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«Munich Personal RePEc Archive Macroeconomic Change, and Cross-border Mergers and Acquisitions: The Indian Experience, 1991-2010 Kotapati Srinivasa ...»

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Munich Personal RePEc Archive

Macroeconomic Change, and

Cross-border Mergers and Acquisitions:

The Indian Experience, 1991-2010

Kotapati Srinivasa Reddy

Indian Institute of Technology (IIT) Roorkee

Online at https://mpra.ub.uni-muenchen.de/63562/

MPRA Paper No. 63562, posted 11 April 2015 10:17 UTC

Macroeconomic Change, and Cross-border Mergers and Acquisitions: The

Indian Experience, 1991-2010

Kotapati Srinivasa Reddy

Indian Institute of Technology (IIT) Roorkee, Department of Management Studies, Roorkee – 247667, Uttarakhand (India).

Mobile: +91-8897449711; E-mail: cssrinivasareddy@gmail.com Paper in Progress Macroeconomic Change, and Cross-border Mergers and Acquisitions: The Indian Experience, 1991-2010 Abstract The purpose of this paper is to analyze the market for cross-border mergers and acquisitions (CB-M&A) representing the Asian emerging market-India for the period 1991 through 2010.

I also compare the market in India among the BRIC economies (Brazil, Russia and China (including Hong Kong)) for various reasons. To do so, I use statistical data on CB-M&A transactions from UNCTAD’s World Investment Report-2011, and discuss potential changes in the market performance based on inductive and deductive logics and case examples. I check macroeconomic indicators of the BRIC group in order to support the economic, banking and financial reforms in India. Further, I highlight the internationalization process of Indian firms by supporting the data on parent corporations and foreign affiliates. I eventually draw conclusions from India’s share as a percentage of the world economy, developing economies, BRIC group and Asia. All in all, India is next to China for all selected categories.

JEL Classification: E60; E64; G20; G34 Keywords: Economic and financial reforms; BRIC economies; Cross-border mergers and acquisitions; Emerging economies; India; Internationalization; International management.

1. Introduction Emerging markets (hereinafter, EMs) promise attractive opportunities, pose many risks and complexities, and returns could vary significantly across countries (Dobbs, Lund, & Schreiner, 2010).1 They have become the focus of sustained and considerable research because they comprise the largest share of the world’s population and land, abundant natural resources, technical skills, robust domestic demand and they prolong to grow quicker than the developed nations (Kearney, 2012; Shah, 2012).2 They are major locations for some activities in global value chains of several businesses and present a dynamic and stimulating setting for international management research (Drummond, 2012; Ramamurti, 2012a).3 Traditionally, most EMs are highly regulated, with restricted competition and mainly closed to foreign entry while their regulatory system is more inconsistent and less sophisticated (Elango & Pattnaik, 2011; Madhok & Keyhani, 2012). With successive policy reforms and amendments in various laws, a number of emerging markets have subsequently pursued potential opportunities of globalization and liberalization. In particular, globalization has different characteristics such as knowledge, foreign direct investment, trade, short-term capital flows and movements of labor. Besides, it is a powerful force for economic growth, and it affects One would certainly notice the growing amount of research in EMs in diverse aspects of international business, ranging from foreign market entry strategies to performance of developing-country MNCs established in the developed countries (e.g., Bhabra & Huang, 2013; Contractor, Kumar, & Kundu, 2007; Dakessian & Feldmann, 2013; Luo & Wang, 2012; Meyer & Thaijongrak, 2013; Nagano, 2013; Ning, Kuo, Strange, & Wang, 2014; Pant & Ramachandran, 2012; Sinkovics et al., 2015; Tran & Rios–Morales, 2015; Tsai, Bernard, Plaisent, & Lin, 2014; Yang, 2015; Yang & Meyer, 2015; Yaprak & Karademir, 2011; Zheng, Wei, Zhang, & Yang, 2014; Zhong, Peng, & Liu, 2013). In addition, a few scholars have suggested some theories/models in international business that suits EMs institutional settings (e.g., Cuervo-Cazurra, 2012; Hennart, 2012).

Kearney (2012) suggests potential areas for future research in EMs: market efficiency, risk-adjusted returns and risk premium, firm-level internationalization, international business strategy, attracting and benefiting from FDI, corporate and institutional governance, and behavioral perspectives.

According to the United Nations Conference on Trade and Development (UNCTAD), the cumulative international direct investment has been reached about US$1,244 billion in 2010 and significant growth is being attributed to high-growth EMs (Nagano & Yuan, 2013).

economic growth in different countries differently (Stiglitz, 2003). Major causes of the globalization process are materialization of new investment opportunities in developing and transition countries–a good source for multinational companies (MNCs) in light of deregulation and privatization policies (Norbäck & Persson, 2008). The complete systemic change has led the liberalization of government controls, a superior role of the private sector and increased competition with the aim of greater integration (Ramaswamy & Renforth, 1996).

While, Holtbrügge and Kreppel (2012) emphasize that the internationalization process of Indian and Brazilian firms is mostly obsessed with economic motives whilst Chinese and Russian firms receive substantial political support from their governments to invest abroad.





For instance, mergers and acquisitions (hereinafter, M&A) announced by EMs in the first quarter (January-March, 2012) accounting for 27.5% of the world economy that reached US$132.5 billion, representing a 32.9% decrease compared to the same period in 2011, and a 19.3% drop than the previous quarter. Importantly, the major targeted EM economy hitherto in 2012 was China, with 674 deals worth of US$31.3 billion, followed by Brazil (US$21.2 billion), India (US$10.6 billion) and Russia, with US$10.2 billion (Thomson Reuters, 2012).

Nevertheless, both Chinese and Indian MNCs seem to be rewriting the rules of M&A (e.g., Kumar, 2009).4 The Theory of Business Cycles in economics (e.g., Fels, 1952; Schumpeter, 1939), the Theory of International Trade (e.g., Brecher & Parker, 1977) and the Theory of Internationalization Process in international business (e.g., Andersen, 1993; Dunning, 1988;

Johanson & Vahlne, 1977), and Resource-based-view (RBV) theory in strategic management (e.g., Geringer, Beamish, & Dacosta, 1989; Penrose, 1959; Wan, Hoskisson, Short, & Yiu,

2011) explore and confirm the link between economic activity, global trade and firm performance.5 Being evidenced that, when the industrial revolution has initiated in western nations, thus emerged the theme of corporate restructuring. In strategic management literature, the term restructuring has widely been used in diverse contexts such as mergers, acquisitions, joint ventures, alliances and buyouts. In due course of time, developed economies merger waves have engulfed developing countries considering the 1990-91 economic deregulation and liberalization experience (e.g., Weston, Chung, & Hoag, 1998;

Weston, Mitchell, & Mulherin, 2003).6 A number of American and European researchers have extensively been investigated M&A in key areas ranging from the negotiation process to due diligence activity, stock returns to accounting performance for pre- and post- acquisition periods, post-merger strategies to culture-integration issues, and so forth (e.g., Barbopoulos, Paudyal, & Pescetto, 2012; Basuil & Datta, 2015; Boateng, Hua, Uddin, & Du, 2014; Collins et al., 2009; Conklin, 2005; Corhay & Rad, 2000; Das & Kapil, 2012; Erel, Liao, & Weisbach, 2012; Ketkar, 2012;

Kling et al., 2014; Malhotra, Sivakumar, & Zhu, 2011; Morresi & Pezzi, 2011; Mukherji, Mukherji, Dibrell, & Francis, 2013; Rasedie & Srinivasan, 2011; Reus, 2012; Serdar Dinc & Erel, 2013; Stepanok, 2015; Vasconcellos, Madura, & Kish, 1990). Conversely, I find a few studies on international mergers and joint ventures noticed in EMs institutional setting. For instance, scholars from emerging markets are pursuing cross-border mergers and acquisitions (hereinafter, CB-M&A) research to add theoretical, conceptual and empirical evidence into well-developed literature and improve the institutional framework (e.g., for China: Anderson, Sutherland, & Severe, 2015; Deng, 2009; Liu & Zou, 2008; for India: Reddy, Nangia, & See an article published by The Economist (2008) – “Emerging-market multinationals: The challengers”.

Dunning (1988 as cited in Ramamurti, 2012b) explores that to become an MNC, a firm must hold significant ownership advantages (or, equity advantage) that can compensate its drawbacks in competing overseas market.

See the extensive literature review on cross-border M&A perspectives (Ferreira, Santos, de Almeida, & Reis, 2014; Martynova & Renneboog, 2008; Shimizu, Hitt, Vaidyanath, & Pisano, 2004).

Agrawal, 2012, 2014a; Srivastava & Prakash, 2014; for Russia: Bertrand & Betschinger, 2012; for Latin America: Pablo, 2009, 2013; for mixed-sample of emerging economies:

Bhagat, Malhotra, & Zhu, 2011; Deng & Yang, 2015; Lebedev, Peng, Xie, & Stevens, 2015;

Nagano & Yuan, 2013; Nicholson & Salaber, 2013; Sun, Peng, Ren, & Yan, 2012; Yang, Jiang, Kang, & Ke, 2009). However, Indian scholars have failed (or, ignored) to show the robust results of the market for CB-M&A over the last two-decade. Therefore, I consider exploratory research to examine the impact of India’s macroeconomic change and policy reforms on CB-M&A market in terms of number of deals and value of transactions during 1991-2010. I assess purchases and sales for the world economy and emerging markets (hereinafter, BRIC group–Brazil, Russia, India and China (including Hong Kong))7 in order to explore authoritative insights from the Indian institutional setting. Further, I also study the internationalization process of Indian multinational enterprises by referring to the statistics on parent corporations and foreign affiliates for the year 2010.

There are three key motivating factors behind choosing an exploratory research for Indian environment. Firstly, growing importance of conducting productive research in EMs, especially the BRIC group has motivated me to examine the market for Indian CB-M&A.

Secondly, rising number of BRIC economies, particularly India’s parental foreign affiliates has been stimulated me to pursue this research. Finally, did 1991 economic reforms influence Indian enterprises, thus to pursue the diversification through international acquisitions? In particular, this paper contributes to the economic policy reforms and its impact on business restructuring activities in the economics literature, and to the internationalization effect of emerging markets in global strategic management.

I present a brief outcome of this study. India and China GDP rates have never shown negative value in the last twenty-year period. I find similar GDP growth rates for both of them in 2010. Expectedly, India’s real GDP per capita is significantly lower than other BRIC economies: Brazil (US$4,543.53) and Russia (US$4,665). From real GDP insights, I notice a slow growth rate for Russia, while higher growth rates for China and a medium growth rate for India. Interestingly, India’s number of deals for CB-M&A sales is notably higher than purchases during 1991-2002, then both sales and purchases are moving together until the year 2006 and thereafter, market for a number of purchases has been surpassed the sales from the year 2007 to 2010. As noted, a number of Indian firms have invested about US$29,083 million in 2007, which is a phenomenal growth representing 333% compared to the previous year. India’s share as a percentage of the world economy represents more than one percent in six years for the number of deals and three years for the value in the last two decades. This radical change recognizes that Indian economic, financial and banking reforms place the local MNCs in the world map through internationalization process. Overall, India is next to China in BRIC group, Asia and developing countries segments.

2. Research design and organization

The purpose of this paper is to discuss the economic and financial reforms and its impact on market for cross-border M&A in India. To do so, I have chosen an archival method to collect appropriate data and information for various reasons. For example, data related to macroeconomic variables are extracted from World Bank – World Development Indicators and Euromonitor Database. Conversely, data associated with CB-M&A transactions is accessed from World Investment Report, spreadsheets (UNCTAD, 2011). In particular, India’s CB-M&A cases are collected from the Thomson Reuters Quarterly Reports, and I consider Hong Kong share for CB-M&A deals in BRIC group; and only Chinese CB-M&A market is considered when I compare “India and China” throughout the study, particularly in sections 5 and 6.

KPMG, PricewaterhouseCoopers and Bloomberg Year book on M&A. Then, I analyze the market for CB-M&A in various segments: world economy, BRIC group, Asia and developing economies, and thereby discussed potential changes based on inductive and deductive logics.

All in all, a blend of empirical data and relevant case examples is being highlighted.

The remainder of the paper is organized as follows. Section 3 checks the economic progress of BRIC group. Section 4 addresses Indian economic, banking and financial reforms engaged since 1991. Section 5 discusses potential changes in the market for cross-border M&A deals (sales and purchases). Section 6 shows additional findings on parent corporations and foreign affiliates of BRIC group. In Section 7, I offer a set of policy guidelines and conclude the research.

3. Economic progress of BRIC group, 1991-2010



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