Why home countries have the advantage in cross-border M&As

A multinational’s success in global acquisitions depends on how home institutions impact ownership decisions and reduce acquisition risks

In today’s increasingly globalised business landscape, understanding what drives successful cross-border acquisitions has become critical for multinational enterprises seeking international expansion. While conventional wisdom often focuses on host country risks and institutional environments, emerging research reveals that a company’s home country institutions play a pivotal role in shaping international acquisition strategies, particularly regarding ownership decisions that can determine long-term success.

Data from fDi Intelligence shows that Chinese firms have started to increase their cross-border acquisitions since 2010 because of China’s “Go Out” policy. After reaching a peak of US$227 billion in 2016, Chinese outbound M&A activity decreased to US$79 billion in 2018 and further declined to US$46 billion in 2020, reflecting changing home-country institutional environments and government policies toward overseas investments. This volatility can be attributed to the implementation of capital controls and scrutiny of overseas investments by regulatory bodies. After years of slowing cross-border investment, China’s cross-border acquisition activities recently show signs of resilience.

A closer examination of recent trends reveals that US outbound M&A deals reached US$439 billion in 2021 and maintained strong momentum through 2022-2023, despite global economic headwinds. The stability of US cross-border acquisition activities, particularly in strategic sectors, such as technology and healthcare, reflected the continued government support for US firms expanding internationally in industries deemed crucial for economic and national interests. This governmental backing has emboldened many US acquirers to pursue higher ownership stakes in their foreign acquisitions because the home country's political institutions create predictable policy environments.

When Tata Motors acquired Corus Group

The interplay between home country institutions and acquisition strategies is particularly evident when examining emerging market multinationals. One case study that highlights this trend comes from India, where relatively stable political institutions have enabled companies to pursue ambitious international strategies despite economic classification as an emerging market.

When Tata Motors acquired 100% of Anglo-Dutch steel maker Corus Group plc in 2007, the bold move from an Indian company surprised many industry observers. The $12 billion acquisition represented one of the largest cross-border purchases by an Indian company at that time and demonstrated a level of confidence rarely seen from emerging market firms. While conventional wisdom suggested companies from emerging economies would typically seek partial ownership stakes to mitigate risk, Tata pursued complete ownership.

This confidence stemmed largely from India’s institutional environment. Although classified as an emerging economy, India has developed relatively stable policies that have improved domestic business environments. Well-developed political institutions created constraints on arbitrary government actions, providing Tata with a stable home base from which to launch its ambitious international strategy.

The acquisition was a transformative moment for Tata, instantly making it the fifth-largest steel producer globally. Rather than being distracted by unpredictable policies at home, Tata could focus its resources and managerial attention on addressing the challenges of integrating Corus and managing operations across different markets. The company was able to access skilled talent from India’s growing pool of management professionals, many trained at world-class institutions like the Indian Institutes of Management and Technology, to support the complex integration process.

Home country institutions and multinational acquisition strategies

This example illustrates findings from a comprehensive study published in the Journal of International Business Studies, which examined how a company’s home country's economic and political institutions affect cross-border acquisition strategies, particularly the level of ownership they pursue in foreign targets.

The research paper, Home country’s economic and political institutions: firms’ ownership decisions in cross-border acquisitions, by Professor Christine Chan from the School of Management and Governance at UNSW Business School, Professor Lei Shi from the School of International Trade and Economics at the University of International Business and Economics, and Professor Jingtao Yi from Renmin Business School at Renmin University of China, challenges conventional thinking about international business strategy.

Most previous research focused on how host country risks influence ownership decisions, with the assumption that companies seek lower ownership stakes when entering riskier foreign markets. Meanwhile, the effect of home country institutions remained largely unexplored.

“Although multinational enterprises are deeply embedded in their home country and institutions play an important role in influencing firms’ ability to deploy strategic resources to succeed in foreign markets, studies have paid less attention to how home countries' formal institutions influence acquirers’ cross-border acquisition ownership strategies,” the authors note.

The researchers analysed 133,623 cross-border acquisitions between 2000 and 2020, examining data from 72 home countries and 59 host countries. They employed Heckman’s two-stage method to address sample selection bias, recognising that a firm’s ownership decision can only be observed if it enters the host country. This rigorous methodology helped establish a clear connection between home country institutions and acquisition strategies.

Economic institutions and reducing acquisition uncertainty

The study differentiated between two types of home country institutions: economic and political. Economic institutions create structures that determine labour market efficiency and education quality, directly affecting the availability of skilled talent.

Companies engaged in cross-border acquisitions face what researchers call “endogenous uncertainty” – challenges that can partly be resolved through the acquiring company’s actions. One significant challenge involves transferring headquarters resources to foreign target firms and effectively integrating the acquisition.

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“Well-developed economic institutions play a market-supporting role by ensuring a continuous supply of well-trained local talent for the labour market,” the researchers explain. “Skilled workers embody the organisational skills and knowledge that enable the flow of information across firms through the mobility of skilled workers in the local market, representing essential human resources for acquirers to determine the share of equity sought in cross-border acquisitions.”

In practical terms, this means companies from countries with strong economic institutions – those with effective education systems and labour markets that produce skilled managers, analysts, lawyers, and technical experts – can more confidently pursue higher ownership stakes in foreign acquisitions. These companies have access to talent capable of managing complex cross-border integration processes.

Political institutions: Creating stability through constraints

The second institutional factor identified was political institutions, which create checks and balances that constrain government actions and policy changes. Companies face “exogenous uncertainty” – challenges that cannot be directly resolved through their actions – when governments unpredictably change policies or apply them unevenly across firms.

“Without the constraints of political institutions in the home country, the government or policymakers can make frequent changes in the rules of the game, resulting in increased exogenous uncertainty,” the authors write. “Firms in a home country with less developed political institutions are likely to be distracted by unpredictable home-country policies and are therefore unable to pay attention to and allocate resources to manage host-country risks.”

When political institutions are well-developed, they constrain arbitrary actions by governments, creating stability that allows companies to focus on managing foreign market challenges rather than being distracted by unpredictable policy changes at home. This enables them to invest more confidently in full acquisitions rather than settling for partial ownership stakes.

The influence of trade relationships on acquisition strategies

The research also revealed that mutual trade dependence between home and host countries significantly affects how companies leverage their home country's institutional advantages. High levels of trade between countries create information flows that reduce uncertainty for acquiring companies.

“Mutual trade dependence intensifies direct information flows among cross-border trading partners, allowing skilled labour at home to have more information to facilitate the transfer of headquarters resources and reducing endogenous uncertainty for acquirers,” the researchers explain.

Interestingly, while strong trade relationships enhance the positive effects of economic institutions on acquisition strategies, they weaken the influence of political institutions. This occurs because governments are less likely to make arbitrary policy changes when they have strong trade dependencies, making the constraints provided by political institutions less crucial.

Leveraging capabilities to enhance institutional benefits

Companies do not benefit equally from their home country institutions. The study found that firms with diverse experience across industries (economic capabilities) and countries (political capabilities) can better leverage the advantages provided by their home economic and political institutions.

Read more: Can community trust and social connections drive merger and acquisition success?

“Acquirers can leverage the economic and political capabilities developed by their foreign affiliates in different industries and different host countries to reap the benefits of their home country’s economic and political institutions; as a result, acquirers are more likely to seek higher equity stakes in foreign target firms,” the authors note.

Practical implications for business leaders and policymakers

For business leaders planning international expansion, this research offers several key insights. First, business leaders can assess the quality of their home country’s economic and political institutions when developing cross-border acquisition strategies. Companies from countries with well-developed educational systems and labour markets can more confidently pursue full acquisitions due to better access to skilled talent for integration.

Second, acquirers can build economic and political capabilities across different industries and countries. By diversifying experience, companies can better leverage home country institutional advantages. As the researchers suggest: “Corporate decision makers should reassess their industry portfolios and geographic footprints to ensure the efficacy of their subsidiaries’ strategy in terms of scope.”

For companies from emerging economies, the research presents an optimistic view. While many emerging markets face institutional challenges, the development levels of economic and political institutions vary significantly. Even in emerging economies, strong political institutions can enable companies to pursue ambitious international acquisition strategies, as demonstrated by Tata’s full acquisition of Corus Group.

Policymakers can support their multinational enterprises by pursuing synchronised institutional development. The research suggests governments should ensure “that the progress of pro-market reforms is synchronised to enable acquirers to reap the benefits of well-developed institutions at home,” while also promoting trade relationships that enhance information flows between countries.

By understanding how home country institutions influence acquisition strategies, both business leaders and policymakers can develop more effective approaches to international expansion, potentially transforming perceived home country disadvantages into strategic advantages in the global marketplace.