Are Chinese Acquirers Discriminated against in Cross‐border Mergers and Acquisitions? An Analysis Based on Covered Transactions Filed with CFIUS

• Author: Qi Wang,Wenxue Li,Sichong Chen
• DOI: http://doi.org/10.1111/cwe.12320
• Published date: 01 March 2020
• Date: 01 March 2020

©2020 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 37–58, Vol. 28, No. 2, 2020 37

*Sichong Chen, Professor, School of Finance and the Collaborative Innovation Center of Industrial

Upgrading and Regional Finance (Hubei), Zhongnan University of Economics and Law, China. Email:

sichongchen@zuel.edu.cn; Wenxue Li, PhD Candidate, School of Finance, Zhongnan University of

Economics and Law, China. Email: victorlwx@163.com; Qi Wang (corresponding author), PhD Candidate,

School of Finance, Zhongnan University of Economics and Law, China. Email: 271521373@qq.com.

This work was supported by the National Natural Science Foundation of China (No. 71973152) and the

Fundamental Research Funds for the Central Universities, Zhongnan University of Economics and Law

(No. 2722020JCT009). This paper is part of the research project “Promoting the establishment of long-term

and stable bilateral economic and trade relations between China and the US” initiated and funded by the

Shanghai Pu Shan Foundation.

Are Chinese Acquirers Discriminated against in

Cross-border Mergers and Acquisitions? An Analysis

Based on Covered Transactions Filed with CFIUS

Sichong Chen, Wenxue Li, Qi Wang*

Abstract

This study employs a sample of covered transactions filed with the Committee on

Foreign Investment in the United States (CFIUS) of cross-border mergers and

acquisitions targeting American companies based on publicly available news reports

and announcements to examine the heterogeneity hypothesis in the CFIUS review

process. A comparative analysis of case studies and an empirical analysis of logit

regressions are performed. We also explore how CFIUS reviews may have an impact on

corporations’ future mergers and acquisitions decisions in a panel data model setting.

The results show that both unfair treatment in CFIUS review and the deterrent effect

of CFIUS interventions have contributed to the recent sharp decline in China’s direct

investment in the US.

Key words: CFIUS covered transaction, cross-border M&A, deterrent effect, fair

treatment

JEL codes: F13, G34, G18

I. Introduction

According to the Financial Times, Ch ina’s d irect investment in the US fell rapidly in

2017 and 2018 following the inauguration of President Donald Trump: from US$46bn

Sichong Chen et al. / 37–58, Vol. 28, No. 2, 2020

©2020 Institute of World Economics and Politics, Chinese Academy of Social Sciences

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in 2016 to US$29bn in 2017, a 37 percent decrease; and further decreased 84 percent

to US$4.8bn in 2018.1 Cross-border mergers and acquisitions (M&As), which played a

dominant part in China’s direct investment in the US, also present a cliff-shaped decline.

An essential question then naturally emerged: What factors caused the sharp decline in

Chinese direct investment into the US?

One possible explanation is that economic nationalism exists in the foreign direct

investment, especially for cross-border M&A deals. The so-called economic nationalism

in the cross-border M&A market refers to the idea that a government would prefer the

target enterprise to remain in the hands of a domestic entity rather than be controlled

by an overseas enterprise (Knight, 1935; Hayek, 1937; Olson, 1987). For example,

Dinc and Erel (2013) showed that there is widespread economic nationalism in large

corporate merger attempts, even within European Union (EU) member states.

The global economy currently faces serious challenges given the recent “America

First” policies. In particular, the US Foreign Investment Risk Review Modernization

Act (FIRRMA), which was signed and promulgated on 13 August 2018, requires all

investments from overseas to be subject to a Committee on Foreign Investment in

the United States (CFIUS) national security risk review once specific conditions are

triggered, even for minority ownership in Silicon Valley start-ups. CFIUS has the power

to block a bid for US corporations or assets by overseas companies on the grounds of

a threat to national security. Headlines such as “US blocks MoneyGram sale to Ant

Financial” and “US blocks Chinese acquisition of chip equipment maker” are frequently

featured. Is the widespread economic nationalism of the CFIUS review responsible for

the sharp decline in Chinese cross-border M&As targeting US companies?

If CFIUS’s national security risk review leads to widespread economic nationalistic

behavior, then it may cause a trending change in the US cross-border M&A market. In

other words, if the sharp decline of Chinese companies’ M&A attempts in the US is a

result of the widespread economic nationalism in the cross-border M&A market, then

we should observe the reasons behind this. However, we nd little evidence to show that

the sharp decline of Chinese companies’ M&A deals in the US is the result of a change

in the cross-border M&A market.

As shown in Figure 1, there has been no downward trend over the past three years

in the proportion of cross-border M&As in all M&A deals targeting US companies

(including cross-border and domestic M&A). In contrast, merger attempts from China,

including Chinese mainland and Hong Kong SAR, showed a signicant decline.

1Available from: http://www.ftchinese.com/story/001081069?full=y&archive (online; cited 14 January 2019).