Cross-border acquisitions from developing countries under decreasing returns to scale
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Cross-border acquisitions from developing countries under decreasing returns to scale Quan Dong 1 & Juan Carlos Bárcena-Ruiz 2 Received: 12 January 2020 / Accepted: 25 August 2020/ # ISEG – Instituto Superior de Economia e Gestão 2020
Abstract We assume that a firm from a developing country wants to acquire a firm from a developed country with better technology. The acquirer, which may be a private firm or a state-owned firm, seeks to improve its efficiency in production. We assume that at most there is one acquisition, and that it needs to be authorized by both the government of the developing country and that of the developed country. Firms face decreasing returns to scale. We find that if the level of inefficiency of the acquirer is very high, the government of the developed country forbids acquisitions. The private firm from the developing country is the acquirer in two cases: if the level of inefficiency of the firms from that country is low and if it is high. If the level of inefficiency is intermediate, the acquirer is the state-owned firm. Keywords Acquisition . Mixed oligopoly . Cournot competition JEL classification L20 . L32 . L13
1 Introduction The phenomenon of state-owned firms from developing countries conducting cross-border mergers and acquisitions has received growing attention in studies on international business.1 In this regard, Huang and Wang (2011) point out that most Chinese outward FDI is undertaken by state-owned enterprises. Evidence 1
See Cuervo-Cazurra et al. (2014), Xie et al. (2017), and Paul and Benito (2018) for surveys on this issue.
* Juan Carlos Bárcena-Ruiz [email protected] Quan Dong [email protected]
1
South China Normal University, School of Economics and Management, Higher Education Mega Center, Guangzhou 510006, People’s Republic of China
2
Departamento de Fundamentos del Análisis Económico I, Facultad de Economía y Empresa, Universidad del País Vasco, UPV/EHU, Avenida Lehendakari Aguirre 83, 48015 Bilbao, Spain
Q. Dong, J. C. Bárcena-Ruiz
shows that deals in which state-owned firms are acquirers differ from those between private firms (Del Bo et al. 2017). Recently, many governments in developed countries have regulated cross-border acquisitions by firms from developing countries, especially when the target of the acquisition is a leading technology firm, with the concern of national security.2 However, considering the mixed cases recently in real world, which shows acquisitions by private and publicly-owned firms, we seek to study the economic reasons underlying cross-border acquisitions from developing countries. We believe that the analysis conducted to date of the welfare consequences of such cross-border acquisitions is insufficient. Motivated by this belief, we study acquisitions by firms from developing countries that can be vetoed by governments in both developing and developed countries. Literature on FDI has studied cross-border merger and acquisitions in which foreign market access involves private firms. In this literature, Nocke and Yeapl
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