This section discusses how returns to partial acquirers can be different to returns on full acquisition. While it does not intend to quantify the performance returns, it shows that with certain acquisition entry strategies firms can achieve their initial motivation in different institutional context. Thus, this section discusses the im-pact of regulatory institutions, regulatory transparency and failed institutions on the performance of partial and full acquisitions.
Formal institutions can influence the performance of acquisition strategies through regulatory pressures of host countries, transparency of regulatory institu-tions and failure in formal instituinstitu-tions precipitating political risk and corruption.
While these set of formal institutional pressures can influence firms strategic choice at entry, their continual existence or introduction of new forms can deter-mine how firms reap the benefits of their investment. The literature have docu-mented several forms of regulatory pressures that influence performance of firms.
They include public equity market regulations (Chacar et al. 2010); corporate governance regulations (Reddy et al. 2010; Chacar et al. 2010); antitrust regula-tions (Chacar et al. 2010; Brito et al. 2013); product market regulation (Chacar et al. 2010), industry-specific regulations (Ramanathan et al. 2010; Doran & Ryan 2012; Feres & Reynaud 2012); labor market regulations (Chacar et al. 2010); and other regulatory laws making it difficult or more expensive for foreign acquirers to get domestic credit than domestic acquirers (Moskalev 2010).
Regulations for public equity market and market for corporate control form part of regulatory jurisdictions of host country financial institutions that govern how corporations determine the sources of their finances and relationship between shareholders and management of the corporations. While corporate control regu-lations aim at reducing principal-agency problems, the market for corporate
con-trol serves as sources of finances for the organization through public offerings (Chacar et al. 2010). It also provides avenues for organizations to monitor and acquire well-performing firms and for shareholders to replace non-performing managers. It is believed that developed markets will have developed corporate control market that sets the “rules of game” on the principal-agency relationship and sources of firm’s finances. (ibid)
Chacar et al. (2010) showed that developed corporate control market has a posi-tive effect on firm performance persistence because it gives MNEs ability to ac-quire well-performing firms and smaller competitive players in the industry. Red-dy et al. (2010) showed that firms that adopted the New Zealand securities com-mission recommendations on average, had a positive influence in firms Tobin’s Q, ratio of market value to book value of assets (MB) and return on asset (ROA).
The recommendation includes establishing subcommittees for audit and remuner-ation and having a majority of non-executive/independent directors on the board of seven members.
There is empirical support that the presence of external governance provisions (i.e., regulations on board structure allowing more outside independent directors of a company) has a positive impact on firms’ performance (e.g., Gompers et al.
2003; Lin 2011). Other studies have shown that certain reforms on corporate gov-ernance had a positive impact on firm performance. For example, Brown and Caylor (2009) showed that exchange reforms allowing board guidelines in each proxy statement is associated with a higher Tobin’s Q. Brown and Caylor (2009) showed that corporate governance regulations ensuring that no former CEO serves on board; nonemployees do not participate in company pension plans;
CEO serves on no more than two boards of other public companies; and auditors were ratified at the most recent annual meeting has an influence on firms perfor-mance.
Some studies have focused on industry-specific formal regulations (e.g., Rama-nathan, Black, Nath & Muyldermans 2010; Doran & Ryan 2012; Feres & Rey-naud 2012). Industry-specific regulations are regulations aimed at a specific in-dustry for example regulations on emissions/pollutions. Feres and Reynaud (2012) showed that formal regulations regulating the environmental pollution on firms in the Brazilian market increased the environmental performance of firms.
Ramanathan et al. (2010) showed that environmental regulations in the UK nega-tively influence innovation performance in the short run. Doran and Ryan (2012) showed that environmental regulations explain a firm's decision to engage in eco-innovation and eco-eco-innovation determines a firm's performance (turnover per worker).
Chacar et al. (2010) showed that product liability laws (a product market institu-tion) has a positive influence on firms performance persistence. They argued that product liability laws increase the cost of new product introduction which tends to be higher for new market entrants. This cost decreases the rate of new product introduction for new firms and thus less product competition for existing players leading to firm performance persistence. They also found that stronger antitrust regulation (a form of product market institution) decreases firm performance per-sistence because it compels firms to compete based on product attributes. It also encourages freer new market entrants and thus increases competitive intensity and thus decrease performance persistence. (ibid)
Thus far, regulatory institutions of host countries influence firm’s performance.
MNEs whose home country regulatory institutions are very similar to that of the host country targets will incur less cost. This is because they can export home country knowledge about policy and regulatory institutions (McGahan & Victer 2010). This reduces the liability of foreignness and the cost of doing business abroad (Eden & Miller 2004). It also reduces the liability of home and in turn reduces the cost of adaptation of business practices in the legal context (Steven &
Shenkar 2012). As a consequence, MNEs that opt for the choice of full acquisi-tion can take full benefits of this similarity (product liability laws, public equity market, industry specific laws, and labor market regulations) in regulatory institu-tions to maximize their synergies related benefits and performance outcomes.
More so, it is been argued that home country institutions define high performing firms within its institutional context (Volberda, Weerdt, Verwaal, Stienstra &
Verdu 2012). As a result, MNEs whose home country institutions are similar to target host countries have experiential knowledge on what strategic choices with-in an with-institutional context defwith-ine high-performwith-ing firms. With full acquisition, parent MNEs can export such knowledge successfully at ease without interference from local owners. On the contrarily, with partial acquisition, the total transfer of all management knowledge and know-how from parent MNEs is highly unattain-able and as such, parent MNEs are ununattain-able to maximize their synergistic benefits.
Based on the aforementioned discussion, it can be summarized that firms that opt for full acquisition will achieve their strategic motives than those that opt for par-tial acquisition the more similar the regulatory institutions of parent MNE home country and acquired target host country. In contrast, Firms that opt for partial acquisition will perform better than those that opt for full acquisition the larger the dissimilarity in regulatory institutions of the MNE home country and acquired target host country.
Similar to the argument above, a parent MNE from a more transparent home country entering transparent host countries will incur less agency cost or contract-ing cost in conductcontract-ing acquisitions because transactions will be governed by the same “rules of game” familiar with the parent MNEs. Transparent regulatory in-stitutions will promote transparent regulatory practices such as product market laws, labor market laws, industry-specific regulations, corporate governance prac-tice, disclosure and accounting practices in financial reports.
Extant literature has shown that countries with transparent regulatory institutions have better protection of minority shareholders and likelihood that foreign inves-tors tend to acquire more equity in target firms (Moskalev 2010). Foreign firms entering such host countries will obtain same regulatory information as domestic firms thus enabling a fair playing environment (Chacar et al. 2010) for companies to compete based on product attributes. Transparency in Regulatory institutions have been shown to increase the economic and financial performance of firms (Bijalwan & Madan 2013) because it strengthens a country ability to attract new business and decreases the cost of investing and transaction cost (cost of making ad hoc payment to acquire information from institutions). It is assumed that enter-ing such host countries with full acquisition than partial acquisition will optimize the high cost of integration of assets and low transactions cost of doing business, in turn leading to maximization of investments and efficient use of scarce re-sources.
On the contrarily, non-transparent regulatory institutions have been attributed to performance failures because of regulatory agencies ineptitude in enforcing legis-lation in punishing offenders and protecting minority shareholders (Mohamad 2002). MNEs from advanced economies entering host countries with non-transparent regulatory institutions will incur an additional cost of investment due to lack of knowledge of host country institutions. The ineffectiveness of such reg-ulatory frameworks makes parent MNEs more vulnerable to institutional con-straints of host countries than domestic firms. As domestic firms may have re-sources and capabilities more tailored to local markets and institutions, they can capitalize on the liability of foreignness of parent MNE to exploit the product marketplace leading to parent MNE performance failure.
Studies have shown a positive relationship between non-transparent regulatory institutions and the choice for partial acquisition (Folta 1998; Folta & Miller 2002; Garner et al. 2002; McGrath & Nerkar 2004; Zhou et al. 2007; Brouthers et al. 2008; Xu et al. 2010). These studies argue that non-transparent regulatory in-stitutions increases information asymmetry. Zhou et al. (2007) found support that stock market reacts more favorably to partial acquisition than to full acquisition
based on the quality of the target nation’s information institution. It is assumed that partial acquisition will perform better than full acquisition in non-transparent regulatory environment. This is because allowing for local ownership will provide the MNEs powerful access to governmental institutions and an ability to have people within the organization to deal with non-transparent regulatory institutions of host countries.
As argued previously, firms would opt for low control entry modes such as partial acquisition in high political risks institutions (Brouthers 1995; Smarzynska & Wei 2002; Lopez-Duarte & Garcia-Canal 2004; Demirbag et al. 2007; Driffield et al.
2010), because political risks and undemocratic rule is not a favorable business environment for foreign MNEs due to policy instability and governance instabil-ity. It was further argued that such investment climate does not safeguard the in-vested capital of MNEs (Samimi, Monfared, Moghaddasi & Azizi 2011). With regards to corruption, it was argued that MNEs from advanced economies that opt for full acquisition when entering host countries characterized by perceived high corruption will incur substantial cost of developing knowledge of how to work with corrupt governments. Due to the liability of home (Morgan 2012) in dealing with corrupt practices, they will perceive the bribing of politicians as unethical.
Domestic players may engage in bribing to overcome various redundant adminis-trative and regulatory obstacles giving them a competitive edge over the foreign firms in exploiting the product marketplace.
There is documented evidence that in high corrupt society MNEs indulging in corrupt practices performs better than those that do not (Francis et al. 2009;
Brockman et al. 2013). This is expecially true for MNEs from relatively similar corrupt countries and inevitably do not face the challenges of liability of home and duality of institutional pressures (Morgan 2012). Liability of home and duali-ty of institutional pressures originates from pressures of conformiduali-ty from the vari-ety of institutional pressures of home and host countries (ibid). MNEs from less corrupt and political stable countries entering high corrupt countries will exhibit post-merger long-term performance failure compared to their peers that are politi-cally connected to host country institutions (Steven & Shenkar 2012). It is ex-pected that full acquisition will achieve poorly under this circumstance. In contra-rily, entering via partial acquisition will give the MNEs local partners with local knowledge of host country institutions and how to respond to corrupt practices and institutional constraints of host countries. Mobarak and Purbasari (2006) found strong evidence that in joint venture schemes, MNEs are more likely to choose politically connected partners in Indonesia. This is because corruption, nepotism, and bribery are of first-order importance in Indonesia. As a result,
po-litically connected firms can gain licenses to import raw materials than non-politically connected firms. (ibid)
Based on the discussion above, it can be summarized that MNEs that opt for full acquisition will achieve their strategic motives than those that opt for partial ac-quisition in a host country characterized by non-failure in formal institutions (po-litical stability and less corruption). MNEs that opt for partial acquisition will perform better than those that opt for full acquisition in a host country character-ized by failure in formal institutions (political instability and perceived high cor-ruption).