Review of Development Economics, 20(1), 87–100, 2016
DOI:10.1111/rode.12213
Foreign Acquisitions in China and Multinationals’
Global Market Strategy
Qing Liu, Larry D. Qiu, and Zhigang Li*
Abstract
Using firm-level data from 2000 to 2006, we find that foreign acquisitions in China change the target
firms’ export extensive margins. We develop a three-country model with cross-border acquisitions to
show that the acquirers can alter the targets’ export decision through three possible channels: fixed-cost
jumping, technology transfer and global market reorganization. We find evidence that foreign
acquisitions change the Chinese target firms’ probability of exporting to a third market. Technology
transfer is not observed. Evidence implies that fixed-cost jumping is used to enable the targets to export,
while global market reorganization is a key motive for the acquirers to withdraw the targets from the
export market.
1. Introduction
International trade and foreign direct investments (FDI) are two important
phenomena of globalization. Cross-border mergers and acquisitions (M&As) are a
significant component of FDI, being roughly about one third of the total FDI flows.
Trade and FDI are interrelated. In this paper, we perform both a theoretical and an
empirical analysis to investigate the motives behind multinationals’ cross-border
M&As and their effects on the target firms’ export decisions.
We analyze the above issue from the perspective of multinationals’ global market
strategy with foreign acquisitions. Specifically, we investigate whether, why and how
a multinational alters the foreign target firm’s export decision to maximize its
global profit. Using firm-level data from 2000 to 2006, we find that foreign
acquisitions in China affect the Chinese target firms’ export extensive margins. To
understand this phenomenon, we develop a model with three countries. A
multinational firm from a country acquires a firm (target) in China. The acquisition
results in ownership changes, which enable the multinational (the acquirer) to
dictate the target firm’s export decision. In particular, the multinational reconsiders
its target firm’s pre-acquisition export decision to a third market (in a third
country). First, we find that foreign acquisition raises the non-exporting target’s
export extensive margin, but reduces the exporting target’s export extensive margin.
The second result is about the possible channels through which the acquirer
alters the target’s export decision: (i) the acquirer can help the target jump over the
fixed cost of export; (ii) the acquirer can transfer technology to the target firm to
*Li: Faculty of Business and Economics, University of Hong Kong. E-mail: [email protected]. Liu (corresponding
author): School of International Trade and Economics, University of International Business and
Economics, Beijing, Email: [email protected]. Qiu: Faculty of Business and Economics, University of
Hong Kong, Hong Kong. The authors thank Andy Bernard, Bo Chen, Kalina Manova, Jim Markusen, Phil
McCalman, Peter Neary, Zhigang Tao and the referee for their valuable comments. Liu thanks the financial
supports from National Science Foundation of China (Project No. 71302009 and 71541002) and the
Fundamental Research Funds for the Central Universities in UIBE (CXTD4-02). Qiu acknowledges the
financial support from RGC Competitive Earmarked Research Grant of Hong Kong (No. HKU17501914).
© 2016 John Wiley & Sons Ltd
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Qing Liu, Larry D. Qiu, and Zhigang Li
raise the latter’s productivity; and (iii) the acquirer may withdraw itself from the
export market and let the target replace it if it has exported to that market before,
but it may withdraw the exporting target from the third market in order to reduce
the competition if the acquirer is also exporting to that market. This last channel is
referred to as the multinational’s global market reorganization strategy.
Third, we derive the necessary and sufficient condition for the multinational to
adopt the global market reorganization strategy. If the target firm’s trade cost is
much larger (smaller) than that of the acquirer, the acquisition will withdraw the
target (the acquirer) from the export market.
These predictions are tested using Chinese experiences. China is a good choice
for our empirical test because it is one of the largest exporters in the world and the
second largest FDI recipient, after the USA, receiving about half of the FDI flows
to developing countries [UNCTAD (United Nations Conference on Trade and
Development), 2010]. Our empirical analysis confirms the prediction about export
extensive margin. It further shows that there is no significant technology transfer
associated with foreign acquisitions, and global market reorganization is a key
motive behind multinationals’ acquisitions of Chinese firms.
Our paper is related to strategies of multinationals, in general, and the following
three strands of literature, in particular. The first is the FDI literature. Most early
studies (both theoretical and empirical) are confined to a two-country framework to
examine the motivations of FDI.1 Some recent studies emphasize the third country
effect in determining FDI.2 In contrast with the literature, we develop a multicountry model to examine both the motives and the effects of FDI. With respect to
the motives, we show that multinationals have global market reorganization
strategies. With regard to the effects, our paper investigates whether and why
foreign acquisitions alter the Chinese target firms’ export decisions (the direct
effect).
The second strand of literature is the trade models with fixed export costs (e.g.
Melitz, 2003). This line of research implies that a firm does not export because it
cannot overcome the fixed export costs or it has low productivity. Our study shows
that ownership changes and, as a result of foreign acquisition, may alter a firm’s
export extensive margin. The third strand of the literature is cross-border M&As.
Existing studies try to explain the rationales for cross-border M&As and their
effects on welfare, efficiency and competition, for example, Qiu and Zhou (2006).
The present study makes a contribution to this literature by identifying
(theoretically and empirically) a new rationale for cross-border acquisitions: global
market reorganization.
2. Preliminary Empirical Finding
In this section, we first describe the data and then present the preliminary empirical
result.
To see whether foreign acquisitions have any impacts on the Chinese target firms’
export behavior, an ideal data set should at least include information of foreign
acquisitions on Chinese firms, Chinese firms’ exports to individual foreign countries
before and after the acquisitions, characteristics of the Chinese firms, and
characteristics of the foreign acquiring firms. Two datasets are very useful for this
purpose. One is from Thomson Financial Securities Data Company (SDC) and the
other is from the Chinese Customs. As the firm-level export data available to us are
from the years 2000–2006, our study covers this period only.
© 2016 John Wiley & Sons Ltd
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Qing Liu, Larry D. Qiu, and Zhigang Li
Table 2. Effects of Foreign Acquisitions on the Targets’ Export Extensive Margin
Sample
ACQ
ACQ9EX0
Year FE
Firm FE
Country FE
Firm–country FE
p-value of F-test: ACQ+ACQ*EX0=0
Observations
R2
(1)
ALL
(2)
US
(3)
HK
(4)
Subsample
0.0062***
(0.0005)
–0.0822***
(0.0052)
yes
yes
yes
no
0
775,062
0.471
0.0043***
(0.0012)
–0.0407***
(0.0110)
yes
yes
yes
no
0.001
148,329
0.505
0.0073***
(0.0008)
–0.114***
(0.0108)
yes
yes
yes
no
0
223,872
0.446
0.0254***
(0.0014)
–0.142***
(0.0054)
yes
no
no
yes
0
256,851
0.637
Notes: Robust standard errors are in parentheses. ***,**,* Denote significance level of 1%, 5% and 10%,
respectively. In all regressions EX0 and GDP are included.
Robustness
In this subsection, we perform a number of robustness checks on the basic results
obtained in the preceding subsection. The results survive in all robustness tests.
•
•
•
Acquirer’s country. Although the two predictions with regard to the acquisition’s
effects on the target firms’ export extensive margin do not depend on the
characteristics of the acquirer’s country, there are reasonable doubts that in
reality the nature of the acquirer’s country matters. Take the USA and Hong
Kong as examples. First, these two economies are very different in terms of their
GDP levels, proximity to China, business structures, size of their multinational
companies, etc. The US acquirers could be more driven by market entry motives
while the Hong Kong acquirers could be more motivated by using the Chinese
firms as a low production base for serving the export markets. To see if our basic
results are sensitive to the acquirer country’s characteristics, we run one
regression based on the subsample in which all acquirers are from the USA and
another regression based on the subsample in which all acquirers are from Hong
Kong. These are the top two economies that acquire Chinese firms. The
regression results for the USA [in column (2)] and those for Hong Kong [in
column (3)] are consistent with the main result.
Firm–country fixed effect. There may be some firm–country specific factors that
affect a firm’s exporting decision to a given country. To take these factors into
account, we re-run the regression, model (2), by introducing the firm–country
pair fixed effect (Dfk).9 Our main results are robust as shown in column (4) of
Table 2.
Difference-in-differences approach. Our simple OLS regression results have
shown the correlation between foreign acquisitions and the Chinese target firms’
export extensive margin. They may not tell us the consistent causal effects of
foreign acquisitions on the targets’ export extensive margin, because foreign
firms do not choose targets randomly.10 If this target selection factor exists, the
above estimation of the acquisition effects will be biased.
© 2016 John Wiley & Sons Ltd
90
Qing Liu, Larry D. Qiu, and Zhigang Li
acquisition affects the target’s export decision, we assume the following market
structure: there is only one firm from S called firm 1; there is only one firm from N
called firm 2; and all other firms (m – 2) are from O. Furthermore, assume that
there is a constant marginal cost of production for each firm; it is c for firm 1 and
zero for all other firms. Given this technology (constant returns to scale), the
equilibrium in each market can be analyzed separately. As our interest is on how
firm 2’s acquisition of firm 1 affects these two firms’ export decisions, let us focus
our attention in the market in O.4
In market O, consumers derive utility from consuming the numeraire good and
the industry’s products
U ¼ Q0 þ ai2M qi 1X 2 bX X
q qi qj ;
2 i2M i 2 i2M j2M
i
where Q0 is the consumption of the numeraire good, qi is the consumption of
variety i, a and b are constants, and M–i is the industry’s product set excluding
variety i. The constant a captures the market size (of country O), and b 2 [0, 1] the
degree of product differentiation between any two varieties. Consumers maximize
their utility subject to their budget constraint. This maximization yields the
following demand functions for the differentiated
products with pi as the price of
P
variety i: pi = a qi bQ-i, where Qi ¼ j2Mi qj .
Following the literature, we assume that there is a fixed cost of export f, for each
firm. The firms need to pay the fixed cost up front before exporting. To further
sharpen the difference between firm 1 and firm 2, we assume that firm 2 does not
have the problem of paying the fixed export cost up front, but firm 1 may. The
trade cost (including transport cost) per unit of sales for firm 1 is t1 and that for
firm 2 is t2.
Suppose that firm 1 does not have the problem of paying the fixed export cost up
front and ti is not too large; thus, all m firms compete in the market (O) by choosing
their quantities, a la Cournot. Then the profit functions are p1 = (a q1 bQ1 t1 c)q1 f for firm 1, p2 = (a q2 bQ-2 t2)q2 - f for firm 2 and
pi = (a qi bQ-i)qi for all other firms. Each firm chooses its output level to
maximize its profit, taking other firms’ output levels as given. Let
A 2 þ bðm 2Þ=b [ 1. We obtain the equilibrium profits denoted with p1 and p2 .5
There are two other interesting market structures to consider.6 First, firm 1 does
not export to the market, but firm 2 does, in which case firm 2 competes with all
other m – 2 firms. This case emerges in equilibrium if firm 1 has the problem of
paying the fixed export cost up front and/or t1 is too large, but t2 is not too large.
The Cournot equilibrium with the m – 1 firms can be derived in a similar way. Firm
2’s profit in this case is denoted p02 .
Second, firm 2 does not export to the market but firm 1 does, in which case firm
1 competes with all other m – 2 firms. This case arises if t2 is too large, t1 is not
very large and firm 1 does not have the problem of paying the fixed export cost up
front. The resulting profit for firm 1 is denoted as p01 .
Acquisitions
Suppose that firm 2 acquires firm 1. The objective of the present paper is not to
examine when a cross-border acquisition is optimal, but rather the motives and
© 2016 John Wiley & Sons Ltd
M&AS AND GLOBAL MARKET STRATEGY
91
effects of foreign acquisition on exports. Thus, our focus is on how the acquirer
maximizes the global profit by changing the production and export decisions of the
two merging firms. In particular, after the acquisition, firm 2 has the full ownership
of firm 1 and makes the following decisions on (i) whether to help firm 1 overcome
the fixed costs of export; (ii) whether to transfer technology to firm 1 so that firm
1’s marginal cost will be reduced from c to zero; (iii) whether to withdraw firm 1
from the export market if firm 1 exports before the acquisition; (iv) whether to
enter or withdraw itself from the export market; and (v) the level of sales of firm 1
and that of firm 2 to the export market. There is a cost CT of transferring
technology from firm 2 to firm 1. We can classify the main actions typically
associated with the acquisition into three types: (i) fixed-cost jumping, in which
case, the acquirer helps the target overcome the fixed costs of export; (ii)
technology transfer, in which case, the acquirer transfers technology to the target to
raise the target’s productivity; and (iii) market reorganization, in which case, the
acquirer alters the pre-acquisition export configuration of the two firms.
Market competition will be different after the acquisition even if the set of firms
in the market is the same as that before the acquisition. In particular, when both
firms 1 and 2 are in the market, they choose their export levels, q1 and q2, to
maximize their joint profit p1 + p2. The resulting profits are denoted as (where
superscript a stands for acquisition) pa1 and pa2 .
After the acquisition, firm 2 will choose the market configuration and outcome to
achieve the largest joint profit. There are five possible outcomes as described in
Table 1.7
Note that which outcome results in the largest profit is independent of the preacquisition export configuration. Denote Π = max{Π1, Π2, Π3, Π4, Π5}. Once the
best outcome is determined, we will know whether and how the target firm’s export
extensive margin will be changed by the acquisition.8
Suppose that firm 1 does not export to the market before the acquisition. Its
export decision remains unchanged after the acquisition if Π2 = Π; and in all other
cases, firm 1 will export. Hence, the implication of acquisition on the target’s export
extensive margin is clear: foreign acquisition increases the target’s export extensive
margin except in case 2. A question is how the acquisition increases the extensive
margin. This question is answered in the following proposition.
PROPOSITION 1. Suppose that the target firm does not export to a market before the
acquisition. Then the acquirer may make the target export by taking one or more
of the following actions: (i) fixed-cost jumping to help the target overcome the
fixed-cost problem, (ii) technology transfer to raise the target’s productivity, and
(iii) self-withdrawing from the export market to let the target substitute it.
Table 1. Possible Outcomes after the Acquisition
Case
1
2
3
4
5
Joint profit
P1
P2
P3
P4
P5
¼ p01
¼ p02
¼ p01 ðc ¼ 0Þ CT
¼ pa1 þ pa2
¼ pa1 ðc ¼ 0Þ CT þ pa2 ðc ¼ 0Þ
Outcome
No technology transfer, only firm 1 exporting
No technology transfer, only firm 2 exporting
Technology transfer, only firm 1 exporting
No technology transfer, both firms exporting
Technology transfer, both firms exporting
© 2016 John Wiley & Sons Ltd
92
Qing Liu, Larry D. Qiu, and Zhigang Li
It is well known in the literature that if a firm does not export, it is likely that the
fixed cost is too high and/or the firm’s productivity is too low (e.g. Melitz, 2003).
Our proposition shows that foreign acquisitions may help the target firm overcome
these two problems. More importantly, our proposition indicates that the foreign
acquirer’s market reorganization strategy also makes the target firm’s export
profitable by reducing competition in the market.
As fixed-cost jumping (e.g. capital injection to alleviate the credit constraint faced
by the target or allowing the target to use the acquirer’s distribution network in the
export market) and technology transfer are two familiar actions taken by the
acquirers in acquisitions, our next task is to further investigate the less-known motive
for acquisition, namely, global market reorganization. In particular, we ask under
what conditions, global market reorganization occurs. Trade cost and transport costs
are known to be important factors that affect export-platform FDI (e.g. Ekholm
et al., 2007), and let us examine how they are related to multinationals’ global
market reorganization strategy. The following proposition is obtained.
PROPOSITION 2. Suppose that the target firm does not export to a market before the
acquisition. Then market reorganization occurs if and only if t1 is sufficiently small
relative to t2. Market reorganization is always accompanied by either fixed-cost
jumping or technology transfer.
We next turn to the second situation in which firm 1 exports to the market
before the acquisition. Note that firm 1’s export decision will be altered after
acquisition if Π2 = Π; but in all other cases, its export decision remains unchanged
after the acquisition. We can establish the following proposition.
PROPOSITION 3. Suppose that the target firm exports to a market before the
acquisition. Then the acquirer may take the global market reorganization strategy
to withdraw the target from the export market, which occurs if and only if t2 is
sufficiently small relative to t1.
Firm 1 withdraws from the export market after the acquisition only in the case
where both firms compete in the market before the acquisition. Although both
firms make a profit before the acquisition, competition results in a small profit for
each firm. After the acquisition, they rationalize the competition by withdrawing
one firm from the market. Firm 1 exits the export market if it is more efficient to
keep firm 2, considering both the productivity and trade costs.
The result that acquisition increases the target non-exporter’s export extensive
margin and reduces the target exporter’s export extensive margin may seem trivial
at first glance, because the direction of change in the respective case is the only
choice. However, the change does not need to occur. The two propositions (1 and
3) show that foreign acquisition does make the change happen and provide
conditions for the change to happen. Note that although Propositions 1–3 are
derived from a simple model with three countries only, it is easy to show that the
propositions hold in a model with more than three countries.
4. Further Empirical Analysis
In section 2, we have shown that foreign acquisitions do have a significant effect on
the Chinese targets’ export decisions, but we do not know why and how. In this
© 2016 John Wiley & Sons Ltd
M&AS AND GLOBAL MARKET STRATEGY
93
section, with the guidance of our theory from the preceding section, we conduct a
further empirical study to first (in the following two subsections) analyze more
rigorously whether foreign acquisitions really have changed the Chinese targets’
export decisions, and then (in the third subsection) identify the mechanism through
which foreign acquisitions change the Chinese targets’ export.
China is chosen because of the following three reasons. First, China is a large
exporting country and an important country for export-platform FDI. Second, there
are increasingly more and more foreign acquisitions in China. Third, foreign
acquisitions normally have better technologies than Chinese firms, which fits our
model with respect to potential technology transfer.
To test all the predictions from our theory, we need to do a little bit work on the
data.
Recall that our model is about acquirers and targets in the same industry (when
the degree of product differentiation b is close to 1), similar industries (when b is
not close to 1 nor zero), or even unrelated industries (when b is close to zero).
Hence, in our empirical analysis, we should exclude other cases. As it is commonly
done in the literature, all acquisitions can be classified into three categories:
horizontal acquisitions, vertical acquisitions and conglomerate acquisitions. Among
the 1561 acquisitions of Chinese firms in our sample, 701 (44.91%) are horizontal,
27 (1.93%) are vertical, and the rest, 833 (53.36%), are conglomerate. This
distribution is comparable with the distribution of worldwide M&As found by
Gugler et al. (2003). It is obvious that we should exclude and only exclude vertical
acquisitions from our analysis, which account for a very small share of the total
acquisitions. In the resulting sample, the median and mean shares of the Chinese
target firms held by the foreign firms after acquisitions in our data are 98% and
74.92%, respectively. Furthermore, to have a better focus, our dataset includes 106
largest countries, measured by GDP in 2000, as China’s (potential) export markets.
Those 106 countries account for most of China’s exports.
Acquisition Effects on Target Firm’s Exports
Inspired by our theoretical analysis, we modify the regression model (1) by
introducing a dummy variable to capture the difference between firms with export
experience and those without before the foreign acquisition:
DEXfkt ¼ a þ a0 EX0fk þ bACQft þ b0 ACQft EX0fk þ cGDPkt
þ Df þ Dk þ Dt þ efkt ;
ð2Þ
where EX0fk is the export dummy equal to one if firm f has exported to country k
before the acquisition, and zero otherwise, and all others are the same as defined in
model (1).
The regression results are reported in column (1) of Table 2. It is clear that for
firms without exports to a country before the acquisitions (EX0fk = 0), their
likelihood of exporting to that country increases significantly after the acquisition.
This finding is consistent with the prediction of Proposition 1. In contrast, for firms
with exports to a country before the acquisitions (EX0fk = 1), their likelihood of
exporting to that country decreases significantly after the acquisition. We have
conducted the F-test and confirmed that b + b0 < 0. This finding supports the
prediction of Proposition 3.
© 2016 John Wiley & Sons Ltd
94
Qing Liu, Larry D. Qiu, and Zhigang Li
Table 2. Effects of Foreign Acquisitions on the Targets’ Export Extensive Margin
Sample
ACQ
ACQ9EX0
Year FE
Firm FE
Country FE
Firm–country FE
p-value of F-test: ACQ+ACQ*EX0=0
Observations
R2
(1)
ALL
(2)
US
(3)
HK
(4)
Subsample
0.0062***
(0.0005)
–0.0822***
(0.0052)
yes
yes
yes
no
0
775,062
0.471
0.0043***
(0.0012)
–0.0407***
(0.0110)
yes
yes
yes
no
0.001
148,329
0.505
0.0073***
(0.0008)
–0.114***
(0.0108)
yes
yes
yes
no
0
223,872
0.446
0.0254***
(0.0014)
–0.142***
(0.0054)
yes
no
no
yes
0
256,851
0.637
Notes: Robust standard errors are in parentheses. ***,**,* Denote significance level of 1%, 5% and 10%,
respectively. In all regressions EX0 and GDP are included.
Robustness
In this subsection, we perform a number of robustness checks on the basic results
obtained in the preceding subsection. The results survive in all robustness tests.
•
•
•
Acquirer’s country. Although the two predictions with regard to the acquisition’s
effects on the target firms’ export extensive margin do not depend on the
characteristics of the acquirer’s country, there are reasonable doubts that in
reality the nature of the acquirer’s country matters. Take the USA and Hong
Kong as examples. First, these two economies are very different in terms of their
GDP levels, proximity to China, business structures, size of their multinational
companies, etc. The US acquirers could be more driven by market entry motives
while the Hong Kong acquirers could be more motivated by using the Chinese
firms as a low production base for serving the export markets. To see if our basic
results are sensitive to the acquirer country’s characteristics, we run one
regression based on the subsample in which all acquirers are from the USA and
another regression based on the subsample in which all acquirers are from Hong
Kong. These are the top two economies that acquire Chinese firms. The
regression results for the USA [in column (2)] and those for Hong Kong [in
column (3)] are consistent with the main result.
Firm–country fixed effect. There may be some firm–country specific factors that
affect a firm’s exporting decision to a given country. To take these factors into
account, we re-run the regression, model (2), by introducing the firm–country
pair fixed effect (Dfk).9 Our main results are robust as shown in column (4) of
Table 2.
Difference-in-differences approach. Our simple OLS regression results have
shown the correlation between foreign acquisitions and the Chinese target firms’
export extensive margin. They may not tell us the consistent causal effects of
foreign acquisitions on the targets’ export extensive margin, because foreign
firms do not choose targets randomly.10 If this target selection factor exists, the
above estimation of the acquisition effects will be biased.
© 2016 John Wiley & Sons Ltd
M&AS AND GLOBAL MARKET STRATEGY
95
To correct this potential (sample selection) bias, we should have information
about the target firms’ exporting decision if they were not acquired. However, this
information is counterfactual. Following the literature, we construct a control group
and employ the difference-in-differences technique to perform the test. We
construct the control group using the Chinese Industrial Enterprise Database, which
is maintained by the National Bureau of Statistics of China (NBS).
We first use the propensity score matching technique (see Rosenbaum and
Rubin, 1983) to find a control group for the target firms (the treatment group), and
then employ the difference-in-differences (DID) strategy to check the treatment
effect of foreign acquisitions on export extensive margin.11 We use firm size
(employment), labor productivity (constant value of output per employee), capital
intensity (asset–labor ratio), liability ratio (liability–asset ratio), short term debt
ratio (short term debt over cash flow), firm age, location (province), industry and
year dummies, to predict the propensity score and the criterion of the nearest
neighbor matching to find the control group.
Although there were 1561 Chinese firms acquired by foreign firms in our study
period, we found detailed pre-acquisition information for only 532 of them and
obtained their propensity scores. Among those 532 target firms, our propensity
score matching found 352 of them with control firms, while others have some items
of information missing for the estimation of propensity scores.
For each matched pair v, we use v(1) to denote the treated firm and v(2) to
denote the control firm; and we define a dummy AFv(i)t = 1 for every year t in and
after the acquisition year (the treatment year) and AFv(i)t = 0 if t is before the
acquisition year. Then, we check the treatment effect of foreign acquisitions on the
target firms’ likelihood of export by running the following regression:
DEXvðiÞkt ¼ a þ b1 TRvðiÞ þ b2 AFvðiÞt þ b3 TRvðiÞ AFvðiÞt þ cGDPkt
þ Dv þ Dk þ Dt þ evðiÞkt ;
ð3Þ
where, i = 1,2, DEXv(i)kt is the export dummy that is equal to 1 if v(i) has exported
to country k in year t and zero otherwise, TRv(i) is the treatment group indicator,
i.e. TRv(1) = 1 and TRv(2) = 0; Dv is the dummy for each pair (v) of the target firm
and its corresponding control firm; other variables are as defined before. We are
interested in b3, which is the average treatment effect of foreign acquisitions on
export extensive margin.
To estimate model (3), we divide our sample into two subsamples according to
each firm’s export history to each country before the acquisitions. To avoid too
many interaction terms, we run regressions for these two groups separately. The
regression results are reported in Table 3. It is clear that the treatment effect is
qualitatively the same as the finding from the OLS regressions.
The Channels: How Do Foreign Acquisitions Alter the Target Firms’ Export
Decision?
In this subsection, we make the first attempt to test whether those three channels
mentioned in section 3 are valid ones and which ones are actually used in the
foreign acquisitions of the Chinese firms. We first focus on the possibility of
technology transfer and then based on that result, further explore the other two
channels.
Because we do not have data on technology transfer, we assume that technology
transfer occurs if the target firm’s productivity increases after the acquisition. To
© 2016 John Wiley & Sons Ltd
© 2016 John Wiley & Sons Ltd
Basic
0.0449***
(0.0010)
yes
yes
yes
no
192,765
0.085
TR9AF
(3)
0.0467***
(0.0011)
yes
no
no
yes
192,765
0.307
Pair–Country
FE
0.0509***
(0.0025)
yes
yes
yes
no
38,583
0.082
US
0.0496***
(0.0022)
yes
yes
yes
no
43,624
0.096
HK
–0.135***
(0.0071)
yes
yes
yes
no
118,414
0.392
Basic
(6)
(7)
–0.152***
(0.0068)
yes
no
no
yes
118,414
0.642
Pair–Country
FE
–0.113***
(0.0154)
yes
yes
yes
no
23,566
0.426
US
HK
(8)
–0.173***
(0.0152)
yes
yes
yes
no
24,340
0.385
To countries with prior export experience
(4)
(5)
Dependent variable: Dummy of Export
Notes: Robust standard errors are in parentheses. ***,**,* Denote significance level of 1%, 5% and 10%, respectively. In all regressions TR, AF, and GDP are
included.
Year FE
Match pair FE
Country FE
Match Pair–Country FE
Observations
R2
(2)
To countries without prior export experience
Sample
(1)
Table 3. Treatment Effect of Foreign Acquisitions on the Targets’ Export Extensive Margin
96
Qing Liu, Larry D. Qiu, and Zhigang Li
M&AS AND GLOBAL MARKET STRATEGY
97
this end, we run the following OLS regression:
PRODUCTIVITYft ¼ a þ bACQft þ Df þ Dt þ eft ;
where PRODUCTIVITYft is firm f’s productivity in year t and other variables are
described as before. Here the firm fixed effect Df controls for all initial
characteristics of the firm that may affect its productivity.
We use several methods to measure productivity. The first is labor productivity
(LBP), which is the constant-value output per employee. The second is total
factor productivity (TFP), which can be estimated using the Solow residual at
the firm level. To estimate the Solow residual of the Chinese target firms, we
use data of constant-value output, labor employment, constant-value intermediate
inputs and capital stock, all in logarithm form. The third measure is the
Levinsohn–Petrin productivity (LPP) as proposed by Levinsohn and Petrin
(2003). In estimating LPP, we use constant-value output, capital stock, labor and
material input (all in logarithm form) as proxy for the unobservable productivity
shocks.
The OLS regression results are shown in the first three columns and the DID
results are shown in columns 4–6 of Table 4. We observe that foreign acquisitions
have no statistically significant effect on the target firms’ productivity.12 This result
is not surprising because similar results are found in other countries, e.g. Javorcik
(2004) for Lithuania. Thus, technology transfer is not observed in foreign
acquisitions of Chinese targets and therefore is not an important channel through
which foreign acquisitions affect the Chinese targets’ exporting behavior.
Although we do not have data to test the other two channels, namely fixedcost jumping and market reorganization, we can at least infer the results
indirectly. First, the same qualitative results can also be obtained when we focus
only on the targets that do not have exports to a foreign market before the
acquisition. If our theoretical model is correct, then the combination of the result
that foreign acquisitions increase the Chinese targets’ export extensive margin for
those targets that do not have exports before the acquisitions and the result that
there is no technology transfer associated with the acquisitions indicates that
either fixed-cost jumping or market reorganization works. Moreover, even if
market reorganization is a reason for the increase in the target’s export extensive
Table 4. Technology Transfer and Productivity Changes
Productivity
ACQ
(1)
LBP
(2)
TFP
(3)
LPP
–390.6
(258.90)
–0.0316
(0.05)
207.5
(202.40)
TR9AF
Year FE
Firm FE
Match pair FE
Observations
R2
yes
yes
yes
yes
yes
yes
1817
0.335
1817
0.937
1817
0.171
(4)
LBP
(5)
TFP
(6)
LPP
26.21
(51.84)
yes
0.0014
(0.04)
yes
155.6
(145.80)
yes
yes
2321
0.998
yes
2321
0.935
yes
2321
0.170
© 2016 John Wiley & Sons Ltd
98
Qing Liu, Larry D. Qiu, and Zhigang Li
margin, fixed-cost jumping is also used in accompany with the market
reorganization because Proposition 2 indicates that market reorganization is
always accompanied with either fixed-cost jumping or technology transfer, and
the empirical analysis above has shown that technology transfer is not present.
Hence, fixed-cost jumping is a key factor and global market reorganization may
be also another key factor to increase the Chinese target firms’ export extensive
margin by foreign acquisitions.
Finally, we provide a direct test of the market reorganization effect. Both
Propositions 2 and 3 indicate that market reorganization strategy is determined by
the relative value of t2 to t1. Trade costs ti mainly include the importing country’s
tariffs and transport costs from the exporting country to the importing country.
However, most countries in our dataset are WTO members that have nondiscriminatory tariffs. The implication of this fact is that including tariffs or not in
the calculation of trade costs does not affect the relative value of t2 to t1.13 Hence,
we can just use transport cost as the trade cost. Following most of the literature, we
use distance to represent transport cost. Accordingly, we introduce a differential
distance dummy variable DDISTfk, which is equal to one if (t2 t1)/t2 is very large
but zero otherwise. To be more precise, we calculate ðln t2 ln t1 Þ for all country
pairs and set DDISTfk = 1 if the corresponding ðln t2 ln t1 Þ is greater than the 75th
percentile of all ðln t2 ln t1 Þ in the whole sample and DDISTfk = 0 otherwise. We
then run the following regression:
DEXfkt ¼ a þ a0 EX0fk þ bACQft þ b0 ACQft EX0fk þ a1 DDISTfk
þ b1 ACQft DDISTfk þ cGDPkt þ Df þ Dk þ Dt þ efkt :
Both Propositions 2 and 3 predict that b1 is positive. This is confirmed by our
regression result, as reported in Table 5. Therefore, evidence suggests that
multinationals do use their global market reorganization strategies through
acquisitions of the Chinese firms.
Table 5. Test of Global Market Reorganization Strategy
(1)
(2)
Dependent variable: Dummy of Export
ACQ
ACQ9EX0
ACQ9DDIST
Year FE
Firm FE
Country FE
Firm–Country FE
Observations
R2
0.0161***
(0.0017)
–0.0995***
(0.0056)
0.0128***
(0.0023)
yes
yes
yes
no
235,083
0.444
0.0231***
(0.0016)
–0.139***
(0.0058)
0.00825***
(0.0027)
yes
no
no
yes
235,083
0.632
Notes: Robust standard errors are in parentheses. ***,**,* Denote significance level of 1%, 5% and 10%,
respectively. DDIST and EX0 are included in column 1. GDP is included in both regressions.
© 2016 John Wiley & Sons Ltd
M&AS AND GLOBAL MARKET STRATEGY
99
5. Concluding Remarks
We have developed a three-country model to examine the motives of foreign
acquisitions and their effects on the target firms’ decision to export to the third
market. We show that if the targets have no exports before the acquisitions, foreign
acquisitions will increase the targets’ export extensive margin through three
channels: fixed-cost jumping, technology transfer and global market reorganization.
However, if the targets have exports before the acquisition, the foreign acquisitions
will reduce the targets’ export extensive margin in accordance with the acquirers’
global market reorganization strategy. These theoretical predictions are confirmed
using the firm-level data on foreign acquisitions of Chinese firms from 2000 to 2006.
Moreover, we find that technology transfer does not occur after the foreign
acquisitions, fixed-cost jumping is used to raise the targets’ export extensive margin,
and global market reorganization is a key motive for the acquirers to reduce the
targets’ export extensive margin.
Our paper makes a contribution to the studies of FDI in a multi-country setting.
Specifically, we study foreign acquisitions (an important type of FDI) and their
effects on the target firms’ export behavior. In contrast to the prediction from
models of export-platform FDI, foreign acquisitions may reduce the target country’s
export. Global market reorganization is found as an motivation of foreign
acquisitions and it has a significant effect on exports.
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Notes
1. See Markusen (2002) for a review of the theoretical studies and Blonigen (2005) for the
empirical work.
2. See a review of this new (but small) literature by Blonigen et al. (2007).
3. We identified those 661 firms by searching each of the 1564 Chinese target firms (from the
SDC Database) in the Chinese Customs Database and matching them by the firm’s name,
double checked by location and industry affiliation.
4. Similarly, Ekholm et al. (2007) assume no domestic demand in the host country. Their
model is more specific than ours.
5. To save space, all mathematical expressions and proofs of the propositions are omitted,
but they are available upon request from the authors.
6. There is another case with regard to market structure in country O before the acquisition,
which is, neither firm 1 or firm 2 export. However, this case is included in our analysis after
the acquisition in the next subsection, and so we omit it here.
7. There is another action not listed in the table, which is “technology transfer, only firm 2
exporting,” but obviously firm 2 will never choose this action.
8. Note that if firm 1 and firm 2 can share part of the fixed export costs (e.g. distribution
channel), then P4 ¼ pa1 þ pa2 þ sf and P5 ¼ pa1 ðc ¼ 0Þ CT þ pa2 ðc ¼ 0Þ þ sf , where s 2 0, 1]
captures the degree of cost sharing. Thus, it is more likely to have Π4 = Π or Π5 = Π than the
case without cost sharing. However, the qualitative aspects of all results in this paper remain
unchanged.
9. However, as there are too many firm–country fixed effects, we confine to a smaller but
more relevant (i.e. export-platform acquisitions) set of data consisting of the 661 firms that
had positive exports to some countries in some years during the same period.
10. For example, Liu and Qiu (2013) find that the targets on average have better
performance measures than those firms not acquired by any firms.
11. This approach is also adopted by Huttunen (2007) and Liu et al. (2015) in their studies
of foreign acquisition’s effect on employment.
12. We also run the regressions based on two different countries/regions, the USA and Hong
Kong, as the acquirers’ countries/regions. The results are the same.
13. Although China became a WTO member only in 2001, China received the most-favored
nation status before 2001. We also tried the regression with the subsample of only WTO
members, and get similar results.
© 2016 John Wiley & Sons Ltd