Cross-border mergers and acquisitions within APEC and their implications for exports

1. Cross-border mergers and acquisitions (M&As) are an important global economic activity. As a form of capital flows, cross-border M&As are also an effective way to transfer technologies and managerial expertise between economies. They are also likely to reduce production costs, improving firm’s efficiency by integrating complementary tasks etc. In particular, the 2001 OECD (Organisation for Economic Co-operation and Development) Report has identified cross-border M&As as one of the two most important features of the present industrial globalization. This is not only the case among the OECD countries, but also the case within the APEC economies. Cross-border M&As within the APEC region have been increasing rapidly. 2. The main focus of this study is on intra-APEC cross-border mergers and acquisitions (M&As) from 1980 to 2007, i.e. cross-border M&As with both the acquiring firms and target firms in the APEC (Asia-Pacific Economic Cooperation) economies. It aims at (i) examining the pattern of intra-APEC cross-border M&As; (ii) exploring the determinants of cross-border M&As; (iii) analyzing the impacts of cross-border M&As on international trade, greenfield FDI, and GDP; and (iv) discussing policies on promoting cross-border M&As and the consequences on economic performance. 3. This study is among the first to take an econometric approach on intra-APEC cross-border M&As and their economic impacts at the macroeconomic level. Building on other related studies, this study has lengthened the time coverage that helps, uncovered more details of cross-border M&As in APEC, and examined more issues related to cross-border M&As. 4. Our results characterize the various patterns of intra-APEC cross-border M&As and their relationship with other economic variables. We conclude that cross-border M&As should be encouraged. Our empirical models suggest that intra-APEC cross-border M&As help raise GDP levels directly and indirectly, with the latter primarily via trade. Our trade model indicates that cross-border M&As promote international trade. Hence, this report identifies another important factor of promoting economic development, namely cross-border M&As. 5. More specifically, we summarise the seven key findings in the following. (1). (General trend of cross-border M&As in APEC): Cross-border M&As within APEC have expanded rapidly, but with large fluctuations. During the sample period (1980-2007), annual growth rates are 21.5% in value and 25.3% in number. The growth exhibits three waves or cycles: 1980-1990, 1990-2000, and 2000-2007. The time trend of cross-border M&As is closely related to domestic M&As of the APEC economies. However, cross-border M&As have increased more rapidly than domestic M&As over time. (2). (Individual economies’ cross-border M&As): Industrialized economies (especially the United States, Canada, and Australia) and emerging economies in the East Asia have been the key driving forces for cross-border M&As within APEC. The United States has transformed from a popular target economy to both active acquirer and target economy. Canada has been active in cross-border M&As throughout the sample period. The importance of China in cross-border M&As has increased rapidly, especially in the past decade. Hong Kong, China has shown intensified participation both as acquirer and target economy. Singapore started to take off in the 1990s. The time trends of different APEC economies are generally highly correlated, with intra-APEC M&As showing largely synchronised cycles. However, the scale, income and asset of firms participating in cross-border M&As vary widely across APEC economies. (3). (Sectoral cross-border M&As): On the acquiring side, the share of mining and construction and that of light manufacturing have declined since mid-1980. In contrast, the share of utility and transportation and that of finance and insurance industry has increased over time. The shares of other industries have been quite stable over time. On the target side, similar pattern appears to a lesser extent. In addition, most industries heavily target the same industries for cross-border M&As, suggesting high degree of vertical supply chain and horizontal scale economies integration within APEC. (4). (Individual firms’ cross-border M&As): Over time, the scale of acquiring firms has decreased and there were more and more firms participate in acquisitions. More M&As may be induced by the increasing market size as a result of deeper market integration across the APEC economies. This observation may also reflect certain degree of increasingly liberalized markets across the board. We also find that acquiring firms are generally larger and more profitable than target firms, indicating that advanced technologies and management skills brought about by M&As are likely to be transferred from more efficient firms to less efficient firms. As a result, it also improves average industry productivity. (5). (Cross-border M&As and trade): Exports are conducive to overseas acquisitions. We find that if an economy exports more to another economy, the former will also acquire more assets in the latter. Moreover, if an economy acquires more assets in another economy, the former will trade more (both imports and exports) with the latter. Specifically, we have found intra-industry cross-border M&As more prevalent in APEC than inter-industry cross-border M&As. For intra-industry cross-border M&As, they can take the form of either vertical supply chain integration or horizontal scale economies integration at the regional level. Both forms are conducive to driving productive efficiency and cost-effectiveness across-border, either through the sharing of comparative advantages between participating economies or through enlarging economies of scale in production and distribution of output. Like trade, cross-border M&As promote GDP and enhance economic development. Like trade, cross-border M&As help drive regional economic integration through capital/technology and skill/people transfers. Moreover, there are more economies participating as both acquirer and target economies in APEC over time. The reducing size of participating firms also indicates a more open regime in APEC that facilitates transfers among APEC economies. Thus, trade and cross-border M&As are largely complementary in this region. Trade flows and capital flows (as a result of cross-border M&As) in this region reinforce each other. (6). (Cross-border M&As and greenfield FDI): Generally speaking, we do not find significant effects between cross-border M&As and greenfield FDI in all directions. However, it is found that if there are more M&As between two economies, the acquiring economy’s greenfield FDI outflows to the target economy would decrease. This finding indicates some degree of substitution between cross-border M&As and greenfield FDI to the acquirer. (7). (Cross-border M&As and GDP): Cross-border M&A activities and the size of GDP (i.e. economic size of the economy) are positively related. Understandably, larger economies in terms of GDP level tend to acquire more foreign assets. On the other hand, larger economies also attract more foreign acquisitions as they represent better market potential. More importantly, cross-border M&As raise GDP. We find that after acquiring more foreign assets, an economy’s GDP will also increase. This finding provides support to the possibility that cross-border M&As promotes economic development via channels such as trade and efficiency improvement in the supply chain. Our empirical findings also help draw the following potential policy implications. (1). Intra-APEC cross-border M&As are conducive to GDP and trade flows. The empirical results suggest removing barriers to cross-border M&As is beneficial from an economic development perspective. This can be one of the driving forces to greater regional economic integration, especially in respect of technology and skills transfers. Nevertheless, while policies promoting cross-border M&As are recommended, there may be concern about the need to balance market concentration with market competition. (2). Trade liberalization not only promotes trade flows, but also induces more cross-border M&As. Although barriers to trade have been lowered through continuous efforts jointly by all economies, various kinds of trade barriers still have significant impacts on trade flows, albeit to various extents in different economies. While the traditional trade barriers such as tariffs and quotas have already be reduced to a lower level, especially in developed economies, other forms of barriers such as anti-dumping and technical barriers are on the rising trend. There is no doubt that governments have been putting in effort to further remove those barriers. Our study makes us to stress one point, which is, removing barriers to trade not only promotes trade flows but also cross-border M&As. (3). The existing regional trade agreements (RTA), with an exception of the North American Free Trade Agreement (NAFTA), are not effective in promoting cross-border M&As directly as they are not originally motivated to increase cross-border M&As. Moreover, we do not find evidence that an economy’s WTO membership helps promote the economy’s cross-border M&As directly. These two findings imply that the existing regional integration in APEC has not given sufficient support to cross-border M&As. Thus, while we are arguing for further regional integration, we should pay more attention to removing barriers to cross-border M&As.