UNIVERSITY OF ECONOMICS ERASMUS UNVERSITY ROTTERDAM HO CHI MINH CITY INSTITUTE OF SOCIAL STUDIES VIETNAM THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M A IN DEVELOPMENT ECONOMICS THE DISCRE[.]
UNIVERSITY OF ECONOMICS ERASMUS UNVERSITY ROTTERDAM HO CHI MINH CITY INSTITUTE OF SOCIAL STUDIES VIETNAM THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE DISCREPANCIES OF DETERMINANTS BETWEEN CROSS-BORDER M&A AND GREENFIELD FDI: EVIDENCE IN EMERGING COUNTRIES BY TA THI THANH TRA MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, DECEMBER 2017 UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE DISCREPANCIES OF DETERMINANTS BETWEEN CROSS-BORDER M&A AND GREENFIELD FDI: EVIDENCE IN EMERGING COUNTRIES A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By TA THI THANH TRA Academic Supervisor: DR VU VIET QUANG HO CHI MINH CITY, DECEMBER 2017 DECLARATION I declare that the thesis entitled “The discrepancies of determinants between cross-border M&A and Greenfield FDI: evidence in emerging countries” has been absolutely conducted by myself under the supervision and guidance of Dr Vu Viet Quang from The University of Economics Ho Chi Minh City I commit that the whole interpretations in the research are based on my academic knowledge and the understanding of literature review presented following the references and this thesis has not been submitted to any graduate program I take full responsibility for the concepts, contentment, and results of this study TA THI THANH TRA ACKNOWLEDGEMENT This thesis reflects not only my work in current times, this is also a milestone that marks one of my most amazing journey When I were freshman, I have been introduced this master program Since then, I have made plan to attend this course because of its unique opportunities and advantages Throughout two years I have learned many different economic fields such as finance, development economics, and international trade This thesis presents the lessons learned in researching one of those aspect: two entry modes of foreign direct investment namely Greenfield investment and Cross-border M&A This thesis is also sweet fruit of dozens of lucky encounters I have experienced from many remarkable individuals who I wish to acknowledge I would first like to express my deep gratitude to my supervisor, Dr Vu Viet Quang for his wholehearted guidance, enthusiastic support and unceasing encouragement He has mentored me since I have just got an idea and no direction He is the one who supported me all the time without hesitation His insightful knowledge, valuable suggestions help me to brainstorm concept, expand the literature review, collect data and finish this research Additionally, his optimism and cheerfulness is what I will remember most, the time spent working with him is truly precious and memorable Besides, I am always grateful to all the lecturers and the staff of Vietnam – Netherlands Program This is my biggest fortune to have the most conscientiously supporters, they always take me in touch and support when I have any difficulty I owe my deepest gratitude to Dr Nam, Dr Thuy, who suppose me with all their resources Even this New Year holiday, they spend precious time to help me unconditionally I am indebted to my precious teammates for their sincerity and willingness to help Although we are very different in personality, interests, and even purpose while attending this course, fate let us meet together and give us precious friendship in real life It is an honor for me to encounter and be friend with all of you Additionally, I would like to give my personal thanks to Mr Khang, Mr Tam, who help me a lot while I am confusing and struggling with this research I wholeheartedly wish that we all can graduate on time and the friendship is forever I wish you all the best and hope your dream come true Last but not least, I would like to spend my inexpressible gratefulness to my beloved family who always believe me and give me freedom to whatever I have decided They have cherished with me every great moment and supported me all the time This thesis would not have been possible without their encouragement ABBREVIATION Cross-border M&A: Cross-border Mergers and Acquisitions FDI: Foreign direct investment Greenfield FDI: Greenfield Foreign Direct Investment IIAs: International Investment Agreements ODA: Official development assistance OLI – theory: Ownership, Location, and Internalization theory RBV: Resource-based view S&P500: The Standard & Poor's 500 TCE: Transaction Cost Economics ABSTRACT Cross-border M&A and Greenfield FDI have been a common strategy when a firm intends to participate in new markets Those two strategies are FDI mode choice and represent a notable alternative for the expansion plan Both Greenfield FDI and Cross-border M&A play an important role in economic growth in the host country Therefore, this empirical research works on the determinants of home firm decision based on two main respects This study estimates the determinants affective those two decisions Then, this research also provides the empirical evidence of the discrepancies of those determinants affecting Cross-border M&A and Greenfield FDI The observations are collected from emerging countries as host firms and use United States firms as home firms This research presents four results Firstly, host countries’ macroeconomic determinants between Cross-border M&A and Greenfield FDI have the similar effect Secondly, an enhancement of IPR protection law in the host countries will increase inward Greenfield FDI, while SHR protection law supports cross-border M&A decision Thirdly, firm level determinants have a strong impact on Cross-border M&A decisions Finally, macroeconomic determinants have a positive effect on Greenfield FDI decisions Key words: Cross-border M&A, Greenfield FDI, emerging countries JEL Classification: F20, F21, F23 TABLE OF CONTENTS LIST OF TABLES CHAPTER 1: OVERVIEW OF RESEARCH 1.1 Introduction: 1.1.1 World Investment context: 1.1.2 Problem statements: 1.2 Research objectives: 1.3 Research questions: 1.4 The importance of the study: 1.5 Structure of research: CHAPTER 2: LITERATURE REVIEWS 2.1 Theoretical Review: 2.1.1 Cross-border M&A and Greenfield FDI as choice to entry in a foreign market 2.1.2 Firm level and industry level factors affecting the decision of a mode of entry 11 2.1.3 Country level factors affecting the decisions of mode of entry 12 2.1.4 Research needs on cross-border M&As as a mode of entry 13 2.2 Empirical Review: 14 2.2.1 Macroeconomic and firm level determinants: 14 2.2.2 Legal environment in host-country: 17 2.3 Research hypotheses: 18 CHAPTER 3: DATA AND METHODOLOGY 20 3.1 Data collection 20 3.2 Empirical model 21 CHAPTER 4: RESULTS AND CONCLUSIONS 25 4.1 Summary statistics: 25 4.1.1 Data description: 25 4.1.2 The correlation matrix 28 4.1.3 Empirical results: 29 CHAPTER 5: CONCLUSION 36 5.1 Main findings: 36 5.2 Policy implications: 38 5.3 Limitations and further research recommendation: 39 REFERENCES 40 LIST OF TABLES Table 4.1: Summary statistics 25 Table 4.2: Summary statistics of entry mode choice via regions 27 Table 4.3: The correlation matrix 28 Table 4.4: The determinants of Cross-border M&A and Greenfield FDI 29 Table 4.5: The estimated results for the value of Cross-border M&A and Greenfield FDI using Seemingly Unrelated Regression (SUR) 33 CHAPTER 1: OVERVIEW OF RESEARCH 1.1 Introduction: 1.1.1 World Investment context: In 2017, global investment is slightly getting better with cautiously optimism forecast from UNCTAD report FDI will be increased by higher economic growth projections around the world, the report expects the value of FDI will reach nearly $1.8 trillion in 2017 However, this report show the ineffective legal policy and geopolitical risks are significant factors that practically damage the recovery In contrast, tax policy represented by corporate tax mostly affect Cross-border M&A decision In 2006, FDI prospects to emerging countries are generally positive excluding those countries in Latin America and the Caribbean Emerging countries as a whole are predict to get about 10 percent of FDI total value in 2017 This assumption bases on considerable development in emerging countries in Asia and Africa, where investors are more confidence to invest due to a better view in major economies through oil prices and regional integration In contrast, Latin America and the Caribbean still face uncertain macroeconomic and policy outlook, especially terrorism and wars which lead to investor’s hesitance Therefore, FDI flows to emerging economies would be continue their recover with a steadily speed, while those flows to developed economies would remain unchanged in 2017 FDI flows come to growth momentum period in 2016 about percent after a strong boost in 2015 Noteworthy is the fall of 14 percent from emerging economies However, they still remain the largest and the most important external source of financial capital for emerging countries – compared with investment portfolio, remittances and ODA In Asia emerging markets, FDI flows fell the first time in five years by nearly 15 percent to $443 billion in 2016 In those market in Africa, FDI flows decrease continuously percent from 2015 to $59 billion In Latin America and the Caribbean, trend in FDI flows speed up to 14 percent to $142 billion, based on weak commodity prices and pressures on exports In conclusion, FDI in lower middle income economies remained delicate with a decline of 13 percent in 2016, while middle income countries fall percent In contrast, upper middle income countries stay stable at $24 39.04% over 2015, Greenfield FDI, by the other hand, reaches to $155,152.7 mil, up 30% compared to 2015 In the 2006-2016 period, Cross-border M&A changes irregularly, while investments through Greenfield FDI have been more balanced and changed little over the years Overall, total investment via Greenfield FDI is practically higher in both quantity and quality compared to Cross-border M&A Emerging market is a country that contains several characteristics of a developed market, however, it does not meet standards to be a developed market (MCSI, 2014) This means that those countries would turn to developed markets in the near future or were in the past lately The economies of China and India are considered to be the largest emerging markets (IMF, 2016) By emphasizing the variables of World Bank economic category, Bremmer (2014) defines an emerging market or emerging country as “a country where politics matters at least as much as economics to the markets” In the end, emerging country or emerging market contains following characteristics Firstly, the purchasing power parity (PPP) per capita income of this country is consisted of the range from 10% to 75% of the average EU per capita income Secondly, this country has experienced a brisk economic growth that has narrowed the income gap with developed countries in the latest decade Finally, during this decade, this country has conducted serious institutional transformations which donated to merge its market more deeply into the world economy Therefore, emerging countries appears to be a result of the current globalization In this case, the list of emerging market are taken from IMF in 2016 Emerging countries remain attractive investment destinations for a variety of reasons, including their large consumer base, a productive workforce, a business environment that encourages innovation, and their legal protections are getting better and better In the 2008-2016 period, both of volume and number of foreign direct investment to Asia emerging countries increase steadily over the years, especially after the economic crisis in 2008 In parallel with global trends from 2008 to 2016, the volume of capital from U.S firms to Asia emerging countries grow gradually However, their Greenfield FDI has a higher investment value than Cross-border M&A over the years Because of this phenomenon, various research has been done to investigate factors affecting investment decisions of foreign firms to emerging countries through different periods However, these trends raise questions about Cross-border M&A and Greenfield FDI characteristics, which determinants led to the difference between Greenfield FDI and Cross-border M&A investment decision, even if they are all modes from FDI? Is there any similarity between these two flows? 1.2 Research objectives: Although research about both cross-border M&A and Greenfield FDI determinants have increased in recently, those comparing between these factors are still generally absent This research aims at discovering not only the factors affecting Crossborder M&A and Greenfield FDI from U.S firms to emerging countries but the comparison between them By identifying this blank space in the previous literature, this paper therefore contributes to the current research by estimating these determinants by two modes of FDI and, consequently, by indicating the heterogeneity of cross-border M&A and greenfield FDI determinants, which have received little academic attention until now This paper investigates whether common determinants lead to both crossborder M&A and Greenfield FDI decisions and evaluates whether such factors have difference impact between them Especially, this research focus on developing countries from six regions around the world as host countries and United States firms as homecountry investors in the 2008-2016 period Therefore, this study aims at supporting a panoramic view of this issue 1.3 Research questions: Based on the research objectives, the study focuses on the questions as follows: What are the determinants of Cross-border M&A and Greenfield FDI? How these determinants affect the value of Cross-border M&A and Greenfield FDI? 1.4 The importance of the study: Various studies have been estimated the Cross-border M&A and Greenfield FDI determinants, the discrepancies among them are simultaneously analyzed Moreover, this is the one of the few studies that take into account the interaction of macro and firmspecific variables of host countries in order to identify the differences and similarities among cross-border M&A and Greenfield FDI determinants The research also contributes to a lot of studies that have been published in discovering the effect of those FDI flows in developing countries The empirical results will support the policy makers in emerging countries while making efforts to attract foreign investments from developed countries Not only does the study give governments suggestions on how to adjust their policies to attract investments, but it also provides host firm with some recommendations on whether enclitic foreign investments is a right way to follow 1.5 Structure of research: The remainder of this paper is organized as follows In Section 2, the brief literature review of both theory and empirical research will be presented In Section 3, the data and methodology are described In Section 4, empirical results and explanation will be gave out Section discusses new empirical evidence and concludes CHAPTER 2: LITERATURE REVIEWS 2.1 Theoretical Review: 2.1.1 Cross-border M&A and Greenfield FDI as choice to entry in a foreign market There is an extensive literature on Cross-border M&A and Greenfield FDI as a potential mode of entry into a foreign market such as Andersen (1997), Brouthers and Brouthers (2000), Kogut and Singh (1988) Greenfield FDI includes the establishment of owned subsidiaries in new countries so they offer the highest level of internal resources and technology control at a highest costs as well (Hennart & Park, 1993) Costs come from not only set up physical facilities but also build the relationships and networks with distributors, customers, and even government to run effectively and smoothly in the new markets (Andersson, Johanson, & Vahlne, 1997) Cross-border M&A allows the home firm to obtain host firm resources such as facilities, technology, and human resources, so home firm gain access to markets and local government Crossborder M&A also give a high control level over capital and resources, which is less than Greenfield FDI is but more than international alliances are (Newburry & Zeira, 1997) Cross-border M&A may be initiated to internalize an activity to reduce or avoid transaction costs Those theoretical research also prove that the decision of a Cross-border M&A or Greenfield FDI as a mode of entry into a foreign market is frequently affected by three level factors Firstly, factors at firms level such as international trade experience, local business, production diversification, internal similarity, and worldwide investment strategy Secondly, factors at industry level such as technological power, advertising power, and sales ability Finally, factors at country level such as host country’s market growth, culture differences to avoid risk propensity Many researchers have compared Cross-border M&A with Greenfield FDI to identify factors that affect the FDI entry mode choice However, the experimental consequences considering the determinants of them are mixed Based on equity or nonequity approaches, theory and research are probably robust, the theoretical foundations of the determinants of these two entry mode stay weak The theoretical review prove that most of perspectives have applied Transaction cost economics theory (TCE) and Ownership – Location – Internalization (OLI) (Shimizu, Hitt, Vaidyanath, & Pisano, 2004) Besides, firm characteristics and their heterogeneous resources and capabilities have not get enough attention (Madhok, 1997) Therefore, complementary resources of target firms and international impacts demands more examination in future research on Cross-border M&A and Greenfield FDI Home firms should take a careful holistic sentiment about firm level, industry level and country level factors while entering foreign market to eliminate information asymmetry (Kogut & Singh, 1988) or liability of foreignness (Zaheer, 1995) Researchers have employed plenty of theoretical perspectives to explain the entry mode decision (Andersen, 1997), but the vast majority have approved the TCE and OLI framework by Dunning (1993) and (Williamson (1975)) However, some of theoretical researchers have estimated the effects from each of the factors differently For example, Brouthers and Brouthers (2000) and (Hennart & Park, 1993) prove the effect of industry level and country level factors such as high or low market growth, while Kogut and Singh (1988) found the impact of low cultural distance between home and host countries Additionally, other researchers demonstrate the influences of firm level factors such as the product diversity level by Wilson (1980), international trade experiment (Harzing, 2002) and local customs knowledge (Barkema & Vermeulen, 1998) Besides, the impact of IPR and SHR to Cross-border M&A and Greenfield FDI have been researched by various theoretical studies Those studies explore the link between the legal environment concerning those legal enviroments and FDI entry mode in emerging countries with mix results For example, the all of theoretical studies by Grossman and Helpman (1993), Maskus and Penubarti (1995), Glass and Saggi (2002), and Lai and Qiu (2003) affirmed that an enhancement in IPR legal protection laws and SHR legal protection laws of emerging countries leads to the decrease in FDI inflows, whereas those by Braga, Grepioni, and Desiraju (1998), Javorcik (2004), and (Branstetter & Saggi, 2011) prove the opposite results Therefore, this study will take a careful look at IPR and SHR impact on Cross-border M&A and Greenfield FDI in the empirical model The empirical literature review of these factors will also be considered more in the following section 10 2.1.2 Firm level and industry level factors affecting the decision of a mode of entry Based on investment strategy of home firm, the diversification action impacts decision of a mode of entry If home firm strategy is to access complementary utility, it will focus on the qualities of resources, host firm current resource portfolio, and even the embeddedness level in the targeted firm Based on a theoretical framework from TCE, Hennart and Park (1993) concluded that home firm primarily chooses Crossborder M&A if its interest in a part of the target assets, because it can focus on assets which suitable with firm strategy In contrast, home firm commonly chooses Greenfield FDI if host firm assets are strictly embedded and distributed, so it probably take more control of host firm Madhok (1997) researches choice of mode of entry based on TCE and OLI framework These theories bring up some valuable concerns that the organizational power framework becomes more suitable with nowadays investment context, which means future research should take a careful look in industry factors due to the importance of firm resources Moreover, (Anand & Delios, 2002) discovered the fungibility technological power across countries, and the power of brand by using host firm and industry characteristics also influence choice of a mode of entry Therefore, those papers recommend that home firms should have clearly distinguish between capability-seeking and capability-exploiting acquisitions based on the availability and importance of the different kinds of potential host firms resources The most value resources by investing firms are commonly intangible and knowledge-based resources However, it is extremely difficult for home firms while identifying and managing those assets In this case, they prefer equity-based modes to manage intangible assets and R&D and advertising intensity (Delios & Beamish, 1999) Vermeulen and Barkema (2001) use organizational learning perspective to prove that Cross-border M&A will broaden the firm knowledge-base While Greenfield FDI creates a path dependence that eventually produces inertial corporate governance in new firm, Cross-border M&A expand the firm’s knowledge base and reduce organizational inertia 11 In another way, Hennart and Park (1993) employ a multiple theoretical framework composed of TCE and RBV to research about the kind of advantage possessed by home firm They discovered that Japanese firms, those have a strong technological advantage, prefer Greenfield FDI over Cross-border M&A This entry mode support them better ways to transfer the advantage to the foreign facility The result can be explained that firm with high and complex technology base get more and more difficult to transfer that technology to foreign country Moreover, their training this to acquired firms will face the same difficulties in human resources, capital and may be unsuccessful That is why high-tech firm would rather choose Greenfield FDI, this is more simple and affordable to train their own staff transferred to the foreign facility Brouthers and Brouthers (2000) investigate the impact of investment size on the entry choice They verify that home firms prefer Greenfield FDI with relatively small investments, whereas Hennart and Reddy (1997) found exactly the opposite results, they concluded that large firms have more difficult in integrity so they prefer Greenfield FDI In contracts, Padmanabhan and Cho (1995) found no relationship between investment size and entry mode choice The mode of entry choice can also be influenced by other firm-level factors, such as time pressure However, they suggest that the investor can only choice Cross-border M&A when they has a short amount of time In fact, Greenfield FDI process demand more time to moderate 2.1.3 Country level factors affecting the decisions of mode of entry First of all, a cultural issue that has significant impact on entry choice is the ability to combine resources, especially human resources The phenomenon of combining different cultures has been examined in the literature by Brouthers and Brouthers (2000), Hennart and Reddy (1997), and Kogut and Singh (1988) By those researches, cultural distance is a convenient proxy for calculating firm’s country risk In fact, cultural distance declares the discrepancies between home firm and host firm Therefore, it also shows the level of the potential investor’s strategic advantages to impose to other countries For example, both Child and McGrath (2001) and Kogut and Singh (1988) use a multiple theoretical framework namely TCE, institutional theory to verify that cultural distance among home firm and host countries practically affect home 12 firm decision Moreover, the bigger the gap, the greater the investor's preference for Greenfield FDI Home firm specifically emphasized that the primary difficulty of cultural distance would be reflected by high management costs during the integrating In contrast, Brouthers and Brouthers (2000) verify an opposite results with the same theoretical framework They confirmed that small cultural distance leads home firm to choose Greenfield FDI to avoid specific aid of host firm, while large cultural distance makes home firm decide Cross-border M&A to receive a higher level of legitimacy from host country Moreover, various theoretical research reported mixed results for product diversification by Barkema and Vermeulen (1998) and multinational experience by Barkema and Vermeulen (1998); Brouthers (2002); Wilson (1980) 2.1.4 Research needs on cross-border M&As as a mode of entry Many previous researches accept the benefits of international investment as given However, there are only several researches compare Cross-border M&A and Greenfield FDI determinants As above discussion, while factors at level country and industry findings are relatively robust, factors at host firm level findings are more mixed For example, the level of global experience calculated by the export ratio has been found to be associated with both Cross-border M&A and Greenfield FDI from Brouthers (2002); Barkema and Vermeulen (1998); Kogut and Singh (1988) results Host firm has more advantages when firm already has trade experience, so trade should be take as an influent on the entry mode selection, the similar results has been proved by Beckman and Haunschild (2002); Agarwal and Ramaswami (1992); and Anderson and Gatignon (1986) Additionally, this field needs more attention to the comparison between Cross-border M&A and Greenfield FDI determinants Furthermore, although value of the investment is frequently reported as determinants of Cross-border M&A and Greenfield FDI, it still lack empirical evidence to prove Therefore, researchers should pay attention to the value of Cross-border M&A and Greenfield FDI Finally, it is not clear whether research findings related to large multinational enterprises can be extended to small- or medium-sized firms Erramilli and D'Souza (1993) So firm size should be taken to estimate as elements that affect Cross-border M&A and Greenfield FDI 13 2.2 Empirical Review: 2.2.1 Macroeconomic and firm level determinants: In previous research, many empirical results prove that common macroeconomic factors of host country have an impact on Cross-border M&A and Greenfield FDI Even though those previous studies focus on the factors that affect Greenfield FDI and Crossborder M&A separately, they both suggest that macroeconomic determinants of host countries have a strong impact on Cross-border M&A and Greenfield FDI decisions Because these are two modes of FDI, the previous results suppose the statement that the most of host-country macroeconomic factors are similar between the two types of FDI Ayers, Lefanowicz, and Robinson (2003) base on a tax policy perspective of 565 taxable cash-for-stock and 370 tax free stock-for-stock acquisitions, their results suggest that capital gains tax policy plays an important role in corporate acquisitions One more suggestion of this paper is that changing capital gains tax ratio adjusts the cost of corporate acquisitions and thereby may influence the movement of capital via corporate acquisitions Huizinga and Voget (2009) also suppose for Ayers et al (2003) research, they found that the international tax system influence the organizational results of Cross-border M&A For example, emerging countries that oblige low levels of international taxation are more attractive the parent companies of recently created multinational firms Besides, GDP per capita, stock market index between home country and host country have a positive correlation to number of Cross-border M&A Rossi and Volpin (2004) apply a sample containing all Cross-border M&A deals announced in 49 major countries, announced in the 1990s and completed by the end of 2002, and reported by SDC Platinum - a database from Thomson Financial This paper suppose evidence that the volume of Cross-border M&A activity is significantly of considerable size in countries with better accounting levels and powerful shareholder protection In Cross-border M&A deals, target firms typically come from countries with poorer investor protection, namely emerging countries, suggesting that cross-border transactions play a governance role by improving the degree of government policy to protect firms Erel, Liao, and Weisbach (2012) investigate majority of cross-border mergers from private firms outside of the United States By analyzing a sample of 56,978 Cross-border M&A in the 1990-2007 period, their results show that geography, 14 ... follows: What are the determinants of Cross-border M&A and Greenfield FDI? How these determinants affect the value of Cross-border M&A and Greenfield FDI? 1.4 The importance of the study: Various... comparison between Cross-border M&A and Greenfield FDI determinants Furthermore, although value of the investment is frequently reported as determinants of Cross-border M&A and Greenfield FDI, it... paper therefore contributes to the current research by estimating these determinants by two modes of FDI and, consequently, by indicating the heterogeneity of cross-border M&A and greenfield FDI determinants,