Cross-border acquisitions in a transition economy: The recent experiences of China and India

Abstract

This paper investigates the causes and consequences of inward cross-border acquisitions in emerging countries. The focus is on business deals made by firms in China and India, where government ownership ratios remain high. Our empirical analysis yields two important findings. First, the Chinese and Indian firms targeted by foreigners have statistically higher cash-reserve ratios and growth opportunities that do not attract domestic acquirers. This result suggests that both target characteristics are required to influence the inward investment decisions of foreign firms. Second, shareholder value created through cross-border acquisitions is higher for foreign acquirers than for domestic acquirers. This finding implies that investment returns on foreign acquisitions in high-growth emerging markets in which governments promote state-owned share releases are higher than returns from domestic takeovers. It also explains why the number of cross-border deals has recently increased in these countries.