*Columbia FDI Perspectives*

Perspectives on topical foreign direct investment issues

No. 205   July 31, 2017
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])

Managing Editor: Matthew Schroth ([log in to unmask])

*State-owned enterprises face challenges in foreign acquisitions**


Jing Li and Jun Xia** <#m_-8326834640353788839__edn2>

Cross-border acquisitions by state-owned enterprises (SOEs) have increased
sharply since 2008 and accounted for over 20% of total cross-border
acquisitions in 2009; SOE acquisitions have since come down but remain
close to 10% of the total.[1] <#m_-8326834640353788839__edn3> However, this
practice is not always preferred or viewed as appropriate by regulators,
the public or other stakeholders in host countries. Foreign SOEs are often
regarded as agents of their home-country governments, pursuing political
agendas and implementing government strategies that are outside of normal
business considerations. They may receive subsidies from home countries, a
practice that conflicts with free-market principles. The lack of
transparent corporate governance of SOEs, sometimes accompanied by a lack
of operational efficiency, can make their acquisition of local firms even
less desirable. Thus, after announcing the purchase of local firms, SOE
acquirers still face the challenge of approvals by regulatory agencies. For
example, all foreign SOE acquisitions in the United States require approval
by the Committee on Foreign Investment of the United States (CFIUS).[2]

These concerns about state-owned foreign acquirers likely raise debates
among regulators regarding the desirability of attracting foreign
investments versus homeland security. Due to the intentional vagueness of
governmental criteria regarding cross-border acquisitions, discretion is
built into the regulatory process in many countries. For example, CFIUS can
question whether foreign control over a US business, especially by foreign
SOEs, presents national security concerns. Here, the concept of “national
security” is vaguely defined, leaving room for regulatory discretion.
Similarly, the threshold question for the Canadian regulator, about whether
a transaction brings “net benefits,” also involves a concept lacking in
clarity. Such vagueness and regulatory debates can result in significant
uncertainty in the outcomes of foreign SOEs’ acquisitions.

Our investigation of cross-border acquisitions in the US from 1990 to 2012
suggested that acquisitions by foreign SOEs were no less likely to be
completed than acquisitions by other foreign firms, but it took SOEs more
days to complete their acquisitions after publicly announcing acquisition
attempts.[3] <#m_-8326834640353788839__edn5> Our findings were based on
multiple acquirer, target, deal, and industry attributes, including whether
acquisitions were in the same industry and whether targets were in
strategic industries that likely raised national security concerns.
Interestingly, earlier studies[4] <#m_-8326834640353788839__edn6> found
that Chinese SOEs were less likely to complete cross-border acquisitions
than their private counterparts, suggesting negative reactions toward
cross-border acquisitions by SOEs from that country. Our sample mainly
consisted of SOE acquirers from other countries, many of which are US
political allies (e.g., UK and Canadian acquirers accounted for 29% of
foreign acquisitions by SOEs). Acquisitions by these firms did not provoke
strong negative reactions. Nonetheless, regardless of their home country,
SOEs experienced a longer duration of deal making that indicates a longer
debate and discussion process undertaken by government agencies (our deals
were all friendly acquisitions, and thus regulatory approval is the main
factor affecting the duration between acquisition announcement and

Characteristics of both local targets and foreign acquirers are important
factors in the success of acquisitions by SOEs. When target firms
participate in more research and development (R&D) alliances in the host
country, implying the centrality of target firms in the country’s
innovation system, SOE acquirers are less likely to complete their
acquisitions than private foreign firms. Regulatory agencies may find it
difficult to justify such deals because of political and strategic
considerations that stem from the fear of losing proprietary knowledge to
foreign governments.

However, there is no evidence that acquisitions take longer for foreign
SOEs when they target firms with more R&D alliances. Given that limited
monitoring mechanisms can be employed to prevent SOEs from sharing acquired
technologies with other SOEs at home, especially those in national defense
sectors, negotiations to address this issue may be seen as futile. As a
result, regulatory authorities prefer to reject such acquisition proposals
at the outset, rather than engage in discussions that prolong acquisition

In addition, the alliance experience of foreign SOEs in host countries
(e.g., manufacturing, marketing, R&D alliances) can facilitate acquisition
completion and shorten acquisition duration. Alliance experience
demonstrates those firms’ credibility and increases their ability to deal
with legitimacy concerns on the part of local stakeholders.

If home country governments want their SOEs to become global players and
their acquisitions to be more welcome, some fundamental reforms at home are
necessary; these reforms include providing a level playing field on which
private firms can more freely compete with SOEs and improving the corporate
governance and transparency of SOEs by reducing direct interference and
subsidies, listing SOEs in investment destinations and/or introducing
foreign ownership participation. These reforms will improve efficiency and
competitiveness of SOEs and make them more legitimate in the eyes of host
country stakeholders. If host countries want to increase foreign investment
via acquisitions, they should build a more efficient system in evaluating
FDI projects involving foreign SOEs. Bilateral trade agreements (e.g., the
EU-Canada Comprehensive Economic and Trade Agreement) are useful to deal
with concerns about foreign SOE investments from particular countries in a
systematic fashion, which can also help reduce investment uncertainty for
SOEs.[5] <#m_-8326834640353788839__edn7>


* <#m_-8326834640353788839__ednref1> *The Columbia FDI Perspectives are a
forum for public debate. The views expressed by the author(s) do not
reflect the opinions of CCSI or Columbia University or our partners and
supporters.* *Columbia FDI Perspectives** (ISSN 2158-3579) is a
peer-reviewed series.*

** <#m_-8326834640353788839__ednref2> Jing Li ([log in to unmask]) is an
Associate Professor of International Business and Canada Research Chair in
Global Investment Strategy at Simon Fraser University; Jun Xia (
[log in to unmask]) is an Associate Professor of Organizations, Strategy
and International Management at University of Texas at Dallas. The authors
are grateful to Michael Enright, Michael Gestrin and Ana Tavares for their
helpful peer reviews.

[1] <#m_-8326834640353788839__ednref3> OECD, *OECD Business and Finance
Outlook*, “Multinational enterprise and the shifting global business
landscape” (2015), pp. 181-197.

[2] <#m_-8326834640353788839__ednref4> Examples to illustrate the
challenges include CNOOC’s failed acquisition of the US oil company Unocal
and Dubai Ports World’s failed acquisition of the British firm P&O, which
had operations in US ports.

[3] <#m_-8326834640353788839__ednref5> Our sample was from the Securities
Data Corporation (SDC), Compustat Global, and Bureau van Dijk (BvD)
databases, and we used logit models to estimate the likelihood of
acquisition completion and ordinary least square models to estimate
acquisition duration. More details can be found in Jing Li, Jun Xia and
Zhouyu Lin, “Cross-border acquisitions by state-owned firms: how do
legitimacy concerns affect the completion and duration of their
acquisitions?,” *Strategic Management Journal *(forthcoming).

[4] <#m_-8326834640353788839__ednref6> Jianhong Zhang, Chaohong Zhou, and
Haico Ebbers, “Completion of Chinese overseas acquisitions: institutional
perspectives and evidence,” *International Business Review*, vol. 20
(2011), pp. 226–238.

[5] <#m_-8326834640353788839__ednref7> International Centre for Trade and
Sustainable Development & World Economic Forum, “The E15 initiative:
strengthening the global trade and investment system in the 21st century”

*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Jing Li and Jun Xia, ‘State-owned enterprises
face challenges in foreign acquisitions’,* *Columbia FDI Perspectives, No.
205, July 31, 2017. Reprinted with permission from the Columbia Center on
Sustainable Investment (***
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*Most recent Columbia FDI Perspectives*

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*All previous FDI Perspectives are available at

*Karl P. Sauvant, PhD*
*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
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