The Propensity of Multinational Companies to Expand Through Acquisitions
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INTRODUCTION
In determing which factors influence a multinational's decision concerning the method of investment, it is useful to review the motivations for the investment decision. Two general categories of foreign investment models have been proposed: aggressive and defensive. The aggressive models, such as the product life cycle model proposed by Vernon [1971], hypothesize that multinationals invest in order to capitalize on some competitive advantage which the company has over other competitors. Investment in the form of either an acquisition or a newly formed company would both be compatible with these models. The defensive models address more specifically the acquisition issue. These models, such as the follow-the-leader concept [Knickerbocker 1973], and the exchange-of-threat model [Graham 1975], suggest that firms react to the actions of their competitors. The follow-the-leader model hypothesizes that when a member of an oligopoly, typically the industry leader, makes a foreign investment, the other members of the oligopoly follow suit. By following the initial investor, the other companies will minimize the risk that the leader will gain something from the new market which would upset the competitive balance in the industry. Risk reduction is also the motivation behind the exchange-of-threat model. This model suggests that when a company from Country A invests in Country B, its competitor in Country B will reciprocate by investing in Country A. These offsetting investments will result in a restored competitive balance. Dubin [1975] proposed that multinationals following either of these defensive models of foreign investment would be more likely to invest via acquisitions. He hypothesized that the threat caused by the initial investment of the competitor would require a rapid response. He suggested also that the fastest method of investing in a foreign market is to acquire an existing firm. In those instances where
FOREIGN INVESTMENT DECISIONS
*Brent D. Wilson is currently a faculty member of the Colgate DardenGraduateSchool of Business Administrationat the University of Virginia. He holds degrees from Weber State College, Northwestern University, and HarvardUniversity. He has previously served on the faculties at Boston University,Simmons College, and ClearyCollege in addition to working for the Ford Motor Company.
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an investment created a competitive imbalance, companies were more likely to react by expanding through acquisitions. These models have hypothesized situations where investment through acquisitions may be preferable; however, not all firms will choose to react by acquiring. The Dubin study, for example, noted that even though speed was important,some firms elected to invest by forming new companies. Thus, there are internalfactors which affect the method of investment in addition to the external competitive situation. As an initia
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