Resource deepening vs. resource extension: impact on asset-seeking acquisition performance.
|Gubbi, Sathyajit R.
|RESEARCH ARTICLE - Report - Abstract
Abstract Seeking critical assets is known to be a key motivation for emerging economy firms to make acquisitions in foreign markets, especially those in developed economies. In this study, we probe this motivation further by identifying two categories of asset-seeking acquisitions: resource deepening and resource extension. Using a sample of 1004 cross-border acquisitions conducted by Indian firms during the period 2000-2010, we find support for the hypothesis that the type of resources sought and their intended utility impacts acquisition performance. Additionally, for resource extension acquisitions, we find that acquisition performance outcomes vary by the assimilative capacity of the firm and the extent of experience in acquisitions at the firm and business group level.
Keywords Cross-border acquisition performance * Asset-seeking * Resource configuration * Emerging economy * Business groups * Assimilative capacity
The use of acquisitions to obtain desired or missing resources is a well-documented argument in foreign direct investment (FDI) literature. According to Makino et al. (2002, p. 406), "... firms invest in foreign countries not only to exploit but also to develop their firm-specific advantages or acquire necessary strategic assets in a host country", thus suggesting that firm-specific advantages can be created through acquisition of assets owned by other firms. In support, Dunning (1998, p. 50) reports that "... the most significant change in the motives for FDI ... has been the rapid growth of strategic-asset seeking FDI" particularly by means of mergers and acquisitions.
Although the use of foreign direct investments (FDI) to acquire critical capabilities, mostly in the high technology industries, has been witnessed across many contexts (e.g., see Chung and Yeaple 2008), asset-seeking cross-border acquisitions have become the preferred choice for firms from emerging economies across a wide spectrum of industries. By definition, emerging economies are those who have undergone survival-threatening institutional changes due to a shift from state control to a free market economy (Hoskisson et al. 2000; Newman 2000). As a consequence of the underdeveloped nature of factor and product markets (Khanna and Rivkin 2001), difficult and constantly evolving home market conditions (Cuervo-Cazurra and Gene 2008; Elango and Pattnaik 2007; Peng 2003), and timeliness of obtaining competitive capabilities when global companies are ramping up in their backyard (Dierickx and Cool 1989; Da war and Frost 1999), the market for firms has become more efficient than the market for resources (Capron et al. 1998). Moreover, acquisitions can be a valuable instmment to either fill persistent gaps near the firm's existing products or to extend the enterprise in a new direction (Lee and Lieberman 2010). As the desired strategic assets are hard to obtain locally, emerging economy firms often resort to cross-border acquisitions and internationalize in the process (Luo and Tung 2007; Mathews 2006).
Cross-border acquisitions of targets with complementary or advanced capabilities, especially those located in industrially-advanced countries, not only help meet the immediate objectives of the indigenous firms in the post-reform period (strategic asset-seeking motive) (Gubbi et al. 2010), and equally important, acquisitions help overcome the latecomer status in global markets and the associated liabilities of newness and foreignness (Luo and Tung 2007). Several recent studies on acquisitive behaviors of emerging economy firms have provided empirical support for the above conjecture (see Rui and Yip 2008; Gubbi et al. 2010). We extend this stream of research further, both theoretically and empirically, by investigating the conditions when these asset-seeking acquisitions (1) create more value for the investors. This aspect of acquisitions in addition to the relative importance of influential factors requires more clarity and better understanding [see Haleblian et al. (2009) for a comprehensive review].
We build our theory on the premise that acquiring firms can select between adding resources and capabilities which strengthen the existing portfolio, i.e., resource deepening, or adding resources and capabilities which extend the existing portfolio, i.e., resource extension (Karim and Mitchell 2000; Lee and Lieberman 2010). For example, firms may acquire resources critical for their short-term survival as well as those in the immediate vicinity of an existing knowledge base or to fill known gaps in the existing resource portfolio. Such resources and capabilities have greater clarity in terms of end usage and are more readily integrated. We term these as resource deepening acquisitions. On the other hand, a firm can choose to acquire advanced or new capabilities, which are more distant from the current knowledge base and more critical for long-term sustainability of competitive advantage. In such instances, there are greater challenges with respect to organizational time and effort necessary to integrate and, more importantly, greater commitments and risks since there is greater causal ambiguity in integrating and deploying such resources. We term these as resource extension acquisitions. (2)
Combining both types of acquisitions into a single group may obfuscate the true relationship between acquisitions and performance. This distinction is critical in the context of emerging economy acquirers since these firms are engaging in output catch-up, i.e. "... acquiring technologies and skills that are directly related to the currently observable product or service" (Awate et al. 2012, p. 206), whereas resource extension capabilities "... are the technologies and skills relating to developing and enhancing the observable product or service. Therefore, they go beyond smaller adaptations and adjustments of the product and, rather, describe firms' ability to develop the 'next generation' of the product". (Awate et al. 2012, p. 208). We propose that, depending on whether the acquisition is aimed at resource deepening or resource extension, acquisition performance in the context of emerging economies is likely to be different.
Our core proposition hinges on the argument that firms in emerging economies have a greater awareness of what is necessary in the short run to survive, but may not have the required visibility and knowledge to estimate what might work in the long run. This is due to the evolving nature of the institutional market and the related instability in home market conditions. Therefore, resource deepening acquisitions are likely to lead to positive outcomes for these firms. In contrast, resource extension acquisitions deal with advanced and complex capabilities, which have a longer gestation period in terms of utility and hence carry greater uncertainty in terms of acquisition outcomes. Therefore, acquisition performance in this case is more difficult to predict. However, using rationalizations from the resource-based view of the firm, we identify two factors related to a firm's ability to benefit from resource extension acquisitions: assimilative capability of the firm and the experience gained from previous acquisitions. We propose that the greater a firm's assimilative capability and/or experience with acquisitions is, both at the firm and business group level, the better its chances of positive outcomes even with resource extension acquisitions.
Our theoretical model finds support in a sample of 1004 cross-border acquisitions undertaken by Indian firms over the period 2000-2010. This study extends existing knowledge on emerging economy firm acquisitions in several ways. First, it differentiates acquisitions using specific motivations of acquiring firms and shows that performance outcomes vary by the fitment and utility of the resource sought by the firm in the transaction. Therefore, it is not just the nature of the resource sought that matters (i.e., whether tangible or intangible), but how the resource matters to the overall resource profile and the outlook of the key decision makers should also be factored in while trying to explicate related performance outcomes. Second, while we find that results for resource extension acquisitions are not positive to performance, this study offers important insights using the resource-based view of the firm to show how one could address this disappointing outcome favorably. Specifically, this study brings in the need for firms to develop assimilative capacity by investing in research and development and by increasing international market exposure to attenuate the performance risk in resource extension acquisitions. Additionally, this study highlights the fact that all forms of acquisition experience may not be equally important for firms involved in resource extension. Business group level acquisition experience, which offers greater variation in knowledge and routine, seems to facilitate resource extension acquisitions, resulting in greater benefits, while firm level experience, which is much narrower, seems to hinder positive performance outcomes. In the following sections, we review the literature and build our theoretical model, detail our sample collection and analysis procedure, report our results and discuss the findings.
2 Theory and Hypotheses
The basic tenets of the resource-based view of the firm stipulate that resources need to be both rare and valuable in order to produce competitive advantage (Barney 1991). Whether a particular resource is valuable is determined by "... market environment, through opportunities and threats,... [a]s the competitive environment changes, resources may change." (Priem and Butler 2001, p. 29-30, italics in the original) A defining feature of emerging economies is that, in the post-reform period, the indigenous firms had to simultaneously grapple with swift changes in the institutional environment while the existing...
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