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Industry on Control Mode Choice and Performance: An Acquirer’s Perspective

INTRODUCTION

Decades of rapid growth fueled by economic reforms have led to a substantial increase in net exports as well as inward FDI in emerging economies. Longer international

experience and higher foreign currency reserves generated by their export revenues have encouraged emerging multinational enterprises (EMNE) to invest abroad including in developed economies. Ramamurti (2012) argues that EMNE invest in developed markets to obtain technologies and brands primarily for exploitation in their home markets. Simultaneously, they also explore, and learn about the host markets (Luo & Tung, 2007; Madhok & Keyhani, 2012; Mathews, 2002). Many EMNEs transfer technologies and brands from industries that have matured in high-income markets, but are still booming in their home market or other emerging markets. For many EMNE, acquisition is the

preferred choice of entry mode when establishing their operations in developed countries (Williamson & Zeng, 2009). Many of these acquisitions in high-income markets are non- controlling minority acquisitions in which the EMNE acquirers own equal or less than 50 percent of their targets’ equity shares after the transactions, as opposed to controlling majority acquisitions in which they own more than 50 percent of targets’ equity shares after the transactions. Anderson and Gatignon (1986) classify these two choices of control as low-control mode and high-control mode, respectively. The choice of equity ownership level affects not only acquirer’s control of the target, but also acquirer’s resource commitment, risk, and returns (Chari & Chang, 2009). While a high-control

mode may be desirable in terms of reaping potential economic returns, it also comes with a higher risk, because the acquirer must assume full responsibility for all decision making in its foreign market operation (Anderson & Gatinon, 1986). Between 1990 and 2016, EMNEs made 28,073 acquisition deals in developed countries4, about 19 percent of which were low-control mode acquisitions.5

From a strategic management research perspective, the choice of control mode made by EMNEs in their acquisitions of firms in developed economies is interesting because it may not be a random decision. Instead, the choice of control mode may be strategic in the EMNEs’ attempts to create sustainable competitive advantage (Hamilton & Nickerson, 2003; Shaver, 1998) and, similar to other strategic decisions, it may have performance implication. Despite few notable exceptions (Chari & Chang, 2007; Ouimet, 2013), acquisitions control modes remain largely unexplored in the strategy literature, especially in the context of emerging multinationals’ acquisitions in developed

economies. Other related studies have recently focused on partial acquisitions, although not necessarily on non-controlling minority acquisitions (e.g., Chari & Chang, 2009; Chen & Hennart. 2004; Contractor, Lahiri, Elango, & Kundu, 2014; Elango, Lahiri, & Kundu, 2013; Gaffney, Karst, & Clampit, 2016; Lahiri, Elango, & Kundu, 2014; Piscitello, Rabellotti, & Scalera, 2014; Yang, 2015).

In this essay, I specifically ask the following research questions: (1) Do EMNE’s acquisitions in developed economies create value for the EMNE acquirers? (2) What drives certain EMNE acquirers to choose low –control acquisition over high-control

4

These are countries classified by UNCTAD as developed economies. 5_{Data were retrieved from Thomson One database on June 14, 2017.}

acquisition when they take over targets in developed countries? (3) Do EMNE acquirers gain when their selection of low-control acquisition or high-control acquisition fits what has been prescribed by the answer to the second research question? In this essay, I combine strategic management and international business (IB) perspectives by responding to the EMNE acquirer’s control mode choice and EMNE acquirer

performance questions in a single framework of analysis. By doing so, I account for a potential self-selection or strategic nature of the control mode choice making, which would then help me in answering the third research question on what would happen to EMNE acquirer performances had they inadvertently made suboptimal choice of control mode.

To address these three research questions, I primarily draw theoretical insights from the dynamic socio-cultural change model proposed in my Essay 1 and enrich them with parallel ideas from the organizational learning literature, particularly the concept of ambidexterity, defined as a dynamic capability possessed by a firm to manage

exploitation and exploration learning processes simultaneously (Raisch, Birkinshaw, Probst, & Tushman, 2009). Exploitation and exploration refer to the adaptive processes of exploiting old certainties and exploring new possibilities, respectively, both of which are needed by every organization to survive (March, 1991). I argue that acquisitions of firms in developed economies provide EMNEs with a unique interspatial configuration of simultaneous exploration and exploitation, which has a strategic value that may lead to enhanced synergistic benefits and therefore value creation for the EMNE.

Moreover, I argue that certain home country profiles of the EMNE acquirer is likely to increase the likelihood for the EMNE to choose low-control mode in its

acquisitions of firms in high-income markets. I characterize emerging economies into four types of industrializing economies based on their export and labor market

characteristics. I show that unlike many other emerging economies, the rapidly growing emerging economies (or “the rapid industrializer”), such as China, has to uniquely face dual challenges from reliance on manufacturing-based exports and the rapidly shrinking labor force, which comes from aging population and previous distortionary population policy that have rapidly increased real wages relative to labor productivity and threatened the sustainability of the country’s trade-driven economic growth. This in turn provides the utmost drive for EMNEs from these economies to engage in exploration-dominant acquisitions in advanced economies to upgrade their resources and capabilities in the speediest way possible. I argue that the low-control mode acquisition in many cases might better accommodate this drive than the high-control mode acquisition, as it provides the EMNEs with a relatively faster and more effective route in terms of deal completion time as well as post-acquisition collective learning.

I also argue that low-control acquisition is associated with learning benefits most relevant to the exploration learning process, which implies a greater incentive for an EMNE to choose low-control mode when it acquires a target in one of the high

technology industries in advanced economies. While both exploitation and exploration learning occur when an EMNE acquires a target in a developed economy, in general the exploration learning is relatively more dominant than the exploitation learning when an EMNE takes over a target in an advanced economy, because the EMNE acquires the target primarily to access its strategic assets to build on the EMNE’s limited firm-specific advantages. I further argue that the exploratory nature of EMNE’s learning is even more

dominant when the target is in a high technology industry where research and development (R&D) is far more intensive than in non-high technology industry.

Finally, I argue there is a self-selection process involved in the control mode choice that EMNE acquirers make. Thus, EMNEs choose control mode by strategically considering their firm and home country characteristics as they attempt to optimize learning that leads to sustainable competitive advantages and, ultimately, better post- acquisition performance. In addition, assuming a perfectly competitive market for corporate control, if an EMNE acquirer inadvertently made a sub-optimal control mode choice contrary to what our previous theoretical arguments prescribe, then such choice would lead to sub-optimal post-acquisition performance for the EMNE acquirer.

This essay begins in the next section by reviewing extant literature. I then present theoretical expositions to provide a basis for developing testable hypotheses. Next, I highlight the methodology employed in the study including the data which are used to test the formulated hypotheses. I subsequently discuss the empirical results. In the final section, I summarize and explore the implications of the study for managers and future research.

The study in this essay contributes to a growing stream of research in emerging multinational enterprises (EMNEs), highlighting the collective learning benefits of control mode choice in EMNE’s acquisitions of firms in developed economies from the dynamic socio-cultural and the organizational learning perspectives. To the best of my knowledge, it is the first empirical study that simultaneously examines drivers of acquirer’s control mode choice and the effect of the choice on acquirer’s performance while also accounts for self-selection/endogeneity in the choice-making process. From a

practical perspective, it has the potential of being insightful for executives of emerging market firms aspiring to venture into high-income markets.

LITERATURE REVIEW