Multilatinas and value creation from cross-border acquisitions: an event study approach.

AutorDakessian, Leon Chant


The extensive and diversified academic production in internationalization and international business areas, particularly from the 1950s-1960s, has been a response to the increasing interest in transnational companies and their economic and social impacts not only on the economies from which they originate, but also on the countries hosting their foreign direct investments (FDIs).

Analogously to Coase's (1937) central proposition to understand and explain the reason for the existence of the firm, different theoretical streams--focused especially on corporations headquartered in developed countries--have striven to understand and explain the reason for a multinational enterprise (MNE) to exist, focusing on aspects linked to the extension and pattern of their activities.

While Hymer' s (1976) seminal contribution and Caves' (1971) studies were based on the theoretical background of industrial organization and imperfect markets, it was only with Buckley and Casson (1976, 2003) that a more explicit treatment was given to the relationship between market imperfections and internationalization movements (Rugman, 1981).

Other theories endeavor to explain some specific phenomena, such as the expansion of North-American multinational companies in the post-war period (Vernon, 1979), as well as the internationalization patterns of Nordic multinational companies, commonly known as the Uppsala School, but also called the gradualism and learning model (Johanson & Vahlne, 1977).

However, it was from the Ownership-Location-Internalization (OLI, or the eclectic) paradigm proposed by John Dunning (1988, 2001)--according to which the competitive advantages of multinational companies arise from the ownership of specific resources and capabilities (Ownership), from the geographical location of their operations (Location) and from the decision to internalize key activities (Internalization) rather than subcontracting them under market conditions--and the studies by Rugman (1981, 1996) and Hennart (1977, 1982) that internalization theory gained momentum to be considered the dominant paradigm to understand, explain and predict MNE internationalization strategies, both from developed countries and from emerging economies. Its interfaces with other theoretical streams, such as the Transaction Cost Theory (Hennart, 2010) and Strategic Management (Rugman & Verbeke, 1992), have expanded its scope, comprehensiveness and predictive capability.

The emergence and accelerated expansion of multinational companies from emerging economies (EMNEs) are phenomena that have been increasingly prominent in the agenda of scholars, consulting firms and corporate communities worldwide, which gave rise to the question of whether existing international business (IB) theories adequately explain and predict their existence and behavior. As Ramamurti properly remarks,

the answer will depend upon what question one asks. Existing IB theories are quite adequate to explain why EMNEs internationalize, what challenges they face in host countries and why they prefer markets or hierarchies, but they fail to explain what the EMNEs' competitive advantages are, where these advantages come from, why some of them make substantial foreign direct investments in developed economies and compete head-on against Western MNEs (Ramamurti, 2009, p. 418).

As far as Latin America is concerned, the primary issue intriguing researchers is the fact that the region has produced a relatively small number of global and competitive companies. Factors commonly attributed to this fact include protectionist policies (through import substitution and tariff barriers), poorly developed capital markets, low investments in research and development (R&D), low productivity, economic instability and the domination of internal markets by diversified family-owned conglomerates (or Business Groups) that, in many cases, have been protected against external competition (Casanova, 2009).

Other causes are also mentioned, such as the presence of structural weaknesses related to poor educational systems, the low capacity for absorbing new technologies, the weak structure in Science and Technology, the delay in the development of telecommunications and the adoption of industrial policies that have poorly emphasized technology intensive industries (Feldmann, 2009).

The aforesaid factors may also have contributed to the late start of the internationalization processes of Latin American MNEs, or Multilatinas, as they are commonly known (Cuervo-Cazurra, 2010), even when compared to similar Asian companies. Analyzing internationalization strategies from a sample of 20 Multilatinas, Cuervo-Cazurra (2008) estimates an average period of 49 years between the foundation and the first foreign direct investment made by Brazilian multinational companies, and an average period of 53 years for Mexican multinationals.

This paper addresses a gap in IB research and literature. To our knowledge this is the first attempt to look at the performance of cross-border acquisition (CBA) activities developed by a sample of EMNEs located in Latin America, which can be regarded as a natural laboratory for the study of the internationalization process followed by companies, as a strategic response to the sweeping promarket reforms carried out by most of the countries in this region. The region also hosts a set of firms that pursued their international expansion strategies, driven mostly by the same market or natural resource-seeking motivations and using cross-border acquisition as a predominant entry mode (Chudnovsky, Kosacoff, & Lopez, 1999; Chudnovsky & Lopez, 2000; Fleury & Fleury, 2011).

Our focus is on the Multilatinas, in particular assessment of their merger and acquisition (M&A) activity performance, measured as investors' short-term reaction to announcements of their cross-border acquisitions, as well as factors that might explain the intensity and direction of these reactions.

The extant literature that deals with these issues usually focus on samples of acquirers located in developed economies. Those that focus their analysis on EMNEs, consider heterogeneous samples of acquisition announcements made by acquirers headquartered in regions (East Asia and Latin America, for example) that have shown significant differences regarding the evolutionary path of their national innovation and production systems (Cimoli, Dosi, & Stiglitz, 2010).

The evolutionary paths of national systems of innovation are the outcome of, among other factors, choices made by governments regarding economic and industrial policies. They also shape the countries' location advantages (or L advantages) which, in turn, interact with and constrain domestic firms' specific advantages, or O advantages (Narula, 2011; Narula & Dunning, 2000; Narula & Nguyen, 2011) and the strategic spaces in which they can be positioned (Rugman, 2008).

These are the main arguments that justify our decision to restrict the sample to Latin American home countries which underwent similar economic reforms--with inward-looking state-led import-substituting industrialization (ISI) policies dominating until 1980s, followed by the implementation of pro-market reforms starting in the 1980s and 1990s (Dau, 2012)--in contrast with East Asian countries that, since the 1960s, have adopted more flexible, new capability- building strategies, following a flying-geese pattern of production and upgrading (Palma, 2010).

The paper is structured as follows: in second section we present a theoretical background and the hypotheses to be tested; in third section we describe the method, data and econometric models; in fourth section we summarize the results and in final section we present our concluding remarks.

Theory and Hypotheses

International expansion of multilatinas

As defined by Dunning and Lundan (2008a), a MNE (a group to which Multilatinas belong) is an enterprise that engages in foreign direct investment (FDI) and owns (or controls) value-added activities in more than one country.

Through these investments, they can grow either vertically--when the firm locates assets and/or employees in a foreign country with the purpose of securing the production of a raw material or an input component (backward integration) or the distribution and sale of a good or service (forward integration)--or horizontally, when they set up a plant or a service delivery facility in a foreign location with the goal of selling in that market, while keeping the production of the good or service in the home country (Guillen & Garcia-Canal, 2009).Vertical expansion is normally associated with natural resource or efficiency-seeking motivation, while horizontal expansion has to do with market-seeking motivation (see Dunning & Lundan (2008a) for a detailed discussion on the four types of motivations that drive MNE internationalization strategies: natural resource- seeking, market-seeking, efficiency-seeking and strategic asset-seeking).

Recent literature on EMNE internationalization processes in general and of Multilatinas in particular has stressed that outward FDIs (OFDIs)--a mechanism through which cross-border acquisitions are implemented--cannot be explained without paying attention to the previous development of the domestic firms in their quest for generating ownership-based advantages that can be exploited abroad (Chudnovsky & Lopez, 2000; Cuervo-Cazurra & Dau, 2008, 2009; Dau, 2012; Dominguez & Brenes, 1997; Fleury & Fleury, 2011).

Referred to collectively as the Washington Consensus, the structural reforms that have been implemented by Latin American governments (and other developing countries as well) in the late 1980s and early 1990s aimed at realigning institutional frameworks in order to reduce transaction costs, improve governance and facilitate market functions. Main components of these reforms included the achievement of fiscal discipline, reordered priorities concerning public...

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