Institutional Factors Of Chinese State-owned Enterprises’ Overseas Mergers And Acquisitions

Due to its dual functions of direct international investment and M&A, Overseas mergers and acquisitions (M&A) has become an important way of corporation growth. The governance model and management model of China’s state-owned enterprises advanced to the market-orientated economy at a later stage, which led to China’s M&A practices and theories in a disadvantageous position in comparison with developed countries.The success rates of Chinese enterprises’overseas M&A are not high for lack of experiences. Chinese state-owned enterprises M&A activity should target to the potential customers to reduce the risk and improve success rate by understanding M&A key factors, establishing an overall evaluation system and dodging the obstacles. This research is of great actual significance. Analyzing institutional factors affecting M&A process, by integrating economic systems, legal systems, political systems and culture as an overall framework, from the perspective of M&A’s theoretical foundations has been a neglected research topic, which failed to form a unified framework and theoretical paradigm in spite of some scattered researches. This is exactly the starting point of this paper.Starting from the background of Chinese state-owned enterprises’overseas M&A, this paper studies the economic system, legal system, political system, culture and other institutional factors applying a variety of research methods, including, comparative research, case studies, specified interpretation in accordance with M&A theory, regulation theory and transaction cost and institutional economic theory. The factors of economy, politics, legal and culture are closely interwoven in the M&A transaction process.On the contexts of theoretical analysis, practical features and M&A mechanism, this paper establishes a logical framework system of the institutional factors affecting the Chinese state-owned enterprises overseas M&A by in-depth analyzing the institutional factors, whose internal working regulations are also demonstrated. Suggestions on improving Chinese State-owned enterprises overseas M&A are forwarded from the standpoints of state and corporate.The following is the outline of the paper. Some M&A related core concepts are defined upon reviewing the historical development of Chinese State-owned enterprises overseas M&A process. A logical framework system of the institutional factors affecting the Chinese state-owned enterprises overseas M&A is suggested. It further studies the dual constraint mechanisms of economic system and political system during the M&A process focusing on the institutional factors.Economic system is the major performance mechanism during the M&A process out of the enterprise’s profit-driven nature. Political system guides and constraints M&A behaviors directly or indirectly by way of conducting mechanism. Political system and economic system check and promote each other in that the reasonable political system construction ensures economic system’s smooth implementation and a comprehensive and broad applicable economic system is the policy embodiment of political system.The relationships among economic system, political system and legal system are investigated by stating that economic system and political system eventually need protection from legal system. Each party should have accepted conduct code resulting from standardized legal systems in M&A’s international practices to guarantee interests of all parties due to some systems’ implicit nature.The effects of cultural recessive systems on the explicit systems of economy, politics and laws are further discussed. The construction of rigid system can be quickly learned, quoted and amended, while culture’s soft system construction is a long process. It then elaborates the dialectical relationship between formal system’s external explicitedness and cultural system’s internal implictedness, institutional form and cultural adaptation to verity the adaptedness of institutional factors.The effects of the economic system, political system, legal system and cultural factors by which each logical mechanism is positioned to the concrete performer in line with the actual overseas M&A behaviors and institutional factors of home and host countries. Integrating the levels of state and corporation, this paper demonstrates the guidance of macro-institutional factors at the state level affecting M&A activity. The impact of institutional factors on the transaction costs and trading risk are analyzed.This paper can be classified into4modules, including economic system, legal system, political system and cultural system. The first module is the economic system. It constructs economic and institutional impact mechanism models for home country, international and host country on Chinese state-owned enterprises overseas M&A by focusing on the major features of M&A-related economic system and economic behavior. Economic system factors of home country include economic policies, financial controls, international trade, GDP, taxes, foreign exchange reserves, stock market, currency supply, exchange rate, etc. Bilateral investment agreements, double taxation avoidance agreements and trade barriers can be classified into international economic factors. Government intervention, financial supervision, market-oriented degree, monetary policy, government spending are listed as host country’s economic system factors. China Non-ferrous Metals Group is applied as a case to forward some suggestions and solutions.The second is the research on political system. Political transaction cost is applied as the main perspective of corporate M&A activity. Some political system related concepts are defined. Political system factors are mainly concentrated in the research scopes of the ideology features of political system, organizational form of political system and regime, political order and international politics. The impact mechanism of political system factors on overseas M&A is constructed on this basis. The existence of political system factors in a large extent adds to the political risks and transaction costs of M&A. Rising transaction costs and political risks reduce the overseas M&A efficiency.To be more specific, M&A on the one hand is checked by society; it must overcome social pressure on the other hand, especially pressures from the special classes and interest groups. In addition, the host country or home country’s position in the political system and political or diplomatic purpose of in the M&A case largely affect M&A efficiency. From the aspect of transaction costs political economy, factors including, signing and enforcement of political contract, governance structure, composes the major constraint conditions of political transaction cost in overseas M&A. The host country and home country can benefit from the M&A activity if they can solve system design and implementation mechanism to reduce transaction costs. Transaction cost reduction by rules and institutions has the potential gains during the planning and practice process of political policy. M&A success to a certain extent can be stated as the equilibrium solution of the lowest political transaction cost for parties of M&A.Centering on this fundamental principle, this part further analyzes the factors affecting Chinese state-owned enterprises overseas M&A, including international politics tendency, geopolitical factor, national political relationship, social responsibility provisions of the host country, the terms of the host union interest groups and government offer, industry sensitivity risk of the host government, national attitude and security or defense awareness of host-country people, instability risk of the host country, political continuity risk caused by ruling party alternation, stability of administrative and management systems, state-owned enterprises’political behavior, exchange rate and trade disputes, social stability, political system transition, etc. Using BAIC’s failing bid for OPEL as the case, this part analyzes the political risks and forwards some suggestions.The third is the research on legal systems. Based on the logical concept that legal system is the behavior guarantee and external behavior of the economic and political systems, it analyzes the associated clauses of international legal systems, host country’s legal system and home country’s legal system with Chinese state-owned enterprises’ M&A one by one, in accordance with the logical mechanism demonstrating the impact of the legal system affecting Chinese state-owned enterprises overseas M&A.Some legislative proposals are suggested to make full use of the favorable factors and overcome legal obstacles combining with the analysis on the positive and negative factors existing in Chinese legal systems during the process of Chinese state-owned enterprises overseas M&A. It focuses on the legal system directly related to overseas M&A, such as audit and anti-dumping laws. Selecting Sinopec’s acquiring ADDAX as the case, this part discusses the major legal institution factors, pros and cons from acquisition stimulus and effects.Next part is the research on culture factors. It emphasizes the effects of informal systems on formal systems as well as the core concept of "Cultural Cognitive Differences". It analyzes the definition and manifestations of cultural differences in overseas M&A, the relation between M&A risk and cultural conflicts by stating the performance mechanism of cultural difference. Cultural exchange environment and differences between China and the host country pose great impact on cultural adaptation during Chinese state-owned enterprises’overseas M&A process.Cultural differences are mainly reflected in the national cultural differences and organizational cultural differences. The existence of cultural difference, on the one hand, leads to cultural conflicts and cultural risks; on the other hand, people of China and host country have inconsistent cognitive assessments on the cultural variations due to their distinctive values, conduct codes and public opinions, which also cause cultural conflicts and cultural risks. Beyond a certain range and intensity, cultural conflict will be escalated to cultural risk in M&A process. The paths generated by the cultural conflict and risk will inevitably affect the performance of Chinese enterprises overseas M&A. The case of CHINALCO’s acquisition of Rio Tinto is utilized to verify that the striking cultural difference between China and Australia leads to cultural divergences. Cultural divergences led to concrete behavior change, which in turn caused conflict and risk in the M&A. This paper then suggests some solutions, such as establishing cultural assessment mechanism, identifying cross-cultural risks, building cultural communication mechanism, setting up cultural training mechanism, etc.In conclusion, the major contributions of the research are listed in the following.Firstly, a framework system of institutional factors for overseas M&A is founded. It goes beyond the past researches’limitations in that they focus only one factor on state-owned enterprises’overseas M&A, such as social economy, political policy, institutional culture, financial marketing, corporation management, etc. It studies the mechanism of institutional factors affecting the Chinese state-owned enterprises overseas M&A, providing a brand new path for the practice and theoretical study of the state-owned enterprises overseas M&A.Second, the concept of political transaction cost is defined. A simple game model is constructed by using transaction cost. In addition to the insights on market transaction cost, this paper doesn’t neglect political transaction cost. During the Chinese state-owned enterprises overseas M&A process, differences of national political systems will directly or indirectly affect M&A activity out of transaction cost internalization according to institutional economics. Negotiation cost is converted into enterprise internal cost by means of multi-party game, political groups, political process, and national interests.Next, M&A-related legal system under the framework of economic systems and political systems are discussed systematically by analyzing the international, domestic and host country’s legal documents related to the Chinese state-owned enterprises overseas M&A process. These legal documents are integrated into M&A impact mechanism, enriching the fullness of legal factor researches in the Chinese state-owned enterprises overseas M&A activity. It analyzes some M&A-related cases combining with legal examples and put forward counter-measures by applying laws of host country, home country and international. The impacts of different economic systems on enterprise M&A are studied.Many graphs and data are applied on analyzing the factors affecting he Chinese state-owned enterprises overseas M&A. We should not only give full consideration to circumvent trade barriers through overseas M&A, but we must take into account the management and development after M&A as well, especially those cases in which products or raw materials need to be transported across the home country. When choosing the home country for M&A, we should not always consider those countries with high trade barriers, or low-level free trade countries. Instead, the enterprises of relatively lower trade-free-degree countries among higher trade-free-degree countries can be our potential targets.A cognitive model for cultural difference is suggested. Cultural differences are classified into objective differences and cognitive differences by following the order of "cultural difference-cultural conflicts-cultural risks" centering on the relation between formal institution and informal institution. A cognitive model for cultural difference is suggested from the aspects of China and host country by emphasizing the actual impacts of cognitive difference on M&A.