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Foreign Ownership and Firm Performance: Emerging Market Acquisitions in the United States

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Abstract

This paper examines the recent upsurge in foreign direct investment by emerging market firms into the United States. Traditionally, direct investment flowed from developed to developing countries, bringing with it superior technology, organizational capital, and access to international capital markets, yet increasingly there is a trend toward “capital flowing uphill” with emerging market investors acquiring a broad range of assets in developed countries. Using transaction-specific information and firm-level accounting data, the paper evaluates the operating performance of publicly traded U.S. firms that have been acquired by firms from emerging markets over the period 1980–2006. The empirical methodology uses a difference-in-differences approach combined with propensity score matching to create an appropriate control group of nonacquired firms. The results suggest that emerging country acquirers tend to choose U.S. targets that are larger in size (measured as sales, total assets, and employment) relative to matched nonacquired firms. In the years following the acquisition target firm sales and employment decline while profitability rises compared with matched nonacquired firms, suggesting significant restructuring of the target firms.

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Notes

  1. According to estimates by the United Nations Conference on Trade and Development (UNCTAD), the outward foreign direct investment (FDI) flow from the developing economies as a group was $226.7 billion in 2006, an increase of 85 percent from the year before. Net developing country FDI flows, inward minus outward, decreased from 2005 to 2006 by 3.5 percent.

  2. Previous studies have focused on the effects of FDI on plant-level productivity measures such as total factor productivity (TFP) or labor productivity (output per worker). Using firm-level financial data, the focus of our paper is on an accounting measure of profitability (ROA) in line with operating performance studies that attempt to identify the sources of gains from acquisitions. The rationale in these studies is that if there are gains from acquisitions they should be eventually reflected in firms’ cash flows.

  3. FDI includes “Greenfield” investment in new assets in a foreign country, and acquisition of pre-existing foreign assets (also termed “Brownfield” investment).

  4. Antras, Desai, and Foley (2009) document the productivity-improving role of U.S. multinational firms. They find that U.S. multinationals are able to exploit technologies abroad through FDI, especially in countries where monitoring is nonverifiable and financial frictions exist. Fukao and others (2006) compare domestic to foreign M&A in Japan and find that Japanese target firms that receive foreign investment experience more rapid improvements in productivity and profitability than those that were acquired by domestic firms. Akben-Selçuk (2008) studies a similar issue using data on Turkish firms.

  5. In this context it is worth noting that Forbes (2008) finds evidence that foreigners hold greater shares of their investment portfolios in the United States if they have less developed financial markets, suggesting that our focus on FDI by emerging market firms may also provide insights into the implications of broader investment trends into the United States.

  6. In particular, Froot and Stein (1991) show that asymmetric information could lead foreign firms to buy U.S. firms in times when the value of the U.S. dollar is low relative to the foreign currency. They provide empirical evidence of a negative relationship between the value of the dollar and FDI flows into the United States using aggregate FDI data, and this relationship is also explored in Chen (2008) using more detailed firm-level data. Harris and Ravenscraft (1990) find evidence that foreign firms prefer technology-intensive industries, Rossi and Volpin (2004) find that targets are typically from countries with poorer investor protection than their acquirers’ countries.

  7. Haskel, Pereira, and Slaughter (2007) describe how U.S. states differ in their incentive packages and taxes with regards to foreign acquirers. At the Federal level there were few legal restrictions on FDI into the United States during the time period studied here, although more stringent laws were recently put into place in order to restrict FDI that threatens U.S. “national security”; these restrictions came into effect in 2007. See: www.ustreas.gov/offices/international-affairs/cfius/

  8. The IMF and the OECD define FDI using a 10 percent threshold, though a broader definition of FDI is ownership of an amount of shares or voting power that allows participation in the management or control of the target firm.

  9. See Appendix I for a full list of the markets included in the database.

  10. See Appendix I for a list of tax-haven markets as defined by the OECD (2008).

  11. The results are robust to these alternative samples and are available upon request.

  12. Our sample includes only those target firms that are kept as independent units and whose financial data continue to be followed by Computat after acquisition.

  13. Our control group consists of all U.S. target firms that did not receive investment by emerging market firms. This group includes firms that have received investment by nonemerging market firms or other U.S. domestic firms, as well as firms that never received outside investment throughout our sample period.

  14. Greenstone, Hornbeck, and Moretti (2008) are able to identify “runners-up” directly in a different context, measuring agglomeration spillovers from the opening of a new manufacturing plant, using publicly available information on “losing counties.” Since this sort of data on “potential runner-up targets” is not available, we construct the control group econometrically.

  15. See Ho and others (2007) for an excellent overview of the benefits of combining propensity score matching with standard parametric methods.

  16. Karolyi and Liao (2009) examine cross-border acquisitions by government-controlled acquirers and find that they are more likely to pursue larger targets than corporate acquirers. In our sample 22 of our 214 emerging market country acquirers (10 percent) are government controlled.

  17. Alternatively, we could also assign zero to a target firm where there has been an acquisition announcement that eventually fell through. Owing to the limited number of such cases, however, this analysis was not feasible.

  18. Other potential candidates for the covariates, such as firm-level imports and exports, the number of patents held, variables related to managerial skill, capital expenditure, advertising expenses or major brands owned, are unfortunately not available for most of the firms in our sample.

  19. In future work we plan to also compare target firm returns to both their matched control firm returns and their industry average return on the announcement date.

  20. We also used alternative matching estimators, including the Mahalanobis distance metric and kernel matching. Results are qualitatively similar to those reported using propensity score reweighting, and are available upon request.

  21. A value for the standardized difference between treated and matched control mean values suggested by Rosenbaum and Rubin (1983).

  22. In the cases of acquisitions that occurred toward the end of our sample, we often have less than five years of postacquisition data. In order to check that our results are not driven by these cases, we re-estimate using balanced samples (including only firms that had all five years’ worth of postacquisition data) and find that the results are robust to the exclusion of these acquisitions.

  23. Another factor that might impact firm performance is business cycle fluctuations. We devised several ways to control for these effects. The first way is to use the proportional time assignment for the untreated group of firms. Secondly, the year dummies in the probit specification also control for time-specific selection that is related to business cycle fluctuations. In addition, we ran separate tests for particular years in the sample. For example, for all target firms that were acquired in 1995 we only assigned control firms that did not receive acquisition up until 1995 and followed their respective performances. This setup is called dynamic matching, and it focuses on one particular year at a time. The downside to this method is that for several years, there are not enough treated firms for the analysis.

  24. We also conducted an exercise where we matched firms by industry and compared their postacquisition performances. These estimates can be considered as an intermediate case between simple difference-in-differences and the full-blown propensity score matching approach. The coefficient estimates using this approach are available upon request. They are generally smaller than those found using simple difference-in-differences, but once again since they do not correct for selection effects, larger in magnitude than those reported in Table 8 based on the propensity score matching approach. As we increase the complexities of the matching procedure by adding more covariates, we expect the estimated coefficients to decrease in magnitude and significance compared with the simple difference-in-difference.

  25. We also conduct robustness checks on a sample that excludes all transactions involving acquiring firms with parent companies based in Hong Kong SAR, Singapore, Taiwan, and South Korea. The results are similar in magnitude and statistical significance to those reported and are available upon request.

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Authors
  1. Anusha Chari
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  2. Wenjie Chen
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  3. Kathryn M E Dominguez
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Additional information

*Anusha Chari is an Associate Professor of Economics at the University of North Carolina at Chapel Hill and a Faculty Research Fellow at the NBER. Wenjie Chen is an Assistant Professor of International Business at George Washington University. Kathryn M. E. Dominguez is a Professor of Public Policy and Economics at the University of Michigan and a Research Associate at the NBER. The authors thank the Editor, Pierre-Olivier Gourinchas, two anonymous referees, Patricia Dechow, Jeff Smith, Jim Levinsohn, James Hines, Matias Busso, Taryn Dinkelman, Dean Yang, Nirvikar Singh, Aart Kraay and participants in the UM Development seminar, the UM IPC lunch group, the NIPFP conference at the Indian Ministry of Finance, the Australian Treasury, the Reserve Bank of Australia, FRBSF, UC Berkeley, the Bank of Canada, the World Bank, and North Carolina State University for helpful comments and advice. They are grateful to the International Policy Center at the Ford School of Public Policy for financial support.

Appendices

Appendix I

Acquiring countries in the sample:

Algeria, Argentina, Kingdom of Bahrain, Brazil, People's Republic of China, Costa Rica, Republic of Croatia, Ecuador, Arab Republic of Egypt, Hong Kong SAR, India, Indonesia, Kuwait, Malaysia, Mexico, Nigeria, Papua New Guinea, Russian Federation, Saudi Arabia, Singapore, South Africa, South Korea, Taiwan, Thailand, Trinidad & Tobago, Uganda, Republic of Uzbekistan, Venezuela.

Tax haven countries (as defined by the OECD, 2008) excluded from the sample:

The Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Cyprus, the Kingdom of Netherlands—Netherlands Antilles, Panama.

Appendix II

Excerpts from business press reports (from Factiva) for acquisitions listed in Table 3:

1. Market Access, Distribution Network Expansion, and Branding

  1. a)

    In June 1994, Agrobios (AB), a unit that manufactures tortillas for Desc SA de CV, acquired all the outstanding common stock of Authentic Specialty Foods Inc (ASF) for a total value of U.S.$141.9 million. Newspaper reports described Desc, SA, the Mexican food, chemical and automotive parts conglomerate as saying that it had agreed to buy Texas-based ASF to expand its U.S. distribution network for Mexican food products. Reports also said that Desc has been acquiring brand-name food and auto parts businesses, tapping the growing Mexican economy and exploiting Mexico's expanding commercial ties with the United States. The transaction was also seen as a signal of Desc's intention to buy more companies in the fragmented Mexican food industry, both in Mexico and the United States.

  2. b)

    Mexico's Cemex, one of the world's biggest cement companies acquired cement manufacturer Southdown for about U.S.$2.6 billion in November 1996. The transaction details suggest that Cemex assumed U.S.$185 million in Southdown's debt. “Southdown is an excellent fit for Cemex,” said Lorenzo H. Zambrano, chairman and chief executive of Cemex according to reports in the Associated Press. “The company's management and facilities are world class and, I believe, will mesh well with our global network. This combination will not only expand our presence in the United States, but help us compete more effectively in all our markets.”

  3. c)

    In 2002, China's Sun Media Investment Holdings Ltd acquired a 25.7 percent stake in Broadcast International Inc, a provider of satellite uplink and related equipment services, for U.S.$16.5 million, in a privately negotiated transaction. International Broadcasting Co., Ltd of America was a two-decade-old operator of enterprise satellite TV networks, located in the Salt Lake City. Sun Media became the largest shareholder of International Broadcasting Co., Ltd. Along with the right to subscribe to U.S.$15 million of shares of International Broadcasting, Sun Media also obtained a 45 percent stock option for the company and planned to renew the services of International Broadcasting in an all-round way by internet protocol television (IPTV) and network multimedia publishing technology, to make International Broadcasting the leading global business-to-business IPTV operator.

  4. d)

    In the commercial banking sector, Taiwan's Bank SinoPac merger with Los Angeles-based Far East National Bank, for U.S.$94 million closed in the mid-1990s. Analysts reported that Chinese banks in the United States were pursuing new Asian business. Details of the strength of Chinese banks suggested for example that the Far East National Bank, a subsidiary of Taiwan's Bank SinoPac serves mainly ethnic-Chinese businesses and was now aggressively pursuing other Asians in the United States. One banker commented that Chinese and Taiwanese banks were actively pursuing the Korean business in the United States. He added that Koreans felt more comfortable with Asian banks. Another insider commented that U.S. banks without branches or partners in Asia often found it hard to serve Asian customers satisfactorily.

2. Technological Alliances, Market Access, and Access to Capital

  1. a)

    CDC software, a Hong Kong-based software arm of the acquired technology provider Chinadotcom (CC) acquired Ross Systems Inc (RS), a developer of business software and supplier to mid-size process manufacturers, in a stock swap transaction valued at U.S.$66.2 million. The transaction was set to provide Ross with access to CDC's R&D resources as well as the capital it needed to grow organically and through acquisitions according to senior sales and marketing staff. The CDC transaction would also provide Ross with better access to the Asian market. Research analysts suggested that Ross would likely get a boost in sales from existing chemical industry customers who were looking to expand into the fast-growing Chinese market.

  2. b)

    Corimon, a paint and coating Venezuelan manufacturer raised its stake in Grow Group to 26 percent for an indicated value of U.S.$56.27 million and illustrates a case where the acquisition provided access to capital for the U.S. target and access to technology for the emerging market acquirer. Corimon was interested in Grow's technology for high-performance coatings, namely industrial and marine coatings, while Grow was interested in Corimon's resin manufacturing capability, which Grow also lacked. According to analysts, the Venezuelan company Corimon (Caracas) was not only taking a financial stake in Grow Group (New York), but also forging a strategic alliance with Grow. The alliance was seen as a way to open up the South American market for Grow. While the company had several distributors in South America, it did not have manufacturing facilities or expanded sales staff there.

  3. c)

    Yet another example of a technological alliance combined with market access is that of Infosys Technologies from India which made a strategic investment in the U.S.-based CiDRA Corp., a developer of agile photonic devices for high-precision wavelength management and control for optical networks. Earlier in the year, the two firms allied to develop bandwidth management products to address the needs of the burgeoning optical fiber market in and outside India.

  4. d)

    Similarly, earlier in the sample period in 1988, Singatronics Asset Holdings, a unit of Singatronics acquired about one million shares of Candela Laser for about U.S.$7 million, increasing Singatronics’ stake in Candela to 27 percent. Candela Laser Corp was the world's largest maker of flash-lamp-excited tunable dye lasers. The acquisition made Singatronics the largest shareholder in the U.S. firm putting it in a position to take part in a specialized high-technology industry and to profit from the growing U.S. medical instrumentation market.

Appendix III

Steps followed in our propensity score matching methodology:

  1. 1

    Run Probit regression where:

    1. a)

      Dependent variable: Y=1, if a firm is acquired by an emerging market firm; Y=0, otherwise.

    2. b)

      Choose appropriate conditioning variables, covariates which are observable firm characteristics such as age, size, profitability, financing-mix, and so on.

    3. c)

      Obtain propensity score: predicted probability (p) or log[p/(1−p)].

  2. 2

    Generate weights using propensity scores:

    1. a)

      For acquired firms, assign weight=1.

    2. b)

      For nonacquired firms, assign weight=p/(1−p) using predicted probability in 1(c)).

  3. 3

    Run multivariate difference-in-difference regression with the generated weights in (2) and covariates that were used in the initial probit along with industry, year, and state fixed effects to eliminate time-invariant, unobservable differences between acquired (treated) and nonacquired (matched control) firms to examine postacquisition firm performance.

Appendix IV

Table D1

Table D1 Details of Sample Construction
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Chari, A., Chen, W. & Dominguez, K. Foreign Ownership and Firm Performance: Emerging Market Acquisitions in the United States. IMF Econ Rev 60, 1–42 (2012). https://doi.org/10.1057/imfer.2012.1

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