Age Matters: The Contingency of Economic Distance and Economic Freedom in Emerging Market Firm's Cross-Border M&A Performance.
| Verfasser | Liou, Ru-Shiun |
| Posten | RESEARCH ARTICLE |
1 Introduction
Lacking market-supporting institutions back home, emerging market multinational firms (EMFs) often choose to acquire internationally at an early stage of the company's development to escape the institutional constraints in their home markets. Particularly, based on case studies of Asian EMFs, Mathews (2006, 2017) suggest that lacking ownership advantages, EMFs follow a trajectory of Linkage--Leverage--Learning (LLL) and turn the latecomer disadvantage into an advantage, when EMFs successfully leverage the strategic assets of the connection with the target firms as well as replicate the learning organizational capabilities to expedient its trajectory for global expansion.
While pioneering studies shed light on how some successful EMFs leverage their acquisitions of established targets to gain competitive advantages, we do not have a clear understanding about under what circumstance EMFs' early inorganic growth via acquisitions benefits their overall firm performance, and specifically whether the young EMFs enjoy better post-acquisition performance than the older EMFs. The age of the internationalizing firm has been shown to play a key role in the outward investment activities (Aykut and Goldstein 2007; Jones 1999). Older firms with established organizational capabilities (Barney 1991; Peteraf and Barney 2003; Schreyogg and Kliesch-Eberl 2007) have internal resources, industry knowhow, capital access and longer domestic presence which might help them in generating organic and inorganic growth in the foreign markets, whereas, the younger firms often have strategic agility (Criscuolo and Narula 2007) and less domestic ties which might impel them to access international markets for resources and capital (Cuervo-Cazurra 2012; Makino et al. 2002; Ramamurti 2016). Thus, it remains an intriguing issue as for whether young and old EMFs perform differently, particularly after conducting cross-border acquisitions.
Empirically, a few studies focus on the short-term stock performance after EMFs announce their cross-border acquisitions (e.g., Aybar and Ficici 2009; Nicholson and Salaber 2013). Findings of this line of research support that cross-border acquisition announcements lead to value enhancement in EMF acquirers' stocks when those acquisitions are made in developed markets (Aybar and Ficici 2009; Nicholson and Salaber 2013). In other words, the announcement effect exists such that stockholders recognize the benefits for EMFs in acquiring valuable targets in the developed markets. However, according to the M&A literature, acquirers assess the potential synergy before the acquisition, but the post-acquisition integration usually present challenges that are not well anticipated before the acquisitions (Bjorkman et al. 2007).
Considering the post-acquisition integration, we propose that the effect of firm age on EMFs' post-acquisition operating performance calls for an understanding of the contextual factors in host and home institutional environments South Africa provides a unique setting as it has experienced colonization as well as apartheid, and, over last 25 years, has integrated into global economy. South Africa (SA) has experienced rapid growth in its GDP from 136 trillion US dollars (2000) to close to 350 trillion US dollars (2014) (UNCTAD 2015). To delineate the intricacy of the post-acquisition operating performance, we integrate the literature of institution-based view and LLL framework to delineate the significant opportunities afforded in the cross-border acquisitions for SA firms in the historical context of South Africa between 1994 and 2012. First, we review relevant institution-based view literature on EMFs' post-acquisition performance and discuss the historical context of colonization and apartheid in South Africa. In the context of our study, LLL framework is ideal as it helps identify the benefits of linkages via cross-border acquisition with the foreign company and leverage target's strengths as well as learn about foreign markets (Mathews 2002, 2006). Second, we offer hypotheses to study the age effect of South African firms on their post-acquisition performance in light of the economic distance and home country economic freedom. Economic distance, defined as the difference in the economic development of the host country relative to that of the home country, reflects the differences in factor costs and technological capabilities between the host and home countries (Ghemawat 2001; Tsang and Yip 2007). Economic distance does not only signify the learning opportunities but also presents the challenges for post-acquisition integration that requires considerable resources and efficient reconfiguration of organizational resources. In addition, the lack of economic freedom explains some SA acquirers' motivation to acquire a target in a foreign country to diversify the heightened risks in their home markets. Third, we report the methodology and results as well as offer a discussion on the implications of our findings.
Overall, we take an integrative approach and build on the LLL framework to examine SA firms' post-acquisition operating performance. We contribute to the researchers' recent call for more understanding of the interaction between the firm level and country level characteristics for SA firms' internationalization (Lu et al. 2017; Meyer et al. 2009; Ramamurti 2016). Lu et al. (2017) reviewed the studies on dragon multinationals and suggested that original LLL framework developed by Mathews (2006) downplayed the critical factors of the EMFs' home institutional environment. As mentioned in the recent review article of springboard EMFs (Luo and Tung 2018), the inorganic growth via cross-border acquisitions provides an excellent opportunity to propel SA firms' growth by augmenting their strategic capabilities and reducing their vulnerability to home institutions. Current study bridge both Springboard perspective and LLL framework (Mathews 2006, 2017) and propose that the country level factors present important boundary conditions to examine the LLL benefit of internationalization for EMFs. Using a sample of SA firms' acquisitions between 1994 and 2012 and post-acquisition performance over three-year period, we find support for the benefit of foreign acquisitions at a young age as well as the moderation effects of economic distance and economic freedom.
2 Literature Review
2.1 Institution-based View of EMFs' Internationalization
In recent years, foreign direct investment originated from emerging economies accounted for a quarter of the worldwide foreign direct investment (UNCTAD 2015). These emerging-market multinational firms (EMFs) are shown to have used their foreign investments to exploit the host-home institutional environmental differences (Cuervo-Cazurra 2012; Makino et al. 2002; Ramamurti 2016). The rationale for the EMFs' inorganic growth, via acquisitions, in foreign markets with regards to the host-home institutional environments is twofold. First, EMFs gain competitive advantages when they acquire established firms' advanced technology and managerial know-how as well as the reputable brand and distribution channel (Elango and Pattnaik 2007; Li et al. 2012; Luo and Tung 2007). Such valuable targets are less likely to be available in EMFs' home economies (Cuervo-Cazurra 2012; Makino et al. 2002; Mathews 2006). Second, in addition to the traditionally conceptualized 'pull' factors for foreign expansion, such as gaining additional market share in a larger foreign market, 'push' factors including weak institutions and economic underdevelopment in their home countries drive EMFs to acquire in foreign countries (Cuervo-Cazurra and Ramamurti 2015). As shown in the collection of studies on EMFs, EMFs seek accelerated internationalization to acquire much needed strategic assets, such as advanced technology and managerial know-how (Elango and Pattnaik 2007; Li et al. 2012; Luo and Tung 2007) as well as to escape the institutional constraints in their home markets with weak market-supporting institutions (Cuervo-Cazurra and Ramamurti 2015; Makino et al. 2002; Ramamurti 2012).
Some EMFs demonstrate the characteristics of the advanced-market firms' internationalization activities, like targeting underdeveloped countries' resources for strategic complementary or market development in underrepresented markets. For example, the Chinese EMFs' rapid expansion in Africa is mainly driven by their strategic resource seeking in these countries (Kolstad and Wiig 2011). Other EMFs have utilized internationalization to escape from the limited domestic market condition. For instance, SabMiller, a brewing and beverage company founded in South Africa, has chosen to operate globally to avoid governmental control over foreign exchange usage (Luo and Tung 2007). In essence, bounded by unique institutional conditions in their home markets, such as lacking stable market-supporting institutions and well-developed economies, EMFs often demonstrate an urgent need for accelerated internationalization (Guillen and Garcia-Canal 2009; Mathews 2006) and conduct a series of aggressive cross-border mergers and acquisitions to expediently expand their international business (Aybar and Ficici 2009; Li et al. 2016).
2.2 Linkage--Leverage--Learning (LLL) Framework
A few researchers have suggested that EMFs possess a unique market-based advantage, which refers to the advantage developed based on the country-specific resources to compete against other firms in the industry (Cuervo-Cazurra and Gene 2011). EMFs have advantages in providing lower cost products as well as in designing products for a niche market, particularly serving emerging market customers. EMFs' cost advantage is mainly derived from the factor endowment in their home country, such as cheaper labour and raw materials (Sun et al. 2012). Since the 1950s, lower trading barriers have encouraged foreign direct investment, and established...
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