International Relations and Cross-Border M&A —— Evidence from Chinese Firms
WANG Xiaosong, YUAN Jiaqi, FENG Sheng
China Economic Reform and Development Research Institute, Renmin University of China; School of Economics, Renmin University of China; China Construction Bank; School of Applied Economics, Renmin University of China
Summary:
In recent years, facing new situations and challenges, Chinese firms have paid particular attention to the internationalization strategy of “venturing overseas and going global”. Against this backdrop, there has been a significant increase in cross-border M&A by Chinese firms, with China surpassing the United States to become the world's largest cross-border acquirer. China has long advocated the establishment of a new type of international relations centered on win-win cooperation, and provided opportunities for Chinese firms to accelerate their overseas development through the Belt and Road Initiative and other cooperation mechanisms. But at the same time, China's OFDI still faces various risks, with political risk being a major risk category encountered by Chinese firms' investment. specifically, political risks related to international relations, such as government opposition, public blacklash and government default risk, are all important factors affecting cross-border M&A. In fact, although China's economic and trade exchanges with other countries continue to deepen, the host government may still refuse China's investment on the guise of economic or military security due to various factors such as ideological differences and competition of national interests. Cross-border M&A are related to how firms can utilize their resource endowments, improve production efficiency, expand market share, strengthen technological innovation, and thereby promote China's industrial transformation and develioment, and climb up the global value chain. Therefore, it is of great practical significance to study cross-border M&A. The contributions of this paper are as follows. Firstly, in recent years, many new phenomena and changes related to the global economy and polity have emerged, which means that the existing trend, objective laws and world order are at risk of being broken down and rebuilt, and also challenge the existing empirical laws and empirical conclusions are also being challenged. Secondly, the measurement of bilateral relations has always been a difficult problem in academia. This paper uses the GDELT news database to construct a monthly index that includes government and non-government entities to comprehensively measure bilateral relations, integrating government interaction and non-governmental exchanges into a unified framework,This clarifies the two action mechanisms of the government and the private sector, so as to reveal the “black box” of how international relations affect firms' outbound M&A. Finally, this paper emphasizes the perspective of bilateral interaction in the field of cross-border M&A research, and further examine the impact of active and passive international relations,the uncertainty of international relations on cross-border M&A, the moderating effect of public opinion and the helerogeneity effect of institutions, time periods and geographic locations, ennching research conclusions in related fields. This paper constructs a monthly measurement index of international relations and uses panel data from 2015 to 2022 to examine the impact of international relations on cross-border M&A. The conclusions are as follows: Firstly, after controlling for factors such as macroeconomic, bilateral trade, and unobservable exogenous shocks, the deterioration of bilateral relations between China and host countries will have a significantly negative impact on the amount, number, and completion of cross-border M&A by Chinese firms. After replacing the core explanatory variables, changing the sample country group, considering sample selection bias and endogeneity issues, this basic conclusion remains robust. Meanwhile, event data includes both the active and passive parties involved in the event. Through analysis, it was found that compared to events actively facilitated by China, events facilitated by domestic entities in the host country have a more significant impact on cross-border M&A by Chinese firms. Secondly, the uncertainty of international relations will significantly affect cross-border M&A activities, evidenced by the decrease in the amount, transaction frequency, and completion rates of Chinese firms' cross-border M&A as the uncertainty of international relations increases. Thirdly, the increase in news media coverage of conflict will amplifu investors' perception of international relations, thereby strengthening the inhibitory effect of deteriorating bilateral relations on cross-border M&A activities. Fourthly,international conflicts can increase the likelihood of investment being opposed by the government and the public respectively by suppressing high-level interactions at the government level and reducing public goodwill at the civilian level, thereby restraining cross-border M&A. Fifthly, from the perspective of institutional, temporal and geographic heterogeneity, the inhibitory effect of the intensification of international conflicts on cross-border M&A activities is more pronounced in countries with lower economic freedom, before the COVID-19 pandemic and in non-Belt and Road countries. On this basis, this paper puts forward the following suggestions. First,as government actions occvpu major part of bilateral relations and play an important role in guiding non-governmental exchanges, we should actively bvild global partnerships and create new opportunities for joint development. Second, non-governmental exchanges are an effective complement to government exchanges and will also affect bilateral relations independently. We should seize the initiative of international public opinion and enhance non-governmental exchanges and cooperation. Third, a stable economic cooperation regime will make cross-border M&A less sensitive to fluctuations in bilateral relations. We should deepen the Belt and Road cooperation and establish investment frameworks. Fourth, the heterogeneity of economic institutions will affect the effect of bilateral relations on cross-border M&A. We should strengthen national political risk prevention and safeguard Chinese firms' overseas investment.
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