Political Economy Model of Cross‐Border Mergers Under Mixed Oligopoly

• Author: Mobing Jiang,Jing Lu,Jie Li
• Published date: 01 February 2017
• DOI: http://doi.org/10.1111/1468-0106.12205
• Date: 01 February 2017

POLITICAL ECONOMY MODEL OF CROSS-BORDER

MERGERS UNDER MIXED OLIGOPOLY

JIE LIJinan University

JING LUZhejiang University

MOBING JIANG*Zhejiang Sci-Tech University

Abstract. This paper analyses the horizontal cross-border mergers under the framework of political

economy in mixed markets. We explore the conditions under which a cross-border merger between a

partially privatized foreign public firm and a profit-maximizing domestic firm occurs and is approved

by the domestic government. We show that a welfare-maximizing domestic government approves the

merger if the share owned by the foreign government is sufficiently low and the merger is relatively

efficient; a government only caring about political contributions always approves such a merger; we

also considerthe case where the governmentcares about both social welfareand political contributions.

1. INTRODUCTION

The past few decades have witnessed a large number of cross-border mergers all

over the world. China, as the second largest economy worldwide, has also car-

ried out numerous cross-border mergers since the beginning of the 21st century.

In 2012 alone, Chinese firms accomplished more than 229 cross-border mergers,

with the total transaction amount of $US3.1bn. Although there are many

successful cases,1there are also numerous cases of failure. For example, China

National Offshore Oil Corporation (CNOOC) failed to acquire the ninth largest

oil corporation (Unocal) in the USA because the US Government was concerned

about its national security and the government background of CNOOC. A sim-

ilar situation also occurred with the Aluminum Corporation of China Limited

(CHALCO) when it planned to merge with the Rio Tinto Group. We note that

the ownership structures of all these merger initiators are quite diversified: some

of them are state-owned firms (such as CNOOC, CHALCO and CNPC), and

others are private or partially privatized firms (such as Wangxiang Group,

Lenovo and Geely). It seems that the US Government is more sensitive to large

mergers initiated by state-owned firms in high-technology or strategic resource

industries. Hence, we wonder what role government background (ownership

*Address for Correspondence: School of Economics, Zhejiang Sci-Tech University, No. 5 Second Av-

enue, Xiasha Higher Education Zone, Hangzhou, P. R. China, 310018. E-mail mercyjmb@qq.com.

Jie Li would like to thank financial support from the National Natural Science Foundation of China

(71333007), the National Social Science Foundation of China (15BJL087), the Guangdong Provin-

cial Natural Science Foundation (2014A030313395), and the Fundamental Research Funds for the

Central Universities (15JNYH001). Jing Lu would like to thank financial support from National So-

cial Science Foundation of China (15ZDB156). The authors would also like to thank Kenneth Chan,

Raouf Boucekkine, and two anonymous referees for their valuable comments and suggestions.

1For example, Wanxiang Group acquired the US Universal Automotive industries in 2001; Lenovo

took over IBM’s PC business in 2004; CNPC acquired Petro Kazakhstan in 2005; Zoomlion Heavy

Industry acquired CIFA in 2008; Geely Holding Group acquired Volvo in 2010; and Hainan Airlines

Group acquired GESEACO in 2011.

Pacific Economic Review, 22: 1 (2017) pp. 83–100

doi: 10.1111/1468-0106.12205

© 2017 John Wiley & Sons Australia, Ltd

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structure) plays in affecting the success rate of cross-border mergers and acquisi-

tions (M&A). Moreover, large cross-border mergers are often accompanied by

lobbying activities. Many Chinese firms such as Lenovo, CNOOC and Wanxiang

Group have begun to participate in cross-border lobbying more frequently in re-

cent years. Figure 1 shows the large amount of money that four Chinese firms

spent in lobbying the US Government annually. Acquirers want to influence

governments’attitude towards cross-border mergers by lobbying actively. It

seems that both the ownership structure and lobbying activities of the merger

initiators crucially influence the attitude of the target firm’s government towards

cross-border mergers. In this paper, we want to answer the following two

questions. First, what role does ownership structure play in affecting the success

rate of cross-border M&A? Second, do lobbying activities really pay off? Do

lobbying activities really change domestic governments’attitude towards

mergers initiated by foreign state-owned firms? Specifically, how does the share

that a foreign government (say China) owns in a foreign firm (say Lenovo) affect

the domestic government (say the USA’s) cross-border merger policy? Moreover,

how does the domestic government’s political inclination (i.e. caring about social

welfare or caring about contributions from the interest groups) influence its cross-

border merger policy? Finally, how does trade protection impact the domestic

government’s cross-border merger policy?

A large number of literature has examined the horizontal merger decisions

among private firms (Marjit et al., 2000; Min and Nagano, 2008). Farrel and

Shapiro (1990) show that under sufficient conditions mergers between private

firms can increase social welfare. Bárcena-Ruiz and Garzón (2003) analyse the

decision to merge by private and public firms and find that the merger decision

Figure 1. annual lobbying spending of chinese firms.

Notes: Data is collected from the following website: http://www.opensecrets.org.

J. LI ET AL.84

© 2017 John Wiley & Sons Australia, Ltd