Adaptable Boundary Of Mergers & Acquisitions And Greenfield Investment

Company growth may be achieved by internal growth and external growth. Internal growth to rely on the company's own strength and reach its growth target by integrating its internal resources and improving its resource efficiency, whereas external growth is to fulfill the growth goal by making use of external resources, which include Merger and Acquisition (M&A), strategic alliances (e.g. joint-ventures, partnership, marketing and distribution alliances, franchising, licensed business, etc.).These two company growth strategies both have their advantages and disadvantages. Greenfield Investment and M&A are the most typical modes in internal and external growth process of a business organization, and are thus most commonly used when investment decisions are being made. In asset perspective, both M&A and Greenfield Investment may result in expansion of asset scale and production capacity, but they may cause different impacts on a firm and its external environment. As firms vary from one to another in terms of their resources and external environment, choice of investment modes is a dynamic process subject to adjustment according to different growth targets and capabilities of the firms in various stages of growth and life cycle. Since choice of growth modes is associated with future performance and development of an enterprise, there is a need to determine the boundary between M&A and Greenfield Investment, and to study under what circumstances M&A or Greenfield Investment is preferred to reach the growth target.The paper follows the logical framework of concept definitions - theoretical basis - impact factors - relation analysis - model establishment - theoretical empirism, which combines the normative study and empirical study, applies the theories and methodology of the Resource-based Theory and the transnational investment theories including the Theory of Monopolistic Advantage, Theory of Product Life Cycle, and the Eclectic Theory of International Production, and, from the perspective of the behavior mechanism of M&A and Greenfield Investment, analyzes the factors that may affect a firm's decision-making.Through theoretical analysis, the paper divides the factors affecting a firm's investment choice of M&A or Greenfield Investment into two categories - external factors and internal factors. External factors include market growth rate, market competition intensity, government policy tendency, exchange rates, and transferability of resources, out of which government policy tendency and exchange rates may also be classified as regional advantages of host countries. Internal factors mainly include a firm's resources, differentiation, size, R&D capabilities, project construction speed, management skills, business experience, technical competence, strategies, and cultural differences. These elements are further classified as 10 factors, namely market growth rate, market competition intensity, regional advantages, and a firm's strategic resources, differentiation ability, size, management skills, business experience, strategy resources, and culture differences.Power producers from Europe and North America have been chosen for the empirical study which tries to research empirically the factors that affect power producers' choice of investment modes. The research consists of 4 parts: study of factors affecting investment behaviors, analysis of factors affecting M&A, analysis of factors affecting Greenfield Investment, and analysis of factors affecting choice of M&A or Greenfield Investment. Through the empirical research, correlations between investment behaviors of the power producers and the impact factors are identified as follows:Strong association exists between a firm's investment behaviors and the factors (indicators) such as market growth rate (market growth rate), market competition intensity (market centrality), and a firm's size (market share), differentiation ability (business diversification), management skills (Rate of Return on net assets), and strategy types (strategies of internationalization).Notable correlation exists between a firm's Greenfield Investment and the factors (indicators) like market growth rate (market growth rate), market competition intensity (market centrality), and a firm's size (market share), differentiation ability (business diversification), management skills (Rate of Return on net assets), and strategy resources (strategies of internationalization), etc. Correspondingly, factors (indicators) that have close relationship with M&A are market competition intensity (market centrality), regional advantages (differences in purchasing power), and a firm's size (market share), differentiation ability (business diversification), business experience (number of M&A operations), management skills (Rate of Return on net assets), cultural difference (cultural difference), and strategy resources (strategies of internationalization).Factors (indicators) that have significant correlation with choice of M&A or Greenfield Investment, which include market competition intensity (market centrality), strategic resources (intangible asset ratio), business experience (number of M&A operations), management skills (Rate of Return on net assets), and cultural difference (cultural difference), have been selected to establish a Logistic Regression Model illustrating the boundary between M&A and Greenfield Investment. Verification results show that the model gives a fairly good account of projections for choice of investment behaviors, and can provide certain reference for firms to choose between M&A and Greenfield Investment. This paper justifies the investment model with Ertan Hydropower Development Company Ltd. as an example. Results of the research are accepted by the company, indicating that our model has shown some directive meanings.The paper focuses on factors affecting the boundary between M&A or Greenfield Investment. Through theoretical analysis and empirical study, it attempts to provide theoretical basis and scientific approaches for investment decisions. The paper has the following innovations:1. Based on the great deal of research work done by others so far, research of the applicable boundary between the investment activities of M&A and Greenfield, which respectively represent the external and internal development, is developed as a base theory of general strategic financial management science.2. In the light of the Resource-based Theory, the Theory of Product Life Cycle, the Theory of Monopolistic Advantage and the Eclectic Theory of International Production, a qualitative analytical research is carried out on the applicable boundary between M&A and Greenfield Investment, which analyzes the different mechanism of M&A and Greenfield Investment and establishes a theory framework for choice of M&A or Greenfield Investment.3. Although the Theory of Monopolistic Advantage and the Eclectic Theory of International Production are developed on the basis of transnational investment, it is in essence an investment theory under a multi-market environment. This paper applies these theories to discuss a firm's general investment behaviors, and groups the factors affecting a firm's investment behaviors into external factors and internal factors, namely the 10 factors including market growth rate, market competition intensity, regional advantages, strategic resources, differentiation ability, size, management skills, strategy resources, and cultural difference.4. With the investment activities of European and North American power producers as samples, an empirical research is done to analyze the relationship between a firm's investment activities and its internal and external affecting factors, and between a firm's M&A and Greenfield Investment and its internal and external impact factors. The research reveals that direct correlation exists between M&A and factors (indicators) including a firm's size (market share), strategic resources (intangible asset ratio), business experience (number of M&A operations), cultural difference (cultural difference), and differentiation ability (business diversification), whereas factors (indicators) such as market growth rate (market growth rate), market competition intensity (market centrality), and strategy resources (strategies of internationalization) have reverse correlation with M&A. Some empirical conclusions of reference value have been reached from the research.5. A Logistic decision-making model illustrating the boundary between M&A and Greenfield Investment is worked out, and 5 significant factors (indicators) have been selected for the model, which are market competition intensity (market centrality), strategic resources (intangible assets), business experience (number of M&A operations), management skills (Rate of Return on net assets), and cultural difference (cultural difference). Based on an analysis of the external environment of China's power industry, the model is applied to verify the investment strategies of Ertan Hydropower Development Company Ltd., and its results give good reference to the company as to the resources it should make available and the various capabilities it should improve.