Abstract
While overseas acquisitions by emerging-economy firms are gaining increased attention from the business press, our understanding of whether and why this inorganic mode of international expansion creates value to acquirer firms is limited. We argue that international acquisitions facilitate internalization of tangible and intangible resources that are both difficult to trade through market transactions and take time to develop internally, thus constituting an important strategic lever of value creation for emerging-economy firms. Furthermore, the magnitude of value created will be higher when the target firms are located in advanced economic and institutional environments: country markets that carry the promise of higher quality of resources, and therefore, stronger complementarity to the existing capabilities of emerging-economy firms. An event study of 425 cross-border acquisitions by Indian firms during 2000–2007 supports our predictions.
Similar content being viewed by others
References
Accenture. 2006. India goes global: How cross-border acquisitions are powering growth. http://www.accenture.com/Global/Research_and_Insights/Policy_And_ Corporate_Affairs/IndiaGoesGlobal.htm. accessed 17 August 2008.
Almeida, P. 1996. Knowledge sourcing by foreign multinationals: Patent citation analysis in the US semiconductor industry. Strategic Management Journal, 17 (2): 155–165.
Anand, J., & Delios, A. 2002. Absolute and relative resources as determinants of international acquisitions. Strategic Management Journal, 23 (2): 119–134.
Andrade, G., Mitchell, M., & Stafford, E. 2001. New evidence and perspectives on mergers. Journal of Economic Perspectives, 15 (2): 103–120.
Aulakh, P. S., Kotabe, M., & Teegen, H. 2000. Export strategies and performance of firms from emerging economies: Evidence from Brazil, Chile, and Mexico. Academy of Management Journal, 43 (3): 342–361.
Barney, J. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17 (1): 99–120.
Berry, H. 2006. Shareholder valuation of foreign investment and expansion. Strategic Management Journal, 27 (12): 1123–1140.
Bharat Forge Ltd. 2005. Bombay stock exchange announcement. September 22, http://www.bseindia.com, accessed 17 August 2008.
Binder, 1998. The event study methodology since 1969. Review of Quantitative Finance and Accounting, 11 (2): 111–137.
Brouthers, K. D., & Hennart, J. F. 2007. Boundaries of the firm: Insights from international entry mode research. Journal of Management, 33 (3): 395–425.
Brown, S. J., & Warner, J. B. 1985. Using daily stock returns: The case of event studies. Journal of Financial Economics, 14 (1): 3–31.
Buckley, P. J., & Casson, M. 1976. The future of the multinational enterprise. London: Macmillan.
Buckley, P. J., Clegg, L. J., Cross, A. R., Liu, X., Voss, H., & Zheng, P. 2007. The determinants of Chinese outward foreign direct investment. Journal of International Business Studies, 38 (4): 499–518.
Business Line. 2007a. Mergers and acquisitions: India Inc. on the prowl. Business Line, 5 January.
Business Line. 2007b. Tata Corus deal: Should investors join the chorus?. Business Line, 4 February.
Cadila Healthcare Ltd. 2007. Bombay stock exchange announcement. April 19, http://www.bseindia.com, accessed 17 August 2008.
Capron, L., & Pistre, N. 2002. When do acquirers earn abnormal returns? Strategic Management Journal, 23 (9): 781–794.
Capron, L., & Shen, J. C. 2007. Acquisitions of private versus public firms: Private information, target selection, and acquirer returns. Strategic Management Journal, 28 (9): 891–911.
Capron, L., Dussauge, P., & Mitchell, W. 1998. Resource redeployment following horizontal acquisitions in Europe and North America, 1988–1992. Strategic Management Journal, 19 (7): 631–661.
Chan, C. M., Isobe, T., & Makino, S. 2008. Which country matters? Institutional development and foreign affiliate performance. Strategic Management Journal, 29 (11): 1179–1205.
Chang, S. J. 1995. International expansion strategy of Japanese firms: Capability building through sequential entry. Academy of Management Journal, 38 (2): 383–407.
Chari, A., Ouimet, P. P., & Tesar, L. L. 2005. Cross border mergers and acquisitions in emerging markets: The stock market valuation of corporate control, Working Paper, University of Michigan.
Chen, S.-F. S. 2008. The motives for international acquisitions: Capability procurements, strategic considerations, and the role of ownership structures. Journal of International Business Studies, 39 (3): 454–471.
Chen, X., Ender, P. B., Mitchell, M., & Wells, C. 2000. Regression with Stata. http://www.ats.ucla.edu/stat/stata/webbooks/reg/default.htm, accessed 17 August 2008.
Chittoor, R., Sarkar, M., Ray, S., & Aulakh, P. S. 2009. Third-world copycats to emerging multinationals: Institutional changes and organizational transformation in the Indian pharmaceutical industry. Organization Science, 20 (1): 187–205.
Coff, R. W. 1999. How buyers cope with uncertainty when acquiring firms in knowledge-intensive industries: Caveat emptor. Organization Science, 10 (2): 144–161.
Conn, R. L., Cosh, A., Guest, P. M., & Hughes, A. 2005. The impact on UK acquirers of domestic, cross-border, public and private acquisitions. Journal of Business Finance & Accounting, 32 (5–6): 815–870.
Cording, M., Christmann, P., & King, D. R. 2008. Reducing causal ambiguity in acquisition integration: Intermediate goals as mediators between integration decisions and acquisition performance. Academy of Management Journal, 51 (4): 744–767.
Cuervo-Cazurra, A., Maloney, M. M., & Manrakhan, S. 2007. Causes of the difficulties in internationalization. Journal of International Business Studies, 38 (5): 709–725.
Datta, D. K., & Puia, G. 1995. Cross-border acquisitions: An examination of the influence of relatedness and cultural fit on shareholder value creation in US acquiring firms. Management International Review, 35 (4): 337–359.
Dawar, N., & Frost, T. 1999. Competing with giants: Survival strategies for local companies in emerging markets. Harvard Business Review, 77 (2): 119–132.
Dewenter, K. L. 1995. Does the market react differently to domestic and foreign takeover announcements? Evidence from the US chemical and retail industries. Journal of Financial Economics, 37 (3): 421–441.
Doukas, J., & Travlos, N. G. 1988. The effect of corporate multinationalism on shareholders’ wealth: Evidence from international acquisitions. Journal of Finance, 43 (5): 1161–1175.
Doz, Y., Santos, J., & Williamson, P. 2001. From global to metanational: How companies win in the knowledge economy. Boston, MA: Harvard Business School Press.
Dunning, J. H. 1988. The eclectic paradigm of international production: A restatement and some possible extensions. Journal of International Business Studies, 19 (1): 1–31.
Economist. 2007a. India's acquisitive companies: Marauding maharajahs. 31 March, pp. 71–72.
Economist. 2007b. Trojan dragons: Chinese firms are taking a new approach to foreign acquisitions. 1 November, p. 80.
Ethiraj, S. K., & Levinthal, D. 2004. Bounded rationality and the search for organizational architecture: An evolutionary perspective on the design of organizations and their evolvability. Administrative Science Quarterly, 49 (3): 404–437.
Ethiraj, S. K., Kale, P., Krishnan, M. S., & Singh, J. V. 2005. Where do capabilities come from and how do they matter? A study in the software services industry. Strategic Management Journal, 26 (1): 25–45.
Eun, C. S., Kolodny, R., & Scheraga, C. 1996. Cross-border acquisitions and shareholder wealth: Tests of the synergy and internalization hypotheses. Journal of Banking and Finance, 20 (9): 1559–1582.
Filatotchev, I., Strange, R., Piesse, J., & Lien, Y.-C. 2007. FDI by firms from newly industrialised economies in emerging markets: Corporate governance, entry mode and location. Journal of International Business Studies, 38 (4): 556–572.
Financial Times. 2002. Tea producer seeks a stronger brew. 5 December, p. 13.
Finkelstein, S., & Haleblian, J. 2003. Understanding acquisition performance: The role of transfer effects. Organization Science, 13 (1): 36–47.
Francis, B. B., Hasan, I., & Sun, X. 2008. Financial market integration and the value of global diversification: Evidence for US acquirers in cross-border mergers and acquisitions. Journal of Banking and Finance, 32 (8): 1522–1540.
Ghemawat, P. 2001. Distance still matters: The hard reality of global expansion. Harvard Business Review, 79 (8): 137–147.
Greenwood, R., & Hinings, C. R. 1996. Understanding radical organizational change: Bringing together the old and the new institutionalism. Academy of Management Review, 21 (4): 1022–1054.
Guillen, M. F. 2002. Structural inertia, imitation, and foreign expansion: South Korean firms and business groups in China, 1987–95. Academy of Management Journal, 45 (3): 509–525.
Gupta, A. K., & Govindarajan, V. 2000. Knowledge flows within multinational corporations. Strategic Management Journal, 21 (4): 473–496.
Haleblian, J., & Finkelstein, S. 1999. The influence of organizational acquisition experience on acquisition performance: A behavioral learning perspective. Administrative Science Quarterly, 44 (1): 29–31.
Haleblian, J., Kim, J., & Rajagopalan, N. 2006. The influence of acquisition experience and performance on acquisition behavior: Evidence from the US commercial banking industry. Academy of Management Journal, 49 (2): 357–370.
Harrison, J. S., Hitt, M. A., Hoskisson, R. E., & Ireland, R. D. 2001. Resource complementarity in business combinations: Extending the logic to organizational alliances. Journal of Management, 27 (6): 679–690.
Heckman, J. 1979. Sample selection bias as a specification error. Econometrica, 47 (1): 153–161.
Hennart, J. F., & Reddy, S. 1997. The choice between mergers/acquisitions and joint ventures: The case of Japanese investors in the United States. Strategic Management Journal, 18 (1): 1–12.
Heritage Foundation. 2009. 2009 index of economic freedom. Washington DC: Heritage Foundation.
Hitt, M. A., Hoskisson, R. E., & Kim, H. 1997. International diversification: Effects on innovation and firm performance in product-diversified firms. Academy of Management Journal, 40 (4): 767–798.
Hitt, M. A., Li, H., & Worthington, W. J. IV. 2005. Emerging markets as learning laboratories: Learning behaviors of local firms and foreign entrants in different institutional contexts. Management and Organization Review, 1 (3): 353–380.
Hitt, M. A., Dacin, M. T., Levitas, E., Arregle, J. L., & Borza, A. 2000. Partner selection in emerging and developed market contexts: Resource-based and organizational learning perspectives. Academy of Management Journal, 43 (3): 449–467.
Hutzschenreuter, T., Pedersen, T., & Volberda, H. W. 2007. The role of path dependency and managerial intentionality: A perspective on international business research. Journal of International Business Studies, 38 (7): 1055–1068.
Hymer, S. 1976. The international operations of national firms. Cambridge, MA: MIT Press.
Johanson, J., & Vahlne, J. E. 1977. The internationalization process of the firm: A model of knowledge development and increasing foreign market commitments. Journal of International Business Studies, 8 (1): 23–32.
Kale, P., Dyer, J. H., & Singh, H. 2002. Alliance capability, stock market response, and long-term alliance success: The role of the alliance function. Strategic Management Journal, 23 (8): 747–767.
Karim, S., & Mitchell, W. 2000. Path-dependent and path-breaking change: Reconfiguring business resources following acquisitions in the US medical sector, 1978–1995. Strategic Management Journal, 21 (10–11): 1061–1081.
Katila, R., & Ahuja, G. 2002. Something old, something new: A longitudinal study of search behavior and new product development. Academy of Management Journal, 45 (6): 1183–1194.
King, D. R., Dalton, D. R., Daily, C. M., & Covin, J. G. 2004. Meta-analyses of post-acquisition performance: Indications of unidentified moderators. Strategic Management Journal, 25 (2): 187–200.
Kriauciunas, A., & Kale, P. 2006. The impact of socialist imprinting and search on resource change: A study of firms in Lithuania. Strategic Management Journal, 27 (7): 659–679.
Lall, S. 1983. The new multinationals: The spread of third world enterprises. New York: Wiley.
Lee, T. J., & Caves, R. E. 1998. Uncertain outcomes of foreign investment: Determinants of the dispersion of profits after large acquisitions. Journal of International Business Studies, 29 (3): 563–581.
Luo, Y., & Tung, R. L. 2007. International expansion of emerging market enterprises: A springboard perspective. Journal of International Business Studies, 38 (4): 481–498.
MacKinlay, A. C. 1997. Event studies in economics and finance. Journal of Economic Literature, 35 (1): 13–39.
Makino, S., Isobe, T., & Chan, C. M. 2004. Does country matter? Strategic Management Journal, 25 (10): 1027–1043.
Makino, S., Lau, C. M., & Yeh, R. S. 2002. Asset-exploitation versus asset-seeking: Implications for location choice of foreign direct investment from newly industrialized economies. Journal of International Business Studies, 33 (3): 403–422.
MAPE. 2006. India Inc. goes abroad. http://www.mapegroup.com. Accessed 18 February 2007.
Markides, C. C., & Ittner, C. D. 1994. Shareholder benefits from corporate international diversification: Evidence from US international acquisitions. Journal of International Business Studies, 25 (2): 343–366.
Mathews, J. A. 2006. Dragon multinationals: New players in 21st century globalization. Asia Pacific Journal of Management, 23 (1): 5–27.
McNamara, G. M., Haleblian, J. M., & Dykes, B. J. 2008. The performance implications of participating in an acquisition wave: Early mover advantages, bandwagon effects, and the moderating influence of industry characteristics and acquirer tactics. Academy of Management Journal, 51 (1): 113–130.
McWilliams, A., & Siegel, D. 1997. Event studies in management research: Theoretical and empirical issues. Academy of Management Journal, 40 (3): 626–657.
Merchant, H., & Schendel, D. 2000. How do international joint ventures create shareholder value? Strategic Management Journal, 21 (7): 723–737.
Meyer, K. E., Estrin, S., Bhaumik, S. K., & Peng, M. W. 2009. Institutions, resources, and entry strategies in emerging economies. Strategic Management Journal, 30 (1): 61–80.
Miller, S. R., Li, D., Eden, L., & Hitt, M. A. 2008. Insider trading and the valuation of international strategic alliances in emerging stock markets. Journal of International Business Studies, 39 (1): 102–117.
Moeller, S. B., & Schlingemann, F. P. 2005. Global diversification and bidder gains: A comparison between cross-border and domestic acquisitions. Journal of Banking and Finance, 29 (3): 533–564.
Morck, R., & Yeung, B. 1991. Why investors value multinationality. Journal of Business, 64 (2): 165–187.
Nelson, R. R. 2005. Technology, institutions and economic growth. Cambridge, MA: Harvard University Press.
Newman, K. L. 2000. Organizational transformation during institutional upheaval. Academy of Management Review, 25 (3): 602–619.
OECD. 2006. Emerging multinationals: Who are they? What do they do? What is at stake? Paris: OECD.
Outlook. 2008. Turning a new leaf. 5 April.
Penrose, E. T. 1959. The theory of the growth of the firm. New York: Wiley.
Reuer, J. J., Shenkar, O., & Ragozzino, R. 2004. Mitigating risk in international mergers and acquisitions: The role of contingent payouts. Journal of International Business Studies, 35 (1): 19–32.
Rosenkopf, L., & Nerkar, A. 2001. Beyond local search: Boundary-spanning, exploration, and impact in the optical disk industry. Strategic Management Journal, 22 (4): 287–306.
Rossi, S., & Volpin, P. F. 2004. Cross-country determinants of mergers and acquisitions. Journal of Financial Economics, 74 (2): 277–304.
Salinger, M. 1992. Standard errors in event studies. Journal of Financial and Quantitative Analysis, 27 (1): 39–53.
Sapienza, H. J., Autio, E., George, G., & Zahra, S. A. 2006. A capabilities perspective on the effects of early internationalization on firm survival and growth. Academy of Management Review, 31 (4): 914–933.
Schoenberg, R. 2006. Measuring the performance of corporate acquisitions: An empirical comparison of alternative metrics. British Journal of Management, 17 (4): 361–370.
Scott, W. R. 1995. Institutions and organizations. Thousand Oaks, CA: Sage.
Seth, A., Song, K. P., & Pettit, R. R. 2002. Value creation and destruction in cross-border acquisitions: An empirical analysis of foreign acquisitions of US firms. Strategic Management Journal, 23 (10): 921–940.
Shan, W., & Song, J. 1997. Foreign direct investment and the sourcing of technological advantage: Evidence from the biotechnology industry. Journal of International Business Studies, 28 (2): 267–284.
Shaver, J. M. 1998. Accounting for endogeneity when assessing strategy performance: Does entry mode choice affect FDI survival? Management Science, 44 (4): 571–585.
Shimizu, K., Hitt, M. A., Vaidyanath, D., & Pisano, V. 2004. Theoretical foundations of cross-border mergers and acquisitions: A review of current research and recommendations for the future. Journal of International Management, 10 (3): 307–353.
Sintex Industries. 2007. Bombay stock exchange announcement. June 1, http://www.bseindia.com. accessed 24 August 2008.
Sirmon, D. G., Hitt, M. A., & Ireland, R. D. 2007. Managing firm resources in dynamic environments to create value: Looking inside the black box. Academy of Management Review, 32 (1): 273–292.
Srivastava, R. K., Shervani, T. A., & Fahey, L. 1998. Market-based assets and shareholder value: A framework for analysis. Journal of Marketing, 62 (1): 2–18.
Tata Group. 2000. The master blender. http://www.tata.com. accessed 15 January 2009.
Teece, D. J., Pisano, G., & Shuen, A. M. Y. 1997. Dynamic capabilities and strategic management. Strategic Management Journal, 18 (7): 509–533.
Tsang, E. W. K., & Yip, P. S. L. 2007. Economic distance and the survival of foreign direct investments. Academy of Management Journal, 50 (5): 1156–1168.
Tuch, C., & O’Sullivan, N. 2007. The impact of acquisitions on firm performance: A review of the evidence. International Journal of Management Reviews, 9 (2): 141–170.
Uhlenbruck, K., Meyer, K. E., & Hitt, M. A. 2003. Organizational transformation in transition economies: Resource-based and organizational learning perspectives. Journal of Management Studies, 40 (2): 257–282.
Uhlenbruck, K., Hitt, M. A., & Semadeni, M. 2006. Market value effects of acquisitions involving Internet firms: A resource-based analysis. Strategic Management Journal, 27 (10): 899–913.
UNCTAD. 2006. World investment report: FDI from developing and transition economies: Implications for development. New York/Geneva: United Nations.
Vanhaverbeke, W., Duysters, G., & Noorderhaven, N. 2002. External technology sourcing through alliances or acquisitions: An analysis of the application-specific integrated circuits industry. Organization Science, 13 (6): 714–733.
Vermeulen, F., & Barkema, H. 2001. Learning through acquisitions. Academy of Management Journal, 44 (3): 457–476.
Vernon, R. 1979. The product cycle hypothesis in a new international environment. Oxford Bulletin of Economics and Statistics, 41 (4): 255–267.
Wells, L. T. 1983. Third world multinationals: The rise of foreign investment from developing countries. Cambridge, MA: MIT Press.
Wernerfelt, B. 1984. A resource-based view of the firm. Strategic Management Journal, 5 (2): 171–180.
Yiu, D. W., Lau, C. M., & Bruton, G. D. 2007. International venturing by emerging economy firms: The effects of firm capabilities, home country networks, and corporate entrepreneurship. Journal of International Business Studies, 38 (4): 519–540.
Zaheer, S. 1995. Overcoming the liability of foreignness. Academy of Management Journal, 38 (2): 341–363.
Zhou, L., Wu, W., & Luo, X. 2007. Internationalization and the performance of born-global SMEs: The mediating role of social networks. Journal of International Business Studies, 38 (4): 673–690.
Acknowledgements
We thank the JIBS Editor, Anand Swaminathan, and three anonymous reviewers for their support and valuable comments, which have assisted in the development of this paper. Earlier versions of the paper were presented at the Academy of International Business (2008), Academy of Management (2008), and SMS India (2008) conferences. Partial financial support for this project was provided by the Social Science and Humanities Research Council of Canada (Grant no. 410-2005-2186). The authors’ names appear in random order. All contributed equally to the paper.
Author information
Authors and Affiliations
Corresponding author
Additional information
Accepted by Anand Swaminathan, Area Editor, 22 March 2009. This paper has been with the authors for two revisions.
APPENDIX
APPENDIX
Event Study Methodology
The impact of an economic event such as an acquisition can be assessed by observing the price change in the acquirer's security over a relatively short period through a technique known as event study methodology (Haleblian et al., 2006; MacKinlay, 1997). The underlying assumption is that the market is efficient, and therefore, all information related to the firm and its expected future performance is incorporated in its security or stock price (Binder, 1998). The methodology involves three primary steps (Brown & Warner, 1985; McWilliams and Siegel, 1997):
-
1)
Identify the event and define the event window and the estimation period.
-
2)
Determine abnormal returns.
-
3)
Cumulate the abnormal returns over the event window and test for their significance.
According to McWilliams and Siegel (1997) event study makes three fundamental assumptions:
-
1)
The market is efficient.
-
2)
The events are unanticipated.
-
3)
There are no other, confounding events.
Given that the first assumption may not be totally tenable in emerging economies such as India, the effect of inefficiency can be minimized by selecting a fairly long event window. However, too long an event window can also be problematic in terms of reducing the statistical power of the test and exacerbating the difficulty of controlling for confounding events (McWilliams & Siegel, 1997). Also, long-event windows increase the likelihood of contemporaneous and intertemporal correlations of residuals resulting in significant underestimates of standard errors (Salinger, 1992). In the past, studies have employed various lengths of event window, ranging from as low as 3 days (announcement day ±1 day) to as high as 181 days (announcement day ±90 days) (McWilliams & Siegel, 1997). In this study we employ a moderate event window of 11 days (announcement day ±5 days), and a preceding estimation period of clear 240 days which excludes the event window so as to not contaminate the normal performance model parameter estimates (MacKinlay, 1997).
Appraisal of the event's impact requires a measure of the abnormal return (MacKinlay, 1997), calculated as the difference between the stock market return associated with a given event involving a firm (i.e., actual return) and the firm's historical return (i.e., normal returns) (Merchant & Schendel, 2000). Here, the normal return is defined as that expected if the event did not take place, and is measured by the return obtained with the market model (Capron & Pistre, 2002). Following the procedure outlined by Brown and Warner (1985) and others, we calculate the daily abnormal returns (AR it ) to the shareholders of acquiring firm i for day t by controlling for both the market return and the firm-specific return as per the model below,
where R it is the observed firm i's return and R it is the return on a market index, both being for day t. In the above equation the term within the brackets is the expected share price normal return, and is calculated by regressing daily share price return on a daily market portfolio (index) return over a predetermined estimation period preceding the event (e.g., 250–50 days prior to the event). The corresponding constant and the coefficient obtained from the above regression are α i and β i , respectively.
We used SENSEX, the benchmark index of the Bombay Stock Exchange, to assess the fluctuation in daily share price of listed and publicly traded acquirer firms. As a cross-check, we used other indices, such as NIFTY, BSE-500, and S&P CNX-500, as alternate benchmarks to assess abnormal fluctuation in the share prices of acquiring firms. The values of expected normal returns obtained across the indices correlated with those obtained using SENSEX. Once the daily abnormal returns around the event have been determined, it is customary to cumulate the abnormal return obtained over the “event window”. This aggregation is undertaken to account for the capital markets’ reaction to announcements that may have been made after trading hours (Merchant & Schendel, 2000), and to account for any information leakage prior to the official announcement of the event. We cumulate the abnormal return over the 11-day window. Finally, to assess whether the event under observation has a significant impact on values of the firms, a suitable test statistic (in our case the average of CAR over the 11-day window for all events) is assessed for statistical significance (McWilliams & Siegel, 1997).
Rights and permissions
About this article
Cite this article
Gubbi, S., Aulakh, P., Ray, S. et al. Do international acquisitions by emerging-economy firms create shareholder value? The case of Indian firms. J Int Bus Stud 41, 397–418 (2010). https://doi.org/10.1057/jibs.2009.47
Received:
Revised:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1057/jibs.2009.47