The Zone of Conformity: A Comparison of Private and State-Controlled Enterprises in M&As.

VerfasserSun, Sunny Li

1 Introduction

Cross-border merger and acquisition (M&A) bids offered by state-controlled enterprises (SCEs) have increasingly failed around the world. For example, China National Offshore Oil withdrew its offer for Unocal because of U.S. government opposition in 2005. The Canadian government blocked a proposed takeover of Aecon by China Communications Construction in 2018, and Germany vetoed the nuclear equipment maker Yantai Taihai's proposed acquisition of Leifeld Metal Spinning in 2018. A commonly believed reason for these deal failures or withdrawals is the lack of legitimacy of SCEs in the host country (Li et al., 2017; Zhang et al., 2011). This observation stands in sharp contrast with the favorable environment for SCEs in their home countries (Ren et al., 2019).

The purposes of SCEs differ significantly from those of private-controlled enterprises (PCEs) and so do their potential actions. However, to our knowledge, international business scholars have rarely discussed firms' different actions and responses in the overseas and domestic markets. In particular, there has been no previous empirical testing of whether there are significant differences in deal abandonment and ownership strategy in cross-border and domestic M&As. The studies on M&A completion have adopted institutional theory or a regulatory perspective (Dikova et al., 2010; Garcia-Garcia et al., 2019; Muehlfeld et al., 2007). They have documented that mainly in overseas markets and argued that SCE acquirers have lower favorability than PCE acquirers and face more significant legitimacy problems (Zhou et al., 2016) due to liability of emergingness (Madhok & Keyhani, 2012) and SCEs' opaqueness (Li et al., 2019).

However, the different purposes and strategic behaviors of SCEs and PCEs in both domestic and overseas markets have received less theorization and conceptual support. Although institutional theory (Garcia-Garcia et al., 2019; Peng et al., 2008) mostly explains the negative effect of SCEs, it cannot consistently explain why SCEs become active in some fields but face bleak odds in other fields; SCEs are facing two kinds of legitimacy issues in home and host countries. For example, in the previous studies in international business, researchers focused on institutional pressures in the host country and SCEs' disadvantages (Li et al., 2017, 2019; Voinea & van Kranenburg, 2018; White et al., 2018) but less discussed legitimacy and potential actions in the home country. Hence, international business literature has less explained SCE's advantages such as more support and fewer sanctions from home state agencies (Xie et al., 2021; Zhou et al., 2017). In this paper, we propose a new concept of zone of conformity to explain SCEs' acceptable actions and compare their behaviors with those of PCEs.

SCE acquirers have social and political agendas in M&A, which leads to different responses and acceptance from multiple stakeholders in both their home countries and target countries, and then enlarge or narrow their "comfort zones" in the acquisition process. Connecting the literature on institutional pressure (Voinea & van Kranenburg, 2018; White et al., 2018) and the concept of acceptance (Simon, 1947), we advance the zone of conformity - the range of a firm's acceptable actions on seeking equity ownership or abandoning deals (cf, zone of acceptance, Simon 1947; range of acceptability, Deephouse 1999) - to better understand the heterogeneity of institutional acceptance. When a firm's behavior does not fall into the zone, it acts "at its own peril, and it is subject to questions and actions challenging its legitimacy, reliability, and rationality" (Deephouse, 1999, p. 152). Accordingly, we predict that firms with different types of ownership adopt different M&A strategies that are contingent on the institutional acceptance of home and host countries.

We test our predictions in the context of Chinese firms conducting domestic and cross-border M&As. Researchers have also widely studied China to analyze the behaviors of SCEs (Cuervo-Cazurra et al., 2014; Bruton et al., 2015) and advance institutional perspective in a transition economy (Mondejar & Zhao, 2013). Even though state-owned enterprises (SOEs) have reformed to pursue market-oriented goals through privatization, the Chinese government retains the social and political agendas of SCEs. SOEs are often classified as state ownership of greater than 20% of outstanding company shares (Krom, 2018) or 15% of state ownership (Li et al., 2019), while a state as a firm's actual controller can influence SCEs even when the state is not the main shareholder. For example, China's signature foreign policy project, the Belt and Road Initiative (BRI), encourages SCEs to take on considerable governance, social, and fiscal risks in pursuing large infrastructure projects (World Bank 2019). In addition, Chinese firms still abandon M&A deals at high rates (Kim & Song, 2017).

By analyzing a large sample of 12,497 announced M&A deals over the period of 1986-2016, with data archived from Thomson Financial Securities Data's Worldwide M&A Database (SDC) and the China Stock Market & Accounting Research (CSMAR) database, we find several interesting results that support our hypotheses. First, SCEs are less likely to abandon M&A deals than are PCEs. Second, SCEs usually seek less equity ownership than PCEs. Third, SCEs are more likely to abandon cross-border M&As deals than domestic deals. Fourth, SCE acquirers seek less equity ownership in cross-border M&As than in domestic M&As. Final, the autocracy level of target country moderates the M&A behavior difference between SCEs and PCEs.

This study has several contributions to the literature. First, we advance the concept of the zone of conformity in the M&A literature to predict multiple stakeholders' requests and focal firms' responses (Voinea & van Kranenburg, 2018). Whereas the liability of foreignness focuses on the question of why foreign firms have low performance in foreign markets (Garcia-Garcia et al., 2019; Zaheer, 1995), and the legitimacy theory investigates the question of how to gain external legitimacy but to keep internal consistency (Kostova & Zaheer, 1999; Kostova et al., 2008), the zone of conformity rather predicts the potential sanctions and actions in both foreign and domestic markets. In particular, we examine how SCEs and PCEs behave differently in domestic and overseas markets.

Second, this study enriches the literature on state capitalism through our investigation of the strategic behaviors of SCEs. In particular, we introduce the percentage of equity ownership sought by acquiring firms as a key dependent variable that represents the acquiring firm's behavior. The previous researchers argued that the state could be either a majority or a minority investor (Cuervo-Cazurra et al., 2014; Musacchio et al., 2015). Our study shows that SCE acquirers intend to seek lower equity ownership of target firms, and that PCE acquirers are more likely to abandon M&A deals than SCEs in domestic M&A deals because of high state control. Our data shows these differences are further contingently moderated by target countries' diverse autocracy level. In other words, the global expansion of Chinese state capitalism through M&A activities in democratic countries is highly constrained, however, this expansion is welcomed in high autocratic countries.

Finally, this study contributes to the international business literature by comparing domestic and cross-border M&As. Previous researchers have mainly discussed SCEs' disadvantages in overseas markets such as the host country's legitimacy (Li et al., 2017) and the liability of opaqueness (Li et al., 2019) but less discussed legitimacy requests in the home countries. With the concept of the zone of conformity, we might better predict how SCEs and PCEs M&A strategies differently under a bifurcated world order (Petricevic & Teece, 2019).

2 State-Controlled Enterprises and the Zone of Conformity

2.1 State-Controlled Enterprises Under State Capitalism

SCE refers to a firm whose ultimate controller is either a state or a governmental authority that has influence on the firm's decisions, although it is not the main shareholder of the firm (Meyer et al., 2014). The term SCE might provide a nuanced perspective from traditional SOE (1) that is owned by the state and mainly focus on the domestic market. In addition, the largest shareholder is not necessarily the same as the actual controller in China, where firms often have multiple hierarchies in the control system (Inoue et al., 2013; Wang et al., 2022); even after SOEs are privatized, the government as a minority shareholder can retain and exercise control over them by various means such as pyramidal ownership structures (Musacchio & Lazzarini, 2014), golden shares held by state-owned holding companies, and appointing the board members (Naughton & Tsai, 2015). In this situation, state ownership does not necessarily mean state control and SOEs might not fully capture the public and private dimensions of businesses, especially in a country characterized by state capitalism.

State capitalism refers to the situation when a powerful state exercises an extensive controlling influence over the economy and promotes strong growth under a capitalist system (Krom, 2018). State capitalism significantly reshapes the global corporate landscape and is most prevalent in China (Musacchio & Lazzarini, 2014). The concept emerged in the 1990s with the government as a minority shareholder and lender indirectly influencing firm behaviors. As a hybrid form, state capitalism mixes state logic with market logic (Bruton et al., 2015; Rodrigues & Dieleman, 2018). In this study, we view SCEs as typical actors that follow state capitalism in that they combine profit-seeking market mechanisms and state social mechanisms (Liang et al., 2015a, b; Zhou, 2018). On the one hand, SCEs need to conform to the...

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