Acquisitions from Emerging to Advanced Countries: Theoretical and Empirical Investigation on the Performances of Target Firms

This paper centers on the performance implications of outward Foreign Direct Investment (FDI) from emerging economies, such as Brazil, Russia, India and China (BRIC). In the late 1990s, a large number of Emerging Multinational Companies (EMNCs) from developing economies started to invest in advanced countries. To do so, they often adopt a Mergers and Acquisitions (M&As) entry strategy, which allows them not only to access new markets, but also to exploit the firm-specific resources and capabilities of target firms (UNCTAD, 2006). Yet, little research has attempted to analyze the performance implications of OFDIs from EMNCs (UNCTAD, 2006; Garg and Delios, 2007) and, more specifically, how acquisitions from EMNCs impact the performance of target firms in advanced countries. Importantly, this research gap limits not only academic conceptualizations as how interfirm differences in performance arise, but also the effectiveness of the strategic plans of EMNCs and the governmental policies of advanced countries. To address this gap, the current study develops a conceptual framework and implement an econometric analysis pertaining to the factors influencing the performance of firms acquired by EMNCs. Building on the resource-based view (RBV) of the firm (Barney, 1991), previous analyses consider the role of the resources that a firm possesses. We add to these studies by showing that the performance of the target firm depends not only on its own resources but also on the resources of the acquiring company. Put differently, we examine if and the extent to which such acquisitions may enable target firms to use resources that do not own or control (Capron, 1999; Uhlenbruck, 2004; Lavie, 2006). Modelling performance in this way is consistent with recent theorizing that emphasizes the importance of considering the value of shared resources (Lavie, 2006). Furthermore, instead of simply focusing on the tangible resources of the acquiring EMNCs, our analysis incorporates both the experience cumulated by the EMNCs and the (tangible and intangible) resources that its globally dispersed affiliates possess. This offers a more complete account of the resources of the acquiring companies as it incorporates the fact that M&As allow EMNCs to accumulate experience (Penrose, 1959; Barkema et al., 1996; Barkema and Vermeulen, 1998; Eisenhardt and Martin, 2000; Uhlenbruck, 2004), and leverage “network resources” (Gulati, 1999) that are provided either by the firm’s subsidiaries or by the countries where such subsidiaries are located (Baum, Calabrese and Silverman, 2000; Lee, Lee and Pennings, 2001; Lavie, 2006; Kafouros, 2008). This theoretical framework is used to implement an empirical analysis aimed at assessing the impact of BRIC’s M&As on the performance of the target firms located in advanced countries. Four different but interconnected dimensions are considered: profitability, sales, employment and labor productivity. The results of the GMM analysis show that EMNC’s resources have a positive effect on target firms’ profitability and labor productivity, while the impact on its sales and employment are not significant and negative, respectively. This means that EMNCs’ resources increase a target firm’s profitability and labor productivity through a reduction of its production costs and through a downsizing of its employment and/or a relocation of its labor-intensive activities, rather than through an increase of its sales. Conversely, EMNCs’ network resources and experiences, especially when cumulated through M&As in advanced economies and in the BRIC home country, positively affect all the performance measures but employment, which still reports a negative sign. Therefore EMNCs’ network resources and experience increase target firms’ profitability and labor productivity through the combined effect of decrease of production costs, decrease and/or relocation of employment, and increase of sales, especially towards the large BRIC markets.