Effects of Absorptive Capacity on International Acquisitions of Chinese Firms

Outward foreign direct investment (OFDI) by Chinese multinational corporations (MNCs) continues to grow, with international mergers and acquisition (M&A) the primary mode of entry for Chinese firms (Alon & McIntyre, 2008). In the first quarter of 2008, cross-border M&A volume from China jumped to $28.5 billion, four times the previous year’s amount (Xinhua, 2008; Fortune, 2009). Although various motivations underlie Chinese overseas acquisitions, strategy asset-seeking predominates (Child & Rodrigues, 2005; Deng, 2007). Chinese MNCs use cross-border M&As to acquire strategic assets or knowledge to improve their competitive advantage in the global marketplace. However, such strategic-asset-driven M&As do not guarantee superior business performance, especially in light of the tacit and proprietary nature of knowledge. For a number of Chinese MNCs, international acquisitions have proven to be highly problematic and value-destroying (Economist.com, 2007).