Antecedents of Inbound and Outbound M&A: Industry-Level Analysis from India.
| Verfasser | Singla, Chitra |
1 Introduction
Emerging markets such as India and China have shown an upward trend in cross-border mergers and acquisitions (M&As) (Deng and Yang 2015; UNCTAD 2014) for over a decade now. For example, in 2013, emerging economies accounted for 36.5% (approximately) of the world's total value of cross-border M&As (UNCTAD 2014). Firms from emerging markets prefer M&A over other modes of internationalization such as alliances and green-field investments because M&As reduce the opportunity costs for these firms to absorb crucial resources such as technology and managerial know-how (Chen et al. 2012; Deng and Yang 2015; Williamson 1991) and also reduce the dependencies of these firms on local firms in the host countries (Gaffney et al. 2013; Haleblian et al. 2009). Cross-border M&A flows allow economic integration across countries and also allow firms to diversify their procurement, production, and distribution in foreign countries (di Giovanni 2005). Given the increasing trend of cross-border M&As, further research is required in emerging markets to understand the drivers and consequences of these cross-border M&As (Deng and Yang 2015; Sun et al. 2012).
Prior M&A studies (see review articles by Haleblian et al. 2009; Lebedev et al. 2015; Xie et al. 2017; Zhu and Zhu 2016) examined the antecedents of cross-border M&As at extensive levels. For example, factors such as a firm's characteristics, environmental factors, value creation in M&As (such as market power), managerial self-interest, top management's characteristics (such as CEO compensation and experience, board members' characteristics), motivations such as asset or marketing seeking, characteristics of the target firm, and dyadic relationships between targets and acquirers (Zhu and Zhu 2016) are considered as firm-level drivers of M&As. Additionally, the impact of industrial deregulation (Cornaggia et al. 2015), industrial structures (Gorton et al. 2009), and industry clusters (Almazan et al. 2010) on a firm's M&A activity has been examined. Zhou et al. (2014) found that firms from technology-intensive industries are more active in cross-border M&As compared to firms in labor-intensive industries.
Therefore, it is imperative to examine why some industries attract more cross-border M&A activity compared to others because an industry's efficiency, competitiveness, productivity, and governance are impacted by cross-border M&As (Chen and Findlay 2003), which has important implications for a firm's strategy and performance. Excessive M&A activity in a particular industry could negatively affect the competitiveness of the industry by concentrating market power in the hand of a few players, which could encourage country-level institutional constraints such as anti-merger legislations for that industry (Peng et al. 2008; Santos and Eisenhardt 2005). This has important implications for the managers of the firms in that industry as well as policy makers. Despite the abundance of literature on M&A activity, there is a research gap in exploring cross-border M&As, especially cross-border M&As from emerging markets.
1.1 Research Gap in the Emerging Market Literature
The extant literature has three notable limitations. First, there is ambiguity about what kinds of industries have higher cross-border M&A activities in emerging economies and what the impact of cross-border M&As is on an industry's productivity. For example, Sun et al. (2012) reported higher outbound M&A activity from the service industry in India and from the manufacturing industry in China, while Zhou et al. (2014) reported higher outbound M&A from technology-intensive industry compared to labor-intensive industry. The main focus of these studies was on the firm-level and country-level antecedents of outbound M&A. Consequently, there was limited focus on inbound M&A and the industry-level antecedents of cross-border M&As (Huyghebaert and Luypaert 2010; Tolentino 2010). From an economy's perspective, both inbound and outbound M&A affect an industry's efficiency, productivity, and structure. Therefore, it is important to study both kinds of M&A activity; otherwise, it could result in incomplete understanding of M&A activity, leading to ambiguous results. Consequently, to understand the drivers of both inbound and outbound M&A as well as the impact of cross-border M&As on an industry's productivity, research at the industry level is required.
Second, most prior studies on cross-border M&A activity subsumed industry effects in country effects. When studies aggregate industry-level data for analysis, they might not be able to capture nuances that can be observed with a finer industry classification (Deng and Yang 2015). For example, a short product life cycle and advancements in technology could be industry-specific factors that would put pressure on firms belonging to such industries to capture opportunities quickly (Chen and Findlay 2003). Higher cross-border M&A activity might be found in such industries because M&As are a faster way to access resources and capture opportunities compared to greenfield investments or other modes. According to Miller (1993), managers perceive risks related to strategic decisions (such as cross-border M&A) at three levels--firm, industry, and country--and these risks are different from one another. Industry-level risks are related to input market, product market demand, and competition in terms of strategic moves of firms in the industry and potential entrants, which cannot be subsumed under country effects. Since cross-border M&As could affect competition in the industry, it is crucial to segregate industry effects from country effects while examining the drivers of cross-border M&As at the industry level (Bower 2001). Third, it is important to examine whether cross-border M&A theories developed in the western context are context-specific or context-free (Child 2009; Xu and Meyer 2013), which can be achieved only after applying these theories in different contexts such as an emerging market context (Lebedev et al. 2015; Sun et al. 2012).
This paper addresses these research gaps by examining the impact of industry characteristics such as domestic industry's growth rate, capital intensity of the industry, and foreign competition via imports in the industry in determining the extent of inbound and outbound M&A activity in the industry. We chose three industry-level variables that cannot be subsumed under country-level variables (or country effects); these variables determine the industry's structure as well. Our unit of analysis is the industry, and we focus on India as the base for inbound and outbound M&As. India, an emerging economy, is an interesting setting for this analysis because some industries in India have experienced very high levels of M&A activity (e.g., the pharmaceutical industry and IT), while others experience very low levels of M&A activity (e.g., consumer electronics). These observations raise questions about what drives these M&As in and out of India, and why there are industry-level differences in the same country. Our research addresses an important research gap in India's cross-border M&A literature, as discussed in the following section.
1.2 Research Gap in Literature on India's Cross-Border M&As
With the rising number of deals in cross-border M&As in India, many researchers have examined the drivers of cross-border M&As as well as the consequences of these M&As. Using the springboard perspective of Luo and Tung (2007), Popli and Sinha (2014) empirically showed that a firm's characteristics such as the firm's size, early experience with alliances, and internationalization embeddedness of business groups impact the merger waves in four industries in India. Similarly, the ownership structure of firms (Chittoor et al. 2015; using behavioral risk perspective) and a firm's financial health, debt structure, and market capitalization (Das and Kapil 2015) impact outbound M&A. Varma et al. (2017) argued that firm, industry, and country characteristics impact a firm's outbound M&A. Jayanthi et al. (2016) empirically showed that host country-related factors such as strategic assets in the host country, economic environment, common language, and openness of the economy drives outbound M&A and choice of location of firms in the Indian pharmaceutical industry. Using data from the Indian service industry, Popli et al. (2016) examined the moderating role of industry affiliation on the relationship between cultural distance and outbound M&A deal abandonment. They found that the relationship is stronger in capital-intensive service industries and weaker in knowledge-intensive service industries. This finding shows that industry effects matter in cross-border M&As.
In addition, researchers have examined the consequences of cross-border M&As on the acquirer's performance (Gubbi et al. 2010, in the context of the pharmaceutical industry; Kalghatgi and Badi 2013; Srivastava and Prakash 2014), the target's performance (Ranju and Mallikarjunappa 2018, using a sample of high technology industries), and the acquirer's R&D intensity (Vyas and Narayanan 2016). Researchers have empirically shown that the ownership structure of the acquirer (Bhaumik and Selarka 2012), industry type, and cultural distance between countries (Nicholson and Salaber 2013) impact the post-acquisition performance of the acquirer. Further, motivations such as resource seeking, strategic asset seeking, and market seeking determine outbound M&A (Ramamurti 2012, 2013) and the choice of country for outbound M&A (Pradhan 2010; Reddy et al. 2016a). Sethi (2009) argued that Indian firms do not restrict themselves to geographically close regions for cross-border acquisitions, which is contrary to what is seen in firms from Brazil, China, and Russia. De Beule and Duanmu (2012) compared Indian firms with Chinese firms in the mining and high technology sectors and examined the impact of firm-level...
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