The Decision to Stay or Resign Following an Acquisition by a Chinese or Indian Company.

VerfasserAlkire, Terry

1 Introduction

To what extent would Western managers choose to resign if their company were suddenly taken over by a foreign multinational? Would their intention to leave be higher in cases of acquisition by foreign companies than in purely domestic acquisitions? And, would this intention be significantly higher if the acquisition were by a Chinese or Indian company?

These three questions deal first with the liability of foreignness (LOF), which represents the additional costs arising from operating across national boundaries and large geographic distances in countries with unfamiliar environments (Zaheer 1995), which can have adverse consequences on post-acquisition performance due to an increase in the loss of key target company managers. The negative reactions and subsequent higher departure rate of target company managers when the acquiring company is a foreign multinational are considered to be one of the factors of the LOF (Krug and Nigh 2001; Krug 2003).

Moreover, the three questions posed above suggest that the importance of the LOF may vary from one foreign acquirer to the other: whereas all multinationals are subject to the LOF, some foreign acquirers seem to be more 'foreign' than others (Sauvant et al. 2009). According to this perspective, emerging-economy acquirers, especially Chinese- and Indian-owned companies, may suffer from the additional "costs of doing business abroad" (Zaheer 1995, p. 342).

National cultural differences, psychic and geographic distances, and the acquiring company's general unfamiliarity with the local environment may produce adverse reactions in target company managers leading to a high likelihood that they will make a decision to resign (Buckley et al. 2012; Forsgren 2002; Chatterjee et al. 1992; Johanson and Vahlne 1977; Krug and Nigh 2001; Larsson and Lubatkin 2001; Schweiger and Very 2003). However, other factors related to the foreign acquirer's home country and target company managers' unfavourable perceptions of it may also contribute to costs and hurdles for foreign acquirers. When a foreign acquisition is conducted, local managers often, for instance, form an opinion of the acquirer based on stereotypes and a negative national image.

The foreign acquirer's home country and the target company managers' (favourable or unfavourable) perceptions of it are two underlying factors of the LOF. They are included in the list of sources of LOF--specifically defined by Zaheer (2005, p. 343) as "costs resulting from the host country environment" and "costs from the home country environment"--and directly affect the relative importance of the LOF to foreign acquirers depending on their country of origin. These two factors have to be analysed jointly as the extent of the impact of the LOF will differ according to the varying perceptions that managers of different host countries might have of an acquirer's country of origin. As a consequence, different combinations of home country/host country may lead to a higher or lower LOF.

The influence of perceptions of the foreign acquirer's home country on management reactions within the target company can be particularly problematic when the acquisition is conducted by newly globalised emerging-economy companies. Emerging-economy acquirers may suffer from negative images and stereotypes generated by a combination of country-of-origin bias and the very nature of their "emergingness" (Madhok and Keyhani 2012). As pointed out by Thite et al. (2012, p. 253), "The MNCs [multinational companies] from emerging economies face a 'double hurdle' of liability of foreignness and liability of country of origin with perceived poor global image of their home country". In the context of cross-border acquisitions, this 'double hurdle' may result in a higher LOF relative to foreign acquirers from more developed countries or regions of the world.

The aim of this paper is to support this hypothesis and demonstrate that in the context of target companies from developed countries (e.g., Western companies), emerging-economy acquirers, especially Chinese- and Indian-owned companies, experience a significantly higher LOF than companies from elsewhere in the world. We examine this hypothesis using a sample of 252 managers from three major developed economies (France, Germany and the US) who were asked to share their decisions about whether they believed they would stay or leave their companies in different takeover scenarios. Since this research is focused on potential future decision making, we employed the policy-capturing method. Through the use of a series of manipulated scenarios, this survey method allowed us to predict whether French, German and US managers would be more likely to leave their job if their existing employer were to be acquired by a Chinese- or Indian-owned company as opposed to a locally-owned company or a company from another Western country (i.e., a European acquirer for US managers or a US acquirer for French and German managers).

In order to further isolate and analyse the importance of the LOF to emerging-economy acquirers, we examined whether the direction and magnitude of Western manager reactions are likely to differ (1) when the acquirer and its target are known to each other through a previous inter-organisational alliance, (2) when the acquirer's top management is experienced in successful acquisitions, (3) when the acquirer has previous experience with the local market (or with the target company's domestic market), and (4) when the target company is to be preserved or assimilated by the acquirer. The inclusion of these moderating variables is important because they are commonly viewed in the acquisition research literature as key determinants of the target company's employee reactions at early post-acquisition stages. More specifically, (1) these four acquisition-related dimensions may be considered as pre-acquisition due diligence tools (Arend 2004) helping potential acquirers to better understand the target's organisation and culture and to reduce information asymmetries, which in turn may decrease the likelihood of adverse selection; and (2) when combined with the question of the target company's preservation or autonomy, they may facilitate the development of mutual awareness and familiarity between the acquirer's as well as the target's management teams, thereby enhancing the acquirer's image and reputation and mitigating the risk of post-acquisition culture clashes and key talent loss (Stahl et al. 2003; Stahl and Sitkin 2010; Very et al. 1997; Zaheer et al. 2010). Hence, we examined the role of prior alliance, experience with successful acquisitions, local market experience and the degree of post-acquisition integration as possible forces able to counterbalance the degree of LOF to be borne by emerging-economy acquirers.

The remainder of this paper is structured as follows. First, we review the extant literature on the relationship between an acquirer's LOF and target company managers' perceptions of the acquirer's country of origin and its influence on their decisions on whether or not to leave. Next, we introduce four common factors from the established acquisition literature stream in order to analyse whether they produce any significant moderating effects on the post-acquisition retention of key talent. Based on this information, we formulate five sets of research hypotheses. We then test the hypotheses and present the statistical results. The main findings and limitations of the paper, as well as directions for future research, are discussed in the final section.

2 Hypothesis Development

2.1 Liability of Foreignness and Country-of-Origin Bias in the Context of International Acquisitions

"The odds that executives will leave increase significantly when a firm is acquired by a foreign multinational" (Krug and Nigh 2001, p. 85). Building on this finding, literature dealing with the human side of acquisitions has begun to examine the adverse consequences this contributes to the LOF. According to the literature, when high numbers of managers resign following an acquisition by a foreign company there is an associated loss of managerial knowledge, social capital (Kiessling et al. 2008) and "leadership continuity" (Krug 2003). The loss of these critical organisational resources can create a shock wave throughout the target company resulting in additional stress and anxiety among lower-level employees, thus prompting them to leave as well (Krug and Nigh 2001). This high loss of key staff is very likely to disrupt the post-purchase integration process, thereby jeopardising the future performance of the acquisition (Buono and Bowditch 1989; Butler et al. 2012).

Many studies in this literature stream have therefore assessed the adverse impact that the LOF can have on the unsolicited post-acquisition exodus of managers, and have compared it to the general liability of acquisition. Such studies show, first, that post-acquisition managerial departure in domestic (i.e., non-international) acquisitions is significantly higher than 'normal' management departure rates unrelated to acquisition, often reaching as high as 60% within the first 5 years (Walsh 1988). Second, they reveal that in the first 5 years following cross-border acquisitions the likelihood that acquired company managers will leave goes up even higher to 75% (Krug and Nigh 2001; Krug 2003).

Negative reactions and subsequent higher management departure rates are often attributed in the literature to well-established factors of the LOF, such as national cultural differences, psychic and geographic distances, and, more generally, unfamiliarity with the local environment (Chatterjee et al. 1992; Krug and Nigh 2001; Larsson and Lubatkin 2001; Schweiger and Very 2003). However, other elements contributing to the LOF related to the acquirer's country of origin and the way in which it is perceived may also negatively influence reactions and increase the...

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