Cross-border acquisitions can be risky and complex but they can also create value and improve productivity in the long term. Much depends on the professional ‘ecosystem’ offered by the host country — and on the acquirer’s willingness to make complementary capital investments at home.
Buying companies in other countries poses significant challenges, requiring close co-ordination and careful integration and creating what’s been referred to in management literature as the ‘liability of foreignness’. But the costs and complications can be matched by the opportunities. The literature also makes clear the potential to access a new managerial and technical ‘ecosystem’ — i.e. the knowledge and resources of the host country — and to benefit from economies of scale and ‘tax and legal optimization’ as a company expands beyond its ‘home’ base.
So how do you minimize the risks and maximize the rewards of cross-border acquisitions? Part of the answer, according to a new study, is to choose your target companies carefully — and to continue to make complementary investments at home. The study compares the productivity of acquiring and non-acquiring companies in France between 1993 and 2004, a period that saw intense M&A activity. It focuses on labour productivity, controlling for divestment and downsizing and restructuring in the home market.
It finds a clear link between foreign acquisition and improved productivity — and that the productivity gains are greater when:
The results also suggest that cross-border acquisitions and investing in home productivity are mutually reinforcing: each makes the other more beneficial to firm productivity. (It’s not hard to see the potential for a ‘virtuous circle’: as ‘distant’ knowledge is transferred and re-combined, companies make more informed decisions about capital investments — and as their capital investments and technological and communications infrastructure improves, the more effectively they disseminate and assimilate ‘learning’.)
Importantly, the study did not find that the productivity gains were related to downsizing or divestment in the domestic market. A supplementary analysis showed that firms employed more people at home following cross-border acquisitions than non-acquiring firms.
The researchers also ruled out the possibility that the gains could just as easily be won through local or domestic acquisitions. Another supplementary analysis found that the effect of ‘home buys’ was ‘not significant’, confirming that the potential for learning and knowledge transfer is greater when the target company is based in another country.
The study suggests that leaders who want to expand their business should:
There are also implications for policy makers. The study challenges the idea that foreign direct investment (FDI) diverts resources from domestic activities and reduces the domestic productivity and/or investment levels of acquiring firms. It underlines the need for trade missions to other countries — and for a model of ‘open’ innovation that extends the search for knowledge and resources beyond national borders
Productivity Enhancement at Home via Cross-Border Acquisitions: The Roles of Learning and Contemporaneous Domestic Investments. Olivier Bertrand & Laurence Capron. INSEAD Working Paper; Strategic Management Journal (Forthcoming).
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