Acquisitions by Chinese Multinational Enterprises and the Host Country Environment

Principal Investigator: Minyuan Zhao, Associate Professor of Management

Co-Principal Investigator: Shixiang Wang, School of Management, Zhejiang University

Lead School: The Wharton School (Management Department)

Chinese Partners: Zhejiang University

Project Abstract

Cross-border mergers and acquisition (M&A) is an important means for multinational enterprises (MNEs) to acquire valuable assets from overseas and to leverage their capabilities on the global market. In particular, eager to upgrade their own resources and capabilities, MNEs from emerging economies (or EMNEs) tend to resort to cross-border M&As to gain quick access to brand equities, technologies, or distribution channels of target firms (Guillén and García-Canal, 2009). While these EMNEs often possess non-technological expertise, such as political savvy (Caves, 1996), operational efficiency (Morck, Yeung and Zhao, 2008) and business model innovation (Cuervo-Cazurra, 2012), much of the attention has been on the potential threat of such acquisitions to the host-country competitive advantage. An immediate implication is that, unlike the MNEs from development countries (or DMNEs), whose unique brands and technological assets make them sought-after investors in the host countries, EMNEs are often considered asset seekers and hence face more scrutiny in obtaining approvals or gaining legitimacy (Tang and Zhao, 2017).

In recent years, Chinese firms engaging in cross-border M&As have been at the center of such controversy. On the one hand, Chinese firms increasingly zoom in on the most developed countries for their expansion efforts. For example, seven out of the top destinations for Chinese outward foreign direct investment (OFDI) from 2006 to 2016 are in developed countries. In 2014 alone, North America and Europe are the destinations of over 60% of cross-border acquisitions from China. On the other hand, liabilities of foreignness (Zaheer, 1995) and liabilities of emergingness (Madhok and Keyhani, 2012) are most highlighted when Chinese firms—either backed by state support or having minimal overseas business experience—enter countries with established economic fabrics and sophisticated rules and regulations. How to reconcile the need to enter from the part of the Chinese acquirers and the resistance against entry from the part of the host countries becomes an important research question for scholars and practitioners alike.

This study focuses on one particular strategy that may help ease the tension, i.e., “beachhead acquisition.” In the context of this study, “beachhead acquisition” is defined as an indirect form of equity acquisition where the acquirer initiates the deal through one of its overseas subsidiaries. This practice has been adopted by Wanxiang, Sanbao and Wanda when they enter developed countries. Since the direct acquirer (i.e., the overseas subsidiary) is either already in the host country or in a country with similar institutional environment, the acquisition may face less resistance from the local community. Given that most of the literature has focused on the questions of where to acquire and what to acquire (Bertrand, 2016; Dow et al., 2016; Kaul and Wu, 2016; Yu et al., 2016), the researchers believe that a study on how to acquire will yield new insights on the strategic nature of cross-border M&As.