The Political Economy Study Of Cross-border Mergers

Cross-border merger has become one of the most important forms of OFDI in China, and China has been more active in the cross-border merger market since financial crisis. However, the most prominent problem of China’s cross-border Merger is its low success ratio which is much lower than the world average level. Meanwhile, China has realized the importance of lobbying on merger policy and begun to lobby foreign government for merger approval since last decade. From the angle of lobbying competition, we constructed a political economy model in mixed oligopoly, and studied the influence of foreign (say Chinese) lobby on the cross-border merger policy of domestic government (say US government). We also studied the factors that affect the success ratio of cross-border mergers and revealed the mechanism how the ownership structure, trade liberalization and industry characteristics affect the Cross-border merger policy.First, following the "protection for sale" model of Grossman and Helpman (1994), we constructed a political model to study the influence of lobbying on merger policy. By revising the objective function of the domestic government, we revealed the mechanism how the lobbying affects merger policy, and we found that when the domestic government only cares about domestic social welfare, the government only approves the merger if the merger is efficient enough; When the domestic government only cares about political contributions, and attach the same weight to domestic and foreign lobbying, the government will approve the merger. However, when the domestic government discriminates the foreign lobbying, or when the efficiency of the foreign lobbying is too low, the government may block the merger; And when the government cares both social welfare and political contributions, the success ratio of mergers decreases when the domestic government discriminates the foreign lobbying.Second, we brought the ownership structure of the acquirer into the political contribution model, and assumed that the acquirer is a firm partially owned by public sector and enjoy much more loose financing constraints than private firms. We studied the mechanism how the differences of financing constraints affect the success ratio of mergers. We derived the following conclusions:when the domestic government is benevolent, the merger policy depends on the state stock share of the acquirer and the merger efficiency, when the state stock share of the acquirer is low, the government will approve the merger. Moreover, industries with high production cost are more preferred, and the domestic government will always reject industries with extremely low production cost; when the domestic government is totally politically-motivated, such a merger will always be approved; When the domestic government not only cares about its domestic social welfare but is also sensitive to the political contributions, the range of approval by the domestic government is substantially expanded compared to the case of a welfare-maximizing government. Furthermore, when the domestic government attaches a sufficiently low weight to social welfare, the merger will always be approved.Third, we described another characteristic of the partially privatized acquirer, changed the objective function of the acquirer, introduced industry competition level, extended the model to the framework of bilateral trade. We assumed the acquirer cares both its profit and social welfare, analyzed the mechanism how the social responsibility of the acquirer influences the merger policy, and derived the following results:when the domestic government is benevolent, it’s cross-border merger policy crucially depends on the state stock share that the foreign government owns in the foreign firm and the merger efficiency. When the state stock share owned by the foreign government takes a low value and the merger is relatively efficient, the domestic government tends to approve the merger. If the domestic government only cares about political contributions, such a merger will always be approved; When trade is freer in the domestic country, the domestic government will always approve such a merger. Finally, when the domestic government is benevolent, it tends to approve the merger if the competition degree is sufficiently high. However, when the domestic government is politically motivated, the result is reversed, and it tends to approve the merger when the competition degree is not too high.We also did a case study by comparing the successful and failure cross-border cases of Chinese firms from the view of national security and lobbying competition. By analyzing the political background of the domestic country, and comparing the model analysis and case study, we proposed suggestions for Chinese firms and Chinese government to implement cross-border mergers successfully.