High-tech firms’ international acquisition performance: The influence of host country property rights protection

Abstract

Prior research suggests that high-tech firms tend to encounter market transaction uncertainties in countries with weak property rights protection (PRP) and that transaction costs will increase significantly with such uncertainties. Basing our study on high-tech firms that have recently been increasingly acquiring targets in these countries, we explain this puzzling phenomenon. In particular, we investigate whether and how high-tech firms can gain value from acquiring targets in host countries with different degrees of PRP. In addition to transaction costs, we take into account market demands for advanced technologies in weak PRP host countries and fierce market competition in strong ones. Overall, we suggest that high-tech firms are likely to increase their performance by acquiring targets in weak PRP host countries where profit-generating opportunities tend to be more frequent than in strong PRP ones. Our theory receives strong empirical support from multilevel analyses of a sample of U.S. information technology (IT) firms’ international acquisitions between 1995 and 2004. We also found that firms differ in their capabilities in gaining value in various levels of PRP host countries. When acquirer size increases, acquirers become less able to gain value through acquisitions in host countries with weak PRP; yet when acquirer host country acquisition experience increases, they are more able to gain value through acquisitions in host countries with weak PRP.