find any significant relationship.
Summary of Chapters
1 INTRODUCTION: Introduces the research context of cross-border M&A, basic definitions of FDI, and outlines the theoretical debates regarding the link between exchange rates and foreign acquisitions.
2 SWITZERLAND: Discusses the unique characteristics of the Swiss economy, focusing on its R&D-intensive nature, export leadership, and the strength of the Swiss Franc as drivers for international M&A.
3 LITERATURE REVIEW: Analyzes the evolution of academic thought on FDI, transitioning from the traditional purchasing power parity view to contemporary theories like imperfect capital and product markets.
4 DATA AND METHODOLOGY: Details the sample selection criteria for Swiss-US and Swiss-UK deals, defines the dependent and independent variables, and explains the application of count regression models.
5 RESULTS: Presents the empirical findings from the regression analysis, evaluates the research hypotheses, and discusses the robustness checks performed on the data samples.
6 CONCLUSION: Synthesizes the empirical findings, concludes that the exchange rate link does not hold for integrated markets, and highlights limitations for future research.
Keywords
Foreign Direct Investment (FDI), Cross-border M&A, Exchange Rates, R&D-intensive industries, Market Integration, Switzerland, United States, United Kingdom, Poisson Model, Negative Binomial, Firm-specific assets, Purchasing Power Parity, Wealth Effect, Capital Markets, Asset Acquisition.
Frequently Asked Questions
What is the fundamental focus of this dissertation?
The paper examines whether the relationship between exchange rate fluctuations and cross-border merger and acquisition (M&A) activity, originally identified by authors like Blonigen, still holds true in contemporary, highly integrated international markets.
What are the primary thematic areas covered?
The research covers the economic theory of FDI, the impact of R&D-intensive manufacturing on acquisition frequency, the role of real exchange rates, and the methodology of count regression models.
What is the central research question?
The central question is: Does the relationship between real exchange rates and acquisition FDI, specifically in R&D-intensive industries, still apply in today’s integrated markets as it did in historically segmented markets?
Which scientific methods are employed?
The study utilizes industry-specific count regression models, specifically the Poisson model, Negative Binomial (NB) model, and Random Effects Negative Binomial (RENB) model to analyze panel data.
What does the main body address?
The main body systematically reviews existing literature, defines the data samples and variable construction, applies econometric models to test hypotheses, and presents and discusses the resulting findings.
Which keywords characterize this work?
Key terms include Foreign Direct Investment, Cross-border M&A, Exchange Rates, R&D-intensive, Market Integration, and Firm-specific assets.
Why was Switzerland chosen as the research platform?
Switzerland was selected due to its stable economy, unique manufacturing sector, and exceptionally high level of R&D activity, providing an ideal base for testing the firm-specific asset acquisition theory.
What was the key finding regarding Blonigen’s theory?
The study found no evidence supporting Blonigen’s firm-specific asset acquisition theory for the country pairs analyzed, concluding that the relationship does not hold for integrated markets.
How does this study handle data limitations?
The author addresses data constraints, such as the unavailability of certain firm counts in the UK, by adapting the regression models and focusing on the consistency of findings across the Swiss-US and Swiss-UK samples.
- Quote paper
- Marc Waldhof (Author), 2014, Exchange rates and cross-border mergers and acquisitions. Does the relationship still apply in today’s integrated markets?, Munich, GRIN Verlag, https://www.grin.com/document/304013
