Acquired versus Non-Acquired Subsidiaries - Which Entry Mode do Parent Firms Prefer

Despite the economic importance of international foreign direct investment (FDI) flows, investment decisions of multinational firms are not well understood. A multinational firm can establish a subsidiary in a foreign country through greenfield investment or through acquiring an existing firm in the target country. The goal of this paper is to shed some light on the determinants of foreign market entry modes. In particular to analyze the systematic variation in the mode choice of FDI, namely acquisition versus non-acquisition (greenfield) investments. We propose a transparent and general applicable method to construct a data base. This database includes information about parent firms and their majority owned affiliates in foreign countries. A particular feature is the construction of a variable which allows to differentiate the establishment mode of parent firms into foreign markets. For this purpose two databases from the Bureau van Dijk are interlinked: Osiris and Zephyr. We provide evidence that firm heterogeneity is important for U.S. multinational firms in determining their entry mode choice. However, this is not a distinguishing feature for European multinational firms. For both sets of parent firms the host country characteristics play an important role in deciding on the entry mode. Higher institutional quality increases the likelihood of acquisitions versus greenfield investments.Acquisition, Greenfield, Subsidiaries, Mode Choice, FDI, Institutions;

Essays on multinational corporations, investment and economic performance

Die einzelnen Forschungsfragen dieser Dissertation untersuchen verschiedene Aspekte der wirtschaftlichen Beziehungen zwischen Mutter- und Tochtergesellschaften. Eine Tochtergesellschaft ist ein rechtlich unabhängiges Unternehmen, welches allerdings in einer wirtschaftlichen Kontrollbeziehung, abhängig vom Anteilsbesitz, zu einem Mutterkonzern steht. Aufgrund dieser Konstellation kann eine abgestimmte Unternehmensführung die wirtschaftliche Gebarung des gesamten Unternehmenskonzerns beeinflussen. Um Fragestellungen dieser multinationalen Konzerne empirisch zu untersuchen, wurde eigens eine Datenbank geschaffen. Diese Datenbank verknüpft Informationen über Mutter- und Tochtergesellschaften anhand des Anteilsbesitzes der Mutterkonzerne. Wir können damit auf Firmenebene die wirtschaftlichen Investitionsströme darstellen. Im Wesentlichen werden drei Fragestellungen aufgeworfen und mit Hilfe von ökonometrischen Modellen empirisch analysiert. Die erste Frage, die sich stellt, ist, welche Faktoren den Gesamterfolg einer Konzerngruppe beeinflussen und ob Tochtergesellschaften eine andere Investitionsstrategie verfolgen als allein operierende Unternehmen. Wir stellen dabei mehrere Hypothesen über die innerbetrieblichen Kapitalströme auf, die auf den Grundsätzen der „Investment Cash-Flow“ Literatur basieren. In der Folge testen wir diese Hypothesen mit Hilfe des erstellten Datensatzes, welcher sowohl börsennotierte als auch nicht börsennotierte Unternehmen in 82 Ländern über einen Zeitraum von 1988-2005 beinhaltet. Im Falle von Spannungen im externen Kapitalmarkt profitiert eine Tochtergesellschaft von der Zugehörigkeit zu einem Konzernverbund, indem der Mutterkonzern benötigte Geldmittel zur Verfügung stellt. Die Studie zeigt, dass sowohl die Konzernstruktur als auch die institutionellen Rahmenbedingungen großen Einfluss auf ein Tochterunternehmen haben. Die zweite Fragestellung konzentriert sich auf die institutionellen Rahmenbedingungen von Ländern, welche als Standort für Tochtergesellschaften gelten. Wir verwenden eine Messgröße für institutionelle Qualität, welche sich aus den folgenden sechs Dimensionen zusammensetzt: Mitsprache und gesetzliche Haftpflichten, Rechtsstaatlichkeit, Korruptionsbekämpfung, Qualität der staatlichen Regulierungsmaßnahmen, Regierungseffizienz und politische Stabilität. Die Qualität staatlicher Institutionen beeinflusst die wirtschaftliche Gestaltbarkeit von Unternehmen. Firmen innerhalb eines globalen Unternehmensnetzwerks sind von den Wirkungsbereichen verschiedener, zum Teil unterschiedlich entwickelter Institutionen betroffen. Bezüglich der Wirtschaftlichkeit von Tochterunternehmen stellt sich die Frage, wessen Institutionen für den Erfolg ausschlaggebend sind. Sind es die Institutionen des Landes, in welchem die Tochtergesellschaft operiert, sind es die Institutionen des Landes der Muttergesellschaft, oder sind es gar beide? Mit Hilfe eines Datensatzes von 23,000 weltweit agierenden, börsennotierten und nicht-börsennotierten Unternehmungen untersuchen wir diese Fragestellung. Die Ergebnisse zeigen, dass Länder mit starken Institutionen sich positiv auf die Wirtschaftlichkeit von Tochtergesellschaften auswirken. Außerdem kann man einen Transfer von „Good Corporate Governance“ von der Muttergesellschaft auf die Tochtergesellschaft beobachten. Das dritte und letzte Kapitel wirft die Frage auf, ob multinationale Unternehmungen aufgrund ihrer Standortwahl unterschiedliche Formen des Markteintrittes wählen. Multinationale Unternehmen können entweder durch den Kauf von bestehenden Vermögenswerten, Merger & Akquisition (M&A), oder durch die Neugründung von Firmenobjekten, Greenfield Investment, in neue Märkte eintreten beziehungsweise ihren Marktauftritt ausbauen. Eine neuartige Methode zur Herstellung eines Datensatzes wird vorgestellt, sodass die Form des Markteintritts von Tochtergesellschaften beobachtet werden kann. Wir stellen das Investitionsverhalten von Mutterkonzernen aus den U.S.A. und Europa gegenüber. Die Ergebnisse sagen aus, dass eher unprofitable U.S. Mutterkonzerne sich dafür entscheiden, Tochtergesellschaften zu akquirieren anstatt solche neu zu gründen. Dieses Ergebnis kann jedoch nicht als solches direkt auf westeuropäische Mutterkonzerne übertragen werden. Sowohl für U.S. als auch für westeuropäische Mutterkonzerne spielt die Güte der Institutionen im Gastgeberland eine entscheidende Rolle.The dissertation investigates the economic relationship between subsidiary and parent firms. Subsidiaries and their parent firms are economic entities tied together by varying degrees of ownership. This special structure allows for within the firm corporate governance transfers and investment streams that influence the performance of the group-firm as a whole. A variety of data sources was used to construct a firm-level data set consisting of subsidiary firms and their corresponding parent firms. Such a data set allows investigation of important economic questions. Several econometric methods are applied to obtain empirical estimates documenting the underlying dynamics between subsidiaries and parent firms. Three lines of questions have been studied and are presented in separate chapters. The first one asks the question, what determines the investment performance of group firms? Do subsidiaries belonging to a group of firms behave differently in their investment behavior compared to stand-alone firms. We derive empirical predictions from the standard investment cash flow framework on the functioning of internal capital markets. We test these predictions using a data set of parent firms and their listed and unlisted subsidiaries in 82 countries over the period 1988-2005. In the presence of capital market imperfections subsidiaries are able to benefit from their group structure by accessing capital funds provided by parent firms. Furthermore the study reveals that company and country institutional structures matter. Another set of questions concern the institutional determinants of subsidiaries' performance. The quality of country institutions has an important impact on a firm's performance. We use a country-specific measure for institutional quality, which is based on six time varying dimensions: Voice and accountability, rule of law, regulatory quality, control of corruption, governmental efficiency and political stability. Firms belonging to a group of firms originating in different institutional backgrounds are exposed to influences from different countries with varying degrees of institutional quality. Is it the institutional quality in the parent firms country that affects the performance of a subsidiary, the institutional quality in the subsidiary's country that is important, or both. We utilize the data set of more than 23,000 listed and unlisted subsidiaries of parent firms worldwide over the period 1994-2005. The results indicate that good institutions (measured by a worldwide governance indicator) lead to better performance for subsidiaries of parent firms. A transfer of good corporate governance by parent firm to its subsidiaries can be observed. Yet the third line poses the question: Do we observe differences in multi-national firms depending on how they choose their market entries in foreign markets? Multinational firms expand their firm's reach into new markets through acquisition of existing assets, namely investment through merger & acquisition (M&A), or through investment in new assets, namely greenfield investment. Those two entry modes are types of foreign direct investment (FDI). Accurately differentiating between M&A activities and other FDI strategies is important for a number of reasons. First, such events represent a substantial restructuring of economic activity for both the parent and the subsidiary firm. Secondly, the entry strategy might be directly correlated with characteristics of the host country e.g. countries with high institutional quality may attract more of one type of entry decisions by the parent. A new and unique method of constructing a data base, which allows to differentiate between acquired and non-acquired subsidiaries, is presented. The study reveals that the determinants for the entry decision of parent firms is different if they are located in the U.S.A. or in Western Europe. Higher institutional development in the host country increases the probability of entry through an acquisition investment relative to a greenfield investment

Acquired versus Non-Acquired Subsidiaries - Which Entry Mode do Parent Firms Prefer

Despite the economic importance of international foreign direct investment (FDI) flows, investment decisions of multinational firms are not well understood. A multinational firm can establish a subsidiary in a foreign country through greenfield investment or through acquiring an existing firm in the target country. The goal of this paper is to shed some light on the determinants of foreign market entry modes. In particular to analyze the systematic variation in the mode choice of FDI, namely acquisition versus non-acquisition (greenfield) investments. We propose a transparent and general applicable method to construct a data base. This database includes information about parent firms and their majority owned affiliates in foreign countries. A particular feature is the construction of a variable which allows to differentiate the establishment mode of parent firms into foreign markets. For this purpose two databases from the Bureau van Dijk are interlinked: Osiris and Zephyr. We provide evidence that firm heterogeneity is important for U.S. multinational firms in determining their entry mode choice. However, this is not a distinguishing feature for European multinational firms. For both sets of parent firms the host country characteristics play an important role in deciding on the entry mode. Higher institutional quality increases the likelihood of acquisitions versus greenfield investments

Competition and Gender Prejudice: Are Discriminatory Employers Doomed to Fail?

According to Becker's (1957) famous theory on discrimination, entrepreneurs with a strong prejudice against female workers forgo profits by submitting to their tastes. In a competitive market their firms lack efficiency and are therefore forced to leave. We present new empirical evidence for this prediction by studying the survival of startup firms in a large longitudinal matched employer-employee data set from Austria. Our results show that firms with strong preferences for discrimination, i.e. a low share of female employees relatively to the industry average, have significantly shorter survival rates. This is especially relevant for firms starting out with female shares in the lower tail of the distribution. They exit about 18 months earlier than firms with a median share of females. We see no differences in survival between firms at the top of the female share distribution and at the median, though. We further document that highly discriminatory firms that manage to survive submit to market powers and increase their female workforce over time