Reseach by: Dynah A. Basuil, & Deepak K. Datta
Despite exceeding the total value of the transactions from the combined manufacturing and primary sectors according to UNCTAD (UN Conference on Trade and Development, 2015), service sector cross-border acquisitions have been understudied. Prof. Dynah A. Basuil and colleague Prof. Deepak K. Datta sought to contribute to our limited understanding in their latest study- the first (to the best of their knowledge) study to examine the determinants of relative size in cross-border acquisitions by acquiring service firms. Given the significant differences that exist in the relative size of acquisitions, it raises an interesting question, “What factors motivate service sector firms to pursue relatively large acquisitions in foreign markets?” or, “When is a service sector firm more likely to pursue a relatively large foreign acquisition?”
Relative acquisition size (i.e., transaction value relative to the acquiring firm’s asset value) represents an important strategic decision in the undertaking of cross-border acquisitions as a signal of greater strategic commitment to the host country and to potential customers that the acquiring firm is in the market for the “long haul.” However, it must be remembered, that relatively large acquisitions also represent greater investment risks for acquiring firms. Given the difficult-to-reverse nature of cross-border acquisitions and their widely documented high failure rates1, relatively large transactions can embody significant risk – something that firms need to carefully consider in making acquisitions. Utilizing Dunning’s (1980) eclectic paradigm and Rugman’s (1981) FSA/CSA framework, the authors found that in deciding the relative size of the cross-border acquisition, service acquiring firms take into account firm- and country-specific factors related to cross-border acquisitions in the decision-making process.
Using a sample of 348 service sector cross-border acquisitions by U.S. firms in 44 countries during 1990-2006, the study findings indicate that firm-specific advantages (FSAs) in the form of available financial slack and target industry knowledge were positively associated with relative acquisition size. However, contrary to expectations, a negative relationship between cross-border acquisition experience and relative acquisition size was observed. In addition, country-specific advantages (CSAs) associated with higher market potential, lower political risk, and greater cultural similarity contributed to increased relative acquisition size in service industry cross-border acquisitions. Finally, analysis reveals that the relationship between available financial slack and relative acquisition size is contingent on cultural similarity with the relationship being more pronounced when cultural similarity is high.
With its focus on acquisitions in the service sector, Profs. Basuil and Datta’s study makes several important contributions to the literature on cross-border acquisitions. Scholars in international business have noted the developmental stage of international strategies by service sector firms2 despite a higher percentage of cross-border acquisitions today involving firms in service industries. Beyond the performance implications of such acquisitions, the authors extend our understanding by being the first to attempt at exploring how FSAs and CSAs impact the choice of relative acquisition size in service sector cross-border acquisitions. While their study relates to relative acquisition size, future research can easily be extended to the examination of other cross-border acquisition decisions (e.g., type of acquisition used). Taken together, this study makes a meaningful contribution to two streams of research, namely, cross-border acquisitions and the internationalization of services. From a practical standpoint, service sector MNEs seeking to expand into international markets via acquisitions can look to this study so managers may better understand the acquisition process and gain valuable insights into the factors that should be considered in determining the relative size of target firms to be acquired in foreign markets.
To cite this article: Basuil, D. A., & Datta, D. K. (2019). Effects of firm-specific and country-specific advantages on relative acquisition size in service sector cross-border acquisitions: An empirical examination. Journal of International Management, 25(1), 66-80. https://doi.org/10.1016/j.intman.2018.07.001.
To access this article: https://doi.org/10.1016/j.intman.2018.07.001.
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