Determinants of Cross-Border M&As in Developing Countries. Investments in the BRICS Countries

Master's Thesis, 2020

97 Pages, Grade: 1,3

Maximilian D. Thomas (Author)


Table of contents

List of abbreviations

List of tables

List of figures

1 Introduction

2 Importance of inbound cross-border M&As
2.1 Definitions and classifications
2.2 Theory-based explanation of cross-border M&As
2.3 Global trend and consequences of cross-border M&As

3 Analysis of country-specific determinants of inbound cross-border M&As
3.1 Macroeconomic environment
3.1.1 Economic development
3.1.2 Tax incentives
3.1.3 Labour compensation
3.2 Political and institutional environment
3.2.1 Governance quality and corruption
3.2.2 Accounting standards
3.3 Financial market environment
3.4 Level of human capital
3.5 Target country’s openness

4 Econometric analysis
4.1 Data description and preparation
4.1.1 Dependent variable
4.1.2 Independent variables
4.2 Research model
4.3 Descriptive statistics
4.4 Results
4.4.1 Baseline results
4.4.2 Robustness test and additional analysis

5 Conclusion



List of abbreviations

Abbildung in dieser Leseprobe nicht enthalten

List of tables

Table 1: Country-specific factors and their expected effect on inbound cross-border M&As

Table 2: Descriptive statistics

Table 3: Pearson correlation coefficients of all independent variables

Table 4: Regression analyses of the cross-border M&A volume and country-specific determinants

Table 5: Variable definitions and data sources

Table 6: M&A transaction forms

Table 7: Categories of the IFRS adoption status and translated score

Table 8: IFRS adoption status history (in terms of listed firms)

Table 9: Descriptive statistics of logarithmized variables

Table 10: Nations with the highest acquisition volume in the BRICS countries (1990-2018)

List of figures

Figure 1: Structure and classification of cross-border M&As

Figure 2: Motivation behind cross-border M&As

Figure 3: Net value of cross-border M&As and foreign direct investments since 1990

Figure 4: Value and number of inbound cross-border M&As in the BRICS countries since 1990

1 Introduction

During the last three decades, the importance of cross-border mergers and acquisitions (M&As) as a favourite top-level managerial strategy of multinational enterprises (MNEs) and national champions has increased significantly.1 The global value of cross-border M&As has grown from around USD 100 billion in 1990 to USD 815 billion in 2018, peaking in 2007 with over USD 1 trillion just before the outbreak of the global financial crisis.2 This development is not surprising, since the ongoing globalization and the changing global market landscape lead to more complex challenges for companies.3 In order to face the increasing intensity of competition that accompanies the global integration of markets, cross-border M&As constitute an appropriate way of maintaining competitiveness and creating added value. The acquisition of pre-existing foreign assets enables MNEs not only to exploit synergies and growth opportunities but also to overcome latecomer disadvantages.4 In addition, M&As offer a time advantage over organic growth strategies such as greenfield investments, which is particularly important considering the dynamic market conditions and the shortening product life cycles.5

Along with the increasing relevance of cross-border M&As as a business strategy for multinational companies, the subject is also becoming increasingly important to policy makers. Research on the consequences of inbound M&As for the host country’s economic development reveals that foreign investments may have a favourable impact. Positive effects include, for instance, the transfer of technology, knowledge spillover and the improvement of local labour capabilities.6 Despite the possibility that the resulting spillover effects may also have negative implications for the host country, policy makers in most countries compete for specific incentives to attract MNEs.7 This is demonstrated by a global foreign direct investment (FDI)-friendly trend that has started in the early 1990s.8 Both developed and developing economies use FDI deregulations to facilitate the access and the activities of foreign companies on local markets.9 In this context, the question of the driving forces and barriers of cross-border M&As carried out by transnational companies has received increasing attention in the literature.

This thesis examines the research question of which country-specific factors determine the volume of inbound cross-border M&As in developing economies. In general, the choice of a cross-border acquisition as an entry mode into a foreign market is influenced by three types of factors: (1) firm-specific factors such as prior acquisition experience, product diversity and core competences; (2) industry-specific factors such as technological, sales and marketing intensity; and (3) country-specific factors such as market size and institutional quality.10 While firm- and industry-specific factors also play a role in domestic M&As, country-specific factors are a peculiarity in cross-border M&As. According to the research question, the aim of this thesis is to identify country-specific factors that represent determinants. On the one hand, findings on country-specific determinants might be helpful to explain why some countries (e.g. China) receive more cross-border M&As than others (e.g. India).11 On the other hand, the results reveal which interests transnational companies pursue and how they change. Drawing on this evidence, policy makers and companies may be able to influence the determining factors in order to stimulate or impede inbound investments in form of M&As.

Prior research on determinants of cross-border M&As has rarely focused on different institutional contexts.12 In order to contribute to this research gap, this thesis focuses on developing economies. Given the increasing contribution of developing economies to the global gross domestic product (GDP), FDI market in general and cross-border M&A market in particular, developing economies represent an interesting field of research.13 However, even developing economies can differ significantly from one another, which is why a more refined classification is needed to obtain meaningful results.14 Consequently, the empirical investigation is based on investments made in the so-called BRICS countries (Brazil, Russian Federation, India, China and South Africa) in the period 1990-2018. The BRICS countries, which are also known as transition countries, are classified in accordance with Hoskisson et al. (2013) as mid-range emerging economies. Although the countries differ in some areas, the similarities predominate, including a strong development of the market institutions and the economic infrastructure.15 Additionally, all of them have witnessed significant economic growth and observable improvements in the quality of governance over the last three decades.16 Given this dynamic, it seems promising to investigate whether the economic and institutional development within the BRICS countries are partly responsible for an increase in the cross-border M&A activity.

Based on established theories, the role of nine country-specific factors is empirically analysed. First, factors of the host country’s macroeconomic environment are included, which provide investors with information on the market potential and the production costs abroad. A positive economic development is expected to attract foreign investors, whereas higher production costs are assumed to cause a decline in M&As.17 Second, the role of the host country’s political and institutional environment is analysed. Since the governance quality determines political risks, more inbound M&As are expected in times of higher governance quality. Further, the adoption of globally accepted accounting standards is expected to have a positive impact, since more harmonised accounting standards are associated with less information costs. As third category, the financial market environment is expected to determine the inbound capital flows. Deep financial markets may attract MNEs by signalling positive expectations and favourable investment conditions. Fourth, the level of human capital is considered to be a key determinant. In contrast to previous results, it is expected that investors attach importance not only to the cost of labour, but also to the qualification level of the workforce in the case of developing economies as host countries.18 Lastly, the host country’s financial openness is analysed, assuming that a reduction in financial restrictions leads to higher volumes of inbound M&As.

The thesis proceeds as follows: In the second section, the general importance of inbound cross-border M&As is stated. Thereby, the relevant terms and the main motives for FDI in general and cross-border M&As in particular are explained. The section ends with an overview of the global development and some consequences of cross-border M&As. Section three deals with the analysis of the selected country-specific factors that are assumed to have a significant impact. For each factor, a detailed review of previous findings is given before hypotheses are developed, taking into account the specific characteristics of developing economies. In section four, the econometric investigation takes place. After providing information on the data used, the research model is adjusted in accordance with the sample used to ensure that the econometric requirements are met. Next, the results of the baseline regression, a robustness test and an additional analysis are presented. The thesis ends with the conclusion in section five, containing a summary of the findings, limitations, policy implications and suggestions for future research.

2 Importance of inbound cross-border M&As

2.1 Definitions and classifications

Companies can choose between two main ways of carrying out FDI: greenfield investment and the acquisition of pre-existing foreign assets.19 While companies begin from scratch during the greenfield investment, the acquisition of already existing assets offers the opportunity of immediate ownership over resources and capabilities.20 Greenfield investments are therefore classified as an organic growth strategy, whereas the acquisition of an existing firm represents a strategy for inorganic growth. Cross-border M&A transactions, which are the subject of the following analysis, are assigned to the latter category. According to the definition by the United Nations Conference on Trade and Development (UNCTAD), a cross-border acquisition involves the transfer of control over assets and operations from a local company to a foreign company, while the former becomes a subsidiary of the latter. In the case of a cross-border merger, two companies of different countries combine their assets and operations. Thereby a new legal entity is established.21 In the following, the most important terms, structures and classifications in connection with cross-border M&A are presented.

Following the UNCTAD, investments abroad are only considered as cross-border acquisitions if the acquiring company acquirers a controlling stake of at least 10 percent of the target firm’s equity. If the acquiring company ends up with a foreign interest of less than 10 percent, the transaction constitutes a cross-border portfolio investment.22 Portfolio investments do not count as FDI, which means that they must also be distinguished from cross-border acquisitions. However, despite the minimum percentage requirement for FDI, it is not always possible to distinguish clearly between the two categories of investment.23 That is due to the decisive difference between the types of investment, which is the future nature of the relationship between the target and the acquiring company. If the acquiring company is aiming for a long-term relationship, which indicates a lasting interest and control of the foreign company’s business operations, the acquisition is defined as FDI and thus constitutes a cross-border M&A.24 On the contrary, portfolio investments are considered as purely financial investments without the intention of changing the existing structures of the acquired company.25 However, even if less than 10 percent of the target company’s equity is acquired, the acquiring firm might be interested in future synergy effects in the long-run. Conversely, acquisitions of more than 10 percent can be made as pure financial investments with short-term interests. For this reason, it is generally difficult to distinguish between the investment types.

If the condition of a long-term strategic interest and the willingness to control the foreign firm is fulfilled, cross-border M&As can take place in various forms and structures.26 Regarding the foreign interest structure in the case of a cross-border acquisition, the UNCTAD provides a possible classification. Accordingly, cross-border acquisitions can be subdivided into three main classes. Firstly, in the case of minority acquisitions, a foreign interest of 10 to 49 percent is acquired. Secondly, in the context of a majority acquisition, 50 to 99 percent of the target company's equity is acquired. Lastly, 100 percent are acquired following the full or outright acquisition.27 In general, the acquisition of the foreign company can be carried out either through the trade of company shares, named stock or share deal, or through the purchase of a certain amount of assets and liabilities of the target company, named asset deal. A combination of both deal types is also possible.28

With regard to cross-border mergers, the UNCTAD divides them into two main categories: consolidation merger and statutory merger. The consolidation merger describes the ongoing coexistence of the two previous companies in form of a new legal entity. An example of this category is the merger of Daimler and Chrysler in 1998. In the case of a statutory merger, only one company retains its economic independence and becomes a newly established legal entity. Thereby, all debts and the entire equity of the merging partner are incorporated by the company that continues to legally exist. Here, the merger of Wal Mart and the ASDA Group in 1999 constitutes an example. The only difference between the statutory merger and the case of a full acquisition is that a new legal entity is founded.29 Figure 1 illustrates the structure and classification of both cross-border acquisitions and mergers.

Abbildung in dieser Leseprobe nicht enthalten

Figure 1 : Structure and classification of cross-border M&As

(Source: Compiled by the author)

Regarding the strategic functionality, cross-border M&As are assigned to three directions: horizontal, vertical and conglomerate integration. The balance between these strategic types of M&As has been changing over the last decades.30 Horizontal M&As take place in the same industry or at the same stage of the value chain. In general, the companies compete with each other, offering similar production lines and gaining know-how in the same field.31 As a result, M&As can provide synergy effects, such as economies of scale, which are one of the main motivations for this type of M&A. Subsequently, these synergy effects (such as combined research and development (R&D), more efficient cost management and a higher degree of capacity utilisation) may result in greater market power.32

Typical industries in which such M&As take place are the pharmaceutical or agriculture industry, as the popular acquisition of Monsanto by Bayer in 2018 shows.33

Similar to the horizontal integration, vertical M&As occur within the same industry but between firms located on different stages of the same value chain. Usually, there are buyer-seller relationships between the acquiring investor and the target firm. Main motives are the reduction of uncertainty and transaction costs. Through downstream M&As and upstream M&As, in the case of backward linkages and forward linkages, firms seek to maintain price stability and to exploit economies of scope.34 Economies of scope result, among others, from the reduction of intersections and the optimization of processes between different stages of the same value chain.35 Vertical M&As are common in the automotive industry, as demonstrated by the acquisition of Albertini Cesare by Bosch in 2017.36

The last functional class of cross-border M&As is the conglomerative direction. Conglomerates or lateral M&As take place between companies in unrelated activities and industries, so without any consistency in the product line or brand.37 In this way, companies try to diversify their business model and portfolio in order to spread their risks and deepen economies of scope. Since there is usually no prior knowledge about a potential new business field, companies are using this class of M&A in order to enter new markets. However, following the trend to focus on core competencies over the last two decades, this type of M&A has been losing practical relevance.38 A popular example of a conglomerate M&A is therefore the outdated takeover of MCA by Matsushita in 1990.39

Besides the classification and structure of cross-border M&As, the terms “home country” and “host country” are commonly used in the context of FDI. The home country is defined as the country in which the acquiring company has its headquarters. Complementary to this, the country in which the targeted or acquired company has its headquarters is considered as the host country. In the case of an acquisition, the investor's headquarters usually remains in the home country. If a merger takes place, the headquarters may subsequently be located in both countries involved (e.g. Royal Dutch Shell - Netherlands and the US) or in only one country (e.g. DaimlerChrysler AG - Germany).40 Considering that the research question of this thesis deals with the determinants of inbound M&As, the empirical analysis in chapter four will only include M&A data in which the BRICS countries are involved as host countries. The analysis of this type of data allows drawing conclusions about the country-specific characteristics and their impact on M&As. No restrictions regarding the home country are set, as the question of how home country characteristics affect M&A transaction is not subject of the following investigation.

2.2 Theory-based explanation of cross-border M&As

The literature provides a variety of possible explanations for domestic and cross-border M&As. On the one hand, there might be different value-enhancing effects associated with M&As, which company executives can aim for. These effects can result from increased market power, improved efficiency, reduced operating and transaction costs or increased resource dependency.41 On the other hand, M&As can be driven by the management’s self-interest or other firm specific characteristics.42 In order to summarize the main motives behind M&As, some theoretical approaches are discussed below, which offer explanations for the question of why companies undertake cross-border M&A.43 Based on this knowledge, categories of country-specific factors are presented that might be potential determinants of cross-border capital inflows.

The first theoretical basis for the motives behind cross-border M&As is the institutional economics approach, also known as the transaction cost approach.44 Transaction costs can arise during both market transactions and internal production procedures. In the context of market transactions, transaction costs include costs such as agreement, information and monitoring costs.45 Especially in the case of cross-border transactions, companies are confronted with different institutional frameworks, which can lead to a high amount of transaction costs. This is due to the fact that in this case it is more difficult to obtain required information and to find a suitable transaction partner.46 Internal transaction costs include, for example, coordination costs between integrated stages of the value chain within a company.47 In order to minimize both types of transaction costs, companies are interested in achieving the optimal depth of their value chain. Following the “make-or-buy-decision”, vertical M&As can be an appropriate way in order to achieve this purpose.48 A general motive for M&As is therefore the minimization of transaction costs, which can be achieved by an optimal positioning in the value chain. The resulting cost reduction represents a competitive advantage.49

Following the industrial economic approach, also known as the market-based view, companies use M&As to improve their competitive situation through higher market power and synergy effects.50 Especially in the case of horizontal M&As, companies acquire direct competitors and hence increase their market shares. The increased market share may in turn lead to greater market power as the competitive intensity is reduced. Hence, companies are able to charge higher prices for their products, which in turn can generate additional profits.51 Besides, the greater size of the company also contributes to greater negotiating power vis-à-vis suppliers and retailers. Finally, an increase in market share raises barriers to market entry as new entrants face a more concentrated competition.52

In addition to the benefits of increased market power, horizontal acquisitions provide synergy effects, including economies of scale or cost degression effects, which can improve the companies’ performance. Economies of scale may arise since a combined production volume may lead to a higher capacity utilisation rate and thus to lower fixed costs per unit. Furthermore, combined production processes can reduce overhead costs. Summarising these potential benefits, the first motive for cross-border M&As, that can be derived from the market-based view, is to improve the competitive situation through higher market power and synergy effects.

Against the background of the ongoing globalisation and the resulting convergence of consumer habits, it has become increasingly easy for companies to enter new markets and exploit them through exports.53 However, particularly in developing economies, there still may be considerable differences in political, cultural and economic conditions that require specific adjustments of corporate activities. This includes, for example, adapted sales and marketing measures. Companies are therefore dependent on regional market presence in order to respond more successfully to individual customer needs. A nearby solution is represented by the greenfield investment, which, however, requires considerable time. Especially due to the shortening product life cycles and the increasing number of transnational competitors, the factor time has become increasingly important.54 In this context, cross-border M&As, such as brownfield acquisitions, represent a more time efficient option. Within brownfield acquisitions, most of the resources and capabilities of the acquired company are replaced, while, among others, facilities and the already established brand remain in use. Thus, despite the cost-intensive restructuring process, a considerable time advantage can be achieved in addition to strategic resources (subject of the next approach, the resource-based view).55 Consequently, the second motive for cross-border M&As according to the market-based view is to achieve a time-efficient regional market access.56

The third theoretical approach is the resource-based view. Accordingly, competitive advantages mainly depend on the company’s tangible and intangible resources.57 In contrast to the market-based view, the performance is determined by the internal circumstances of the company and not by external circumstances. While tangible resources like machines have become less important in recent decades, intangible resources like technological knowledge have become increasingly important.58 Following Baretto (2010), dynamic capabilities like expert knowledge or an established brand determine today whether companies are able to operate sustainably.59 M&As can be used to obtain both types of resources. Especially on the global stage, cross-border acquisitions provide access to strategic resources such as established brands or expertise on specific technologies. This access is important for investors to overcome the latecomer disadvantage they face compared to other MNEs and domestic competitors.60 In addition, market entry via M&A enables the investor to benefit from the target company's local employees and managers who have relevant knowledge about the foreign market and customer needs. Other firm-specific resources like political ties and networks can also provide strategic benefits for the acquiring company. Political access can be used to create political barriers in order to impede new foreign competitors and to avoid possible disadvantages against domestic competitors.61 Concluding, the motive for cross-border M&As, following the resource-based view, is the acquisition of required resources, with strategic resources in particular becoming increasingly relevant.

The last approach is based on behavioural considerations and focuses on the personal objectives of the responsible executives behind the M&A process.62 Various theories suggest that executives are acting with the aim of maximising their own benefit rather than the benefit of the company.63 The remuneration of executives is usually linked to the financial performance of their company.64 The manager’s income portfolio can thus be equated with the company’s portfolio. Assuming that managers are risk-averse, they should tend to diversify their portfolio and thus that of the company in order to minimize both the risks of the company and their personal risks. In this context, acquisitions of low-correlated subsidiaries are an option, which make both the company’s performance and the manager’s salary more stable against potential crises and stock crashes.65 The first justification for M&As, derived from personal objectives, is therefore to diversify the corporate portfolio in order to minimize personal risks. This could be achieved most efficiently through lateral acquisitions (lowest correlation).66

According to the “empire-building-hypothesis”, managers use M&As as an instrument to increase the size of their company and thus to maximize their remuneration. The reason for this is that the manager's salary usually depends not only on the company's financial performance, but also on the size of the company managed.67 Key operating figures that are generally linked to the remuneration, such as sales and the number of employees, can be easily increased through acquisitions.68 Apart from the monetary aspect, the theory assumes that stakeholders use M&As as an opportunity to gain prestige as well.69 Especially cross-border transactions offer the opportunity of a high gain in prestige, as the execution of cross-border strategies and transactions is usually considered more complicated than domestic ones. In addition, a transnational area of responsibility is associated with a higher reputation than a national one, which might encourage managers to make further foreign acquisitions. The derived motive for cross-border M&As, according to the “empire-building-hypothesis”, is therefore not only the improvement of one's own salary but also of one's personal reputation.

Lastly, the “Hubris-assumption” attributes M&As to the overconfidence of the management. Accordingly, managers overestimate their ability to generate added value for the company by acquiring and integrating target companies. The misinterpretation of synergy potentials leads to an increased willingness to carry out M&A transactions, as managers value target companies higher than the market dictates.70 As a result, overconfident managers tend to carry out more M&As within a given period of time than less confident ones. Thereby, the increased M&A activity leads on average to higher failure rates, which underlines the principal-agent problematic.71 The role of the management's self-confidence in cross-border M&As is also demonstrated by findings showing that prior acquisition knowledge constitutes a firm-specific determinant of cross-border M&As. Accordingly, the executives’ acquisition knowledge is positively correlated with the M&A activity of firms.72 This confirms the dependence of managers' acquisition activity on the self-assessment of their skills and experience.

In summary, the motivation of cross-border M&As derived from selected theoretical approaches can be subdivided into two main categories. The first category includes motives to improve the company’s competitiveness and performance. Competitive advantages can result from the reduction of transaction costs, the exploitation of synergy effects, higher market power, time efficient regional market access and the acquisition of strategic resources. Stakeholders’ personal objectives represent the second category. By using cross-border M&As, stakeholders are able to maximize their own benefits in terms of risk diversification, remuneration and gains in prestige and reputation. Another part of cross-border M&As is simply driven by the overconfidence of the management.

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Figure 2 : Motivation behind cross-border M&As

(Source: Compiled by the author)

In order to select suitable categories of potential country-specific determinants of cross-border M&As in Section 3, besides the motives for cross-border M&As in particular, the motives for FDI in general must not be neglected. Since cross-border M&As constitute a part of FDI, the motives are generally valid. In this context, Dunning (1998) provides a good overview of the main motives behind FDI, which are derived from different international production theories. Accordingly, the investment decisions of MNEs are primarily driven by four types of motives: market-seeking motives, efficiency-seeking motives, resource-seeking motives and strategic asset-seeking motives.73 Briefly summarised: market-seeking motives include the objective to exploit new markets while efficiency-seeking motives include the aim of exploiting cost reduction opportunities. Resource-seeking motives are related to the need of natural resources and material, and finally, strategic asset-seeking motives are based on the need of knowledge-based assets and high qualified workforce, among others.74

Based on these motives and in combination with Dunning’s (1977/1980) Ownership-Location-Internalisation (OLI) framework, which represents a paradigm for foreign market entry of MNEs, Dunning assumes that some country-specific factors are potential location advantages and hence determine the volume of inbound FDI.75 Basically, the OLI framework states that the investment choice of MNEs depend on three variables: ownership advantages, location advantages and internalization opportunities. With regard to the research question, ownership advantages (company-specific factors such as technology and expert knowledge) and internalization opportunities can be neglected. Merely the location advantages, which include country-specific factors such as market size and human capital, are relevant to the subject of this paper.

Building on Dunning’s OLI framework, the first two categories of determinants that might be suitable for the analysis in section 3 are the macroeconomic environment and the level of human capital.76 These categories may be relevant for the market-, efficiency-, and strategic asset-seeking motives behind FDI in general and cross-border M&As in particular. Moreover, other country-specific factors of the host country might be important regardless of the driving motive behind cross-border M&As. For example, the institutional and financial market environment, as well as the openness of the host country seem to be fundamentally important framework conditions. Factors of these categories may determine whether investors can actually achieve their objective and how many risks and difficulties are associated with their realization. Thus, these categories are also expected to be considered by MNEs who are deciding on investment locations abroad.

Finally, when deciding on potential determinants during the analysis, emphasis is placed on the fulfilment of a certain criterion: The selected determinants should be capable of being influenced by third parties. By selecting modifiable determinants, the results may have more useful implications for affected stakeholders, such as policy makers and potential target companies, seeking to either stimulate or avoid foreign direct investment in form of M&As. Fixed country-specific characteristics such as the language, culture or geographical position are therefore not included in the investigation. The same applies to the endowment of natural resources, although this factor is assumed to play a relevant role according to the motives derived from the resource-based view. Interestingly, previous studies indicate a negative correlation between natural resources and capital inflows, which corresponds to the “the Resource Curse”.77 However, resource endowments are considered to be a time-invariant factor (ignoring commodity extraction measures), which is why they are neglected within the investigation.

2.3 Global trend and consequences of cross-border M&As

In the course of internationalisation and globalisation, FDI in general and cross-border M&As in particular have become increasingly important over the past four decades. However, the volume of investments has not increased in a linear way, but has shown a wave-like pattern during the period. The main milestones of this development are briefly outlined in the following section, followed by a broad definition of a promising investigation period for the empirical section. Along with the increased volume, the question of possible advantages and disadvantages in connection with incoming transactions has simultaneously gained importance. Both political authorities and private companies face the question of whether to facilitate inbound M&As or not. In general, it is assumed that the potential advantages of inbound acquisitions outweigh the disadvantages.78 Some consequences of cross-border M&As, which are recognised in research, are presented in the second part of this section. Insights into both positive and negative consequences are relevant for the empirical analysis, as spillover effects may affect country-specific factors. If these factors are included in the empirical analysis in the form of independent variables, there might be a risk of endogeneity problems.79

Especially since the 1980s, the volume of cross-border M&As has grown significantly and accounted interim for the bigger part of FDI compared to greenfield investment.80 One characteristic feature of the M&A activity at national and international level is its wavelike occurrence in terms of number and value.81 In general, the literature identifies six waves of M&As whereby the last three are considered to be international ones.82 The first cross-border M&A wave had begun in the 1980s and ended around 1987 due to a stock market crash and the subsequent economic downturn.83 During this wave, Europe and the US accounted for the largest share of the global transaction value as they moved ahead with the liberalisation and deregulation of their financial markets.84 However, the overall M&A activity during the first wave was comparably low compared to the following two waves. The second wave had started in the 1990s and culminated in 2000 before collapsing again in 2001/2002. This was caused by the bursting of the New Economy/Dotcom bubble and the accompanying economic slump.85 The third wave, which was primarily driven by the ongoing investment liberalisation in many countries, had started in 2004.86 However, this wave also collapsed due to the economic and financial crisis in 2007-2008. Since then, as shown in Figure 3, an upswing can be observed that continues until 2018, whereby the all-time high of 2007 has not yet been reached again. As this development is still ongoing, it is not yet considered to be a wave.

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Figure 3 : Net value of cross-border M&As and foreign direct investments since 1990

(Source: Compiled by the author; UNCTAD cross-border M&A and FDI database)87

Figure 3 shows the global development of FDI in general and cross-border M&As in particular over the last three decades in order to illustrate their wavelike occurrence. Here, the first wave of cross-border M&As is not included, as the wave would not be visible due to its comparably low aggregated transaction values. The origin of the illustrated two waves is attributed to the combination of a continuing global FDI-friendly trend and privatisation initiatives that have taken place against the background of globalisation. Since 1991, more and more countries have joined this trend and have implemented policy measures to facilitate the access and the activities of foreign companies on local markets.88 Hence, especially the last three decades (1990-2018) appear to be appropriate to examine, whether these measures and the associated changes in country-specific factors have affected the volume of inbound cross-border M&As or not.

Regarding the consequences of this trend, the literature attributes cross-border M&As a variety of potential positive effects. According to established research, cross-border M&As can boost the host country’s economic development due to direct and indirect channels like knowledge and technology transfers and learning-by-watching.89 In line with this, Stoian and Filippaios (2008) define three specific channels that foster the local economies. Following the first channel, cross-border transactions may improve the capabilities of local labour. Foreign investors possess specific training and management techniques from their home country, which they can use to improve the skills of local employees. This corresponds to the findings by Oldford and Otchere (2016), who demonstrate that cross-border capital flows not only improve the labour productivity but also increase wage and employment levels within the host country.90 Secondly, when an acquired company establishes backward and forward linkages with domestic firms, a transfer of knowledge automatically takes place between the linked companies. In this way, domestic companies benefit from being integrated into the acquired company’s supply chain as they gain new insights that might be helpful for transforming their processes. The third channel occurs indirectly through the financial support and cooperation of MNEs with local research institutions such as universities. In this way, new insights are gained that both expand the local knowledge base and support the interests of international investors.91

Furthermore, cross-border M&As can have positive effects on the host country’s economic development by replacing the inefficient management of target companies with more experienced executives. Thereby, they facilitate a better use of productive assets.92 In developing economies in particular, M&As are often associated with a change of ownership. Many acquisition targets are former state-owned companies that are not run by an independent and qualified management with the goal of maximizing the shareholder value. Consequently, the quality of corporate governance is often improved in the course of cross-border M&As.93 On top of that, the linkage between the acquiring and the acquired company provides the management with access to needed credit in times of regulatory and market failures. Finally, the entrance of international companies into the local market creates a higher degree of competition, which may spur local companies to become more efficient.94

Besides the above-mentioned potential benefits, inbound cross-border M&As can also have negative impacts on both the acquired company and the host country in general. The most common disadvantages are asset stripping, job cuts and poor business performance due to miscalculations and overestimation of one’s own capabilities.95 Employment may be reduced if international companies merge business units and outsource certain activities to the home country. Poor business results are to be expected if M&As have been carried out caused by hubris of executives, whereby synergy effects have been misjudged and the merger turns out to be inefficient.96 Moreover, M&As may lead to monopolistic behaviour by the acquiring companies as they increase their global market share and power. Instead of a balanced market where local companies become more efficient due to the increased competition, the multinational companies could dominate the market. This could negatively affect the social welfare due to higher prices and deteriorated service or product quality.97

To conclude this section, it should be noted that the consequences of inbound cross-border M&As on acquired companies and their home countries’ economic environment can be dichotomous. It is difficult to assess the final consequences without taking into account the case where the country has not received the inbound cross-border M&A. Therefore, the presented results and assumptions regarding the consequences of inbound M&As should be considered with caution. Regarding the empirical analysis in section four, it is important to note that there may be inverse causalities between country-specific factors and cross-border M&As. For instance, the presence of international investors seems to have a positive effect on the host country’s human capital, whereas human capital is also considered to be a potential determinant of cross-border M&As. In order to counteract this potential endogeneity problem, research variables (proxies) are selected, which are unlikely to be dependent on the volume of inbound cross-border M&As.

3 Analysis of country-specific determinants of inbound cross-border M&As

3.1 Macroeconomic environment

3.1.1 Economic development

Section 2.2 briefly addresses some categories of country-specific determinants, which have a potential impact on inbound cross-border M&As and meet the requirements for the forthcoming analysis.98 These categories include the macroeconomic environment, the political and institutional environment, the financial market environment, the level of human capital as well as the target country’s openness. In this section, the categories are discussed in more detail, whereby some representative factors and appropriate proxies for the upcoming empirical investigation are chosen (e.g. the market size as a factor of the macroeconomic environment or the level of corruption as a factor of the political and institutional environment).

In order to identify the potential role of each factor in cross-border M&As, first an overview of established theories and previous research is given, demonstrating the general economic importance of the factor. In this context, research results are presented that relate to inbound FDI in general and cross-border M&As in particular. Reference is made to the results on FDI in general, as for some factors there is only a limited number of previous surveys focusing on the role in cross-border M&As. In doing so, the literature review draws on research that has dealt with both developed and developing economies. Following the research overview, the implications of the results are combined with the specific characteristics of developing economies to develop an adapted hypothesis for each factor.

Starting with the role of the macroeconomic environment in cross-border M&As, the analysis is based on the OLI framework by Dunning (1977/1980), which is outlined at the end of section 2.2.99 Dunning (1998) suggests, that the investment decisions of MNEs are primarily driven by four types of motives: market-seeking motives, efficiency-seeking motives due to cost reductions, resource-seeking motives and strategic asset-seeking motives.100 In line with the types of motives, the macroeconomic environment is subdivided into three directions: the economic development, tax incentives and labour compensation. While the host country’s economic development is expected to matter for market-seeking motives which may lead to corresponding inbound market-seeking FDI, the other two directions point to efficiency opportunities which are expected to be relevant for efficiency-seeking FDI.101

With regard to the first direction, MNEs, who are driven by market-seeking motives, invest abroad to exploit the market of the host country and neighbouring countries by selling products and services directly to customers.102 The background of this motive is, that MNEs outgrow their home markets and are thus seeking for new growth opportunities. In this context, the target country's economic development may indicate the prospects for future growth opportunities. As discussed in Section 2.2, M&As appear to be an appropriate strategy for market-seeking FDI. The entry mode does not only provide direct ownership of resources and capabilities and thus a fast market access, but also includes strategic resources such as an established brand and experienced employees. Subsequently, possible cultural differences, which are particularly prevalent in developing economies, might be easier to overcome.

Previous studies point to the importance of market-seeking FDI and show that the bulk of FDI is driven by market-seeking motives.103 Xie, Reddy and Liang (2017), who summarise the prior literature on the determinants of cross-border M&As, point to the importance of the host country’s market size and market growth as determinants, as they provide insights into the host country’s market potential.104 These two figures share the characteristic of enabling addressees to draw conclusions about consumers' purchasing power and future demand prospects.105 Developing economies in particular are generally characterized by high market growth, indicating a promising development of demand and increasing profit potential.106 Looking at the BRICS countries, the GDP has grown by an average of 9.08% per year over the last three decades (1990-2018), while global annual growth was only about 4.88% within this period.107 Although the growth rates vary considerably within the countries and across the period, the economic development of the BRICS countries indicates high market potential. Based on these figures, they may have become attractive host countries for market-seeking FDI.108

Assuming that developing economies in general and the BRICS countries in particular are popular targets for market-seeking FDI, factors which provide insights into the market potential ought to be determinants. If the market potential in one of these countries falls, the expected consequence would be that investors prefer alternative countries with higher market potential or at least reduce their investments. On the one hand, this assumption is consistent with earlier results pointing to a positive relationship between FDI and the market size of developing economies.109 On the other hand, the expectation is in accordance with the standard gravity model established in research, which states that trade flows increase with the economic size of the participants.110 Hence, the first hypothesis is formally stated as follows:

H1: The host country’s market size (measured by the GDP) is positively related to the volume of inbound cross-border M&As in the context of developing economies.

Besides the market potential, the host countries’ exchange rate represents another potential determinant of cross-border M&As which is related to the countries’ economic development. Although, according to neoclassical theory, exchange rates should not influence the volume of cross-border transactions, since the source of financing should not play a role in an efficient financial market, prior research suggest the opposite.111 Among others, Froot and Stein (1991) provide theoretical arguments and empirically demonstrate, that exchange rates matter. Accordingly, investors pay attention to exchange rate movements, as these determine the future exchange of capital that is needed to acquire assets in the home or host country. Further, the depreciation of the host country’s currency can lead to cost saving opportunities for foreign investors, as production costs (including both fixed and variable costs) are reduced.112 This might attract international investors who are driven by efficiency-seeking motives and are looking for production locations. In addition to the production costs, the value of local assets decreases for foreign investors in the case of a currency depreciation. As a result, initial and follow-up investments become cheaper and thus more attractive for MNEs.113

Particularly in developing economies, the acquiring companies are likely to pursue long-term strategies in order to benefit from the promising market potential and the relatively low production costs.114 Consequently, besides the initial acquisition, follow-up investments will probably be required to gain more market power and secure a relevant position on the market, which will allow the companies to benefit sustainably from the customers’ increasing demand. In this context, countries with depreciated currencies and undervalued assets provide better conditions than countries with appreciated currencies. In principle, the more the currency of the host country is depreciated, the greater is the purchasing power of foreign investors. Subsequently, a higher M&A activity is expected in times of lower exchange rates within the BRICS countries. Hence, a negative correlation between the exchange rate and the volume of inbound cross-border M&As ought to be the result. Based on the outlined arguments, the second hypothesis is presented as follows:

H2: The host country’s exchange rate (measured by the real effective exchange rate (REER)) is negatively related to the volume of inbound cross-border M&As in the context of developing economies.

3.1.2 Tax incentives

In addition to promising growth opportunities, the OLI paradigm suggests that international investors are looking for efficiency opportunities outside their home country. Efficiency opportunities can generally be understood as opportunities to reduce costs (including production costs as well as distribution costs).115 While the host country’s exchange rate affects indirectly the production costs, tax obligations and compensation regulations have a direct influence on the production costs within the host country. Consequently, all country-specific factors which determine the production costs (such as tax rates, energy and wage costs) are seen as potential location advantages following Dunning (1980).116


1 Cf. Ferreira et al. (2014), p. 2550.

2 Cf. UNCTAD (2020), cross-border M&A database – Annex table 5 (Excel sheet).

3 Cf. Shimizu et al. (2004), p. 308.

4 Cf. Lebedev et al. (2015), pp. 652.

5 Cf. UNCTAD (2000), p. 140.

6 Cf. Stoian/Filippaios (2008), p. 352; Oldford/Otchere (2016), p. 452.

7 Cf. Hyun/Kim (2010), p. 292.

8 Cf. Ferraz/Hamaguchi (2002), p. 390.

9 Cf. Pandya (2016), p. 455.

10 Cf. Shimizu et al. (2004), p. 311.

11 China and India as example countries, as both countries offer high economic growth, large markets and favourable production costs. Nevertheless, over the past three decades China has received an average investment volume more than twice as high as India.

12 Cf. Tunji/Ntim (2016), p. 147.

13 Cf. Hoskisson et al. (2013), p. 1295; Lebedev et al. (2015), p. 651.

14 Cf. Hoskisson et al. (2013), pp. 1297-1301.

15 Cf. Hoskisson et al. (2000), pp. 249-252; Hoskisson et al. (2013), p. 1296.

16 Cf. The World Bank (2019): Worldwide Governance Indicators (Excel sheet); Transparency International (2020),; The World Bank (2020): World Development Indicators (Excel sheet).

17 The economic development is indicated by the market size and exchange rate. Production costs are demonstrated by the average corporate tax rate and average wage level.

18 Previous results suggest that the level of human capital plays only a significant role for inbound capital flows in the case of developed economies as host countries.

19 Cf. UNCTAD (2000), p. 99. A third way of FDI is called “brownfield investment”. Brownfield investment is a hybrid concept between greenfield investment and acquisition of pre-existing assets. Companies using this kind of FDI are acquiring foreign firms and replace previous factors like equipment, labour and plant. For further details see Meyer and Estrin (2001).

20 Cf. Manne (1965), pp. 119-120.

21 Cf. UNCTAD (2000), p. 99. A popular example of a cross-border merger is the case of Daimler and Chrysler which took place in 1998. The takeover of Monsanto by Bayer, which took place in 2018, constitutes a cross-border acquisition.

22 Cf. UNCTAD (2000), pp. 99-102.

23 Cf. UNCTAD (2000), p. 101.

24 Cf. UNCTAD (2000), p. 267.

25 Cf. UNCTAD (2000), p. 101.

26 Cf. Lucks/Meckl (2015), p. 6.

27 Cf. UNCTAD (2000), p. 99.

28 Cf. Whitaker (2016), pp. 69-70.

29 Cf. UNCTAD (2000), pp. 99-100.

30 Cf. Gaughan (2007), pp. 35-36.

31 Cf. UNCTAD (2000), p. 101.

32 Cf. Lucks/Meckl (2015), p. 29.

33 Cf. UNCTAD (2000), p. 101.

34 Cf. Paprottka (1996), pp. 11-12; UNCTAD (2000), p. 101.

35 Cf. Horzella (2010), p. 133.

36 Cf. UNCTAD (2000), p. 101.

37 Cf. Ebert (1998), p. 13.

38 Cf. Horzella (2010), pp. 133-134.

39 Cf. UNCTAD (1994), p. 42: Matsushita was specialised on electronic devices, whereas MCA was in the media industry.

40 Cf. UNCTAD (2000), p. 99: Additionally, in the case of a merger, the headquarter may be located in a new country where none of the participants was previously resident.

41 Exemplary literature on the various topics: Kim/Singal (1993), regarding market power; McGuckin/Nguyen (1995), regarding efficiency; King/Slotegraaf/Kesner (2008), regarding operating costs; Williamson (1985), regarding transaction costs; Casciaro/Piskorski (2005), regarding resource dependency.

42 Literature regarding management self-interest, see Sanders (2001); regarding firm characteristics, see Haleblian/Kim/Rajagopalan (2006).

43 The theoretical approaches behind the motives presented in this section are based on the theoretical framework of Lucks and Meckl (2015), pp. 7-13.

44 Cf. Williamson (1975) pp. 15-23; Peng/Wang/Jiang (2008), pp. 921-923.

45 Cf. Wirtz (2014), pp. 25-29.

46 Cf. Dunning (1980), p. 11; Williamson (1985), pp. 20-22; Chen/Huang/Chen (2009), p. 675: E.g. due to border laws relating to taxation, legal fees and investor protection.

47 Cf. Bausch (2003), pp. 133-134.

48 Cf. Porter (1998), p. 301; Bausch (2003), p. 58.

49 Cf. Lucks/Meckl (2015), p. 8.

50 Cf. Porter (1998), pp. 336-337; Lindstädt (2006), p. 64.

51 Cf. Gugler et al. (2003), p. 627.

52 Cf. Porter (1998), p. 4: “The five forces”, less bargaining power of suppliers and retailers (customers) and less threat of new entrants.

53 Cf. Lucks/Meckl (2015), p. 9.

54 Cf. Lucks/Meckl (2015), pp. 9-10.

55 Cf. Meyer/Estrin (2001), pp. 580-581.

56 Cf. UNCTAD (2000), p. 140.

57 Cf. Barney (1991), pp. 106-112.

58 Cf. Anand/Kogut (1997), p. 447; Lucks/Meckl (2015), p. 10.

59 Cf. Barreto (2010), pp. 263-264.

60 Cf. Luo/Tung (2007), p. 481; Luo et al. (2011), p. 434; Sun et al. (2012), pp. 5-6.

61 Cf. Estrin/Meyer (2011), p. 488.

62 Cf. Cyert/March (2004), pp. 221-223.

63 Cf. Ferraz/Hamaguchi (2002), p. 387: Managers pursue growth-maximizing strategies instead of profit maximization. This leads to a principal-agent conflict, in this case with moral hazard as specific agency problem.

64 Cf. Markoczy et al. (2013), pp. 1372-1373; The salary structure of executives generally consists of share and performance-based payments and a comparatively low fixed component.

65 Cf. Markowitz (1952), pp. 77-91.

66 Cf. Lucks/Meckl (2015), p. 11.

67 Cf. Murphy (1985), pp. 40-41; Jensen (1986), p. 323; Jensen (1988), pp. 28-29.

68 Cf. Lebedev et al. (2015), pp. 659-660.

69 Cf. Glaum/Hutzschenreuter (2010), p. 84.

70 Cf. Roll (1986), p. 200.

71 Cf. Roll (1986), pp. 212-213; Glaum/Hutzschenreuter (2010), p. 87.

72 Cf. Haleblian/Kim/Rajagopalan (2006), p. 368.

73 Cf. Dunning (1998), p. 50.

74 Cf. Dunning (1998), p. 53.

75 Cf. Dunning (1977), pp. 395-418; Dunning (1980), p. 13.

76 Cf. Dunning (1980), pp. 17-18.

77 Cf. Sachs/Warner (1995), pp. 21-23; Asiedu/Lien (2011), p. 109; Tunyi/Ntim (2016), p. 157.

78 Cf. Hyun/Kim (2010), p. 292.

79 Cf. Francis/Huang/Khurana (2016), pp. 1300-1301: Francis, Huang and Khurana draw attention to this type of problem during the examination of similar accounting standards. They address the problem by investigating an event that caused an exogenous change (Mandatory adoption of IFRS standards). In this way, the effect of a possible endogenous change is excluded.

80 Cf. Francis/Huang/Khurana (2016), p. 1299.

81 Following the literature, the wavelike occurrence has different reasons. While Rhodes-Kropf/Robinson/Viswanathan (2005) see the overvaluation of companies as the reason, Mitchell/Mulherin (1996) consider economic, technological and regulatory shocks as the cause.

82 Cf. Martynova/Renneboog (2008), p. 2149; Alexandridis/Mavrovitis/Travlos (2012), p. 663.

83 Cf. Shleifer/Vishny (1991), pp. 51-59.

84 Cf. Shleifer/Vishny (1991), p. 53.

85 Cf. Gaughan (2007), p. 68.

86 Cf. Shimizu et al. (2004), p. 309.

87 Cf. UNCTAD (2020a); UNCTAD (2020b).

88 Cf. Ferraz/Hamaguchi (2002), p. 390.

89 Cf. Hyun/Kim (2010), p. 292.

90 Cf. Oldford/Otchere (2016), p. 452.

91 Cf. Stoian/Filippaios (2008), p. 352.

92 Cf. Palepu (1986), p. 16.

93 Cf. Ferraz/Hamaguchi (2002), pp. 384-385.

94 Cf. Tunyi/Ntim (2016), p. 148.

95 Cf. Gugler/Burcin (2004), pp. 498-499.

96 Also refer to the “Hybris assumption” as motive behind cross-border M&As in section 2.2.

97 Cf. UNCTAD (2000), p. 194.

98 The determinants have the characteristic in common, that they can be altered by external measures.

99 Cf. Dunning (1977), pp. 395-418; Dunning (1980), p. 13.

100 Cf. Dunning (1998), p. 50.

101 Cf. Dunning (1998), p. 53.

102 Cf. Krugman (1980), pp. 955-958; Franco/Rentocchini/Marzetti (2010), p. 61.

103 Cf. Brainard (1997), pp. 538-539.

104 Cf. Xie/Reddy/Liang (2017), p. 142.

105 Cf. Francis/Huang/Khurana (2016), p. 1324; Tunyi/Ntim (2016), p. 165.

106 Cf. Globerman/Shapiro (1999), p. 519.

107 Cf. The World Bank (2020): World Development Indicators (Excel sheet); The CAGR was calculated using the data provided by the World Bank.

108 Cf. Ferraz/Hamaguchi (2002), p. 384.

109 Cf. Dunning (1980), pp. 20-22; Amal/Raboch/Tomio (2009), pp. 89-91: Investigation of developing economies in Latin America; Tunyi/Ntim (2016), p. 164: Investigation of developing economies in Africa.

110 Cf. di Giovanni (2005), p. 136.

111 Cf. Hyun/Kim (2010), p. 297.

112 Cf. Froot/Stein (1991), pp. 1206-1207.

113 Cf. Cushman (1985), p. 306; Oldford/Otchere (2016), pp. 451-452.

114 Cf. Ferraz/Hamaguchi (2002), p. 384.

115 Cf. Dunning (1998), p. 53.

116 Cf. Dunning (1980), p. 18.

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Determinants of Cross-Border M&As in Developing Countries. Investments in the BRICS Countries
University of Bremen
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Cross-border M&A, Developing Countries, BRICS Countries, Panel Data, Determinants, Empirical Investigation, Mergers and Acquisition, Macroeconomic Factors, Institutional Factors, Financial Market Factors
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Maximilian D. Thomas (Author), 2020, Determinants of Cross-Border M&As in Developing Countries. Investments in the BRICS Countries, Munich, GRIN Verlag,


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