Session 3 - ULisboa

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Cross-border Mergers and Acquisitions

Session 3

Cross-border M&A © Larry Qiu 2

Outline

• Introduction• Research questions• Objectives• The IO literature• Cross-border M&A• Conclusion


Introduction

Acceleration of globalization.• Traditional form: export, green-field FDI• New form: cross-border M&As, cross-border strategic

alliances• They are two distinctive features of the recent industrial

globalization (OECD)

The value of cross-border M&As grew from USD 153 billion in 1990 to USD 1 trillion in 2000• Daimler-Chrysler merger

The number of new cross-border strategic alliances increased from around 830 in 1989 to 4520 in 1999• Ford-Mazda alliance and Renault-Nissan alliance


Outline



Research questions

Why do firms take cross-border M&As and/or form strategic alliances? What economic factors affect their incentives to take such M&As and form such alliances? How does this new form of globalization affect the traditional foreign market entry modes?What are the implications of M&A and alliances on trade liberalization and competition policy reform?How do trade liberalization and competition policy reforms affect M&A and alliances?Etc.


Outline


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Objectives

This lecture serves to give you the details about the recent developments of this literature, the frameworks and methodologies to analyze cross-border mergers and strategic alliances.


Outline



The IO literature

General discussionCournot merger paradoxExtensions of the Cournot model


The IO literature: general discussion

Huge literature in finance, management, accounting and economicsFocus on economics literature = industrial organization literature

Horizontal mergers vs. vertical mergersTheoretical vs. empirical


Definition

In general, a (horizontal) merger creates a new firm which combines the assets of the merging firms. We just discuss models in the oligopolistic setting. We will review a few representative models and results. For a more extensive literature review, please refer to Chapter 23 in Church and Ware (2000).

"Losses from horizontal merger: the effects of an exogenous change in industry structure on Cournot-Nash

equilibrium"

Salant, Switzer and Reynolds, (1983), Quarterly Journal of Economics

98:2,185-199.

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Cournot merger paradox

The best known model: Salant, et al. (1983), sometimes called the standard Cournotmerger modeln identical firmsConstant MC: cHomogenous productLinear demand


Profit

Cournot: taking others’ output as given

Solving to get the symmetric eq’m


Merger• Suppose firms 1 and 2 merge. Because all firms

produce identical products and have the same technology, the merger will reduce the total number of firms from n to (n-1). We can just consider that merger eliminates firm 1 from the market.

Solving this (n-1)-firm Cournot equilibrium yields, for all the remaining firms,


Merger incentives• The two firms have incentive to merge if and only

if the joint profits after the merger is larger than the joint profits before the merger,

Merger conditions (an upper bound on n)


A more general case: m firms mergeThen, after the merge, there will be (n-m+1) identical independent firms in the market.

Comparison: • Merging firms reduce joint output: good for them, good for

non-merging firms (outsiders)• Outsiders expand their output: good for them, bad for

merging firms


Result 1. An outsider to the merger always gains from the other firms’ merger.

Proof: Intuition: free-rider

Result 2. (Cournot Merger Paradox) A merger is profitable iff the number of firms involve in the merger is no less than 80% of the firms in the industry.

Proof:

Intuition

iff

iff

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Extension of the standard Cournot model

Salant, et al. paper generates a big debate• It does not explain reality (80%)• Model with unprofitable mergers is not desirable

Various models• Price competition• Differentiated products• Merger synergies• Endogenous merger• Others


Price competition

Deneckere and Davison (1985) consider price (Bertrand) competition and find that the Cournotmerger paradox goes away.Consumer utility and resulted demand (b degree of product differentiation, n=3)


No-merger equilibrium


Suppose firms 1 and 2 merge. They choose their prices jointly. Equilibrium


Comparisons

The merger increases prices.An immediate result is that it reduces consumer surplus. Intuition: strategic complements

Result 3. In Bertrand competition, the merger is always profitable.It is general. Solves the paradox.Outsider’s profit increases (robust)

Merger decreases welfare


Differentiated product model

Deneckere and Davison (1985) also show that given that there are n firms in the industry producing differentiated goods, a merger between two firms is profitable if and only if the products are sufficiently differentiated (see analysis later).

Hence, product differentiation helps to solve the Cournot merger paradox.

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The merger synergy model

Motta (2004). n=3, price competition. The merger will generate cost savings that allow the merging firms to produce each variety at a marginal cost sc, with s ∈ (0, 1].No-merger equilibrium beforeMerger equilibrium


Result 4. The merger always benefits the merging firms. It increases the outsider’s profit if merger synergy is small enough . The merger always increases the total industry profits.Discussion: not very surprising, but…

Result 5. The merger is beneficial to consumers if and only if it involves enough efficiency gains ( ). The merger improves welfare if .


Endogenous merger model

Two questions: • why firms merge, and • how they merge.

To answer the first question: a single merger, outsiders => exogenous mergersTo answer the second question: any merger, who with whom, outsiders’ response, etc => endogenous mergers• Small, growing, most important literature


Review: endogenized only partially• Restricted the number of firms to three (Barros,

1998) or four (Fauli-Oller, 2000)• Assumed mergers occur in a pre-determined

order (Gowrisankaran, 1999; Fauli-Oller, 2000)• Kamien and Zang (1990) model the merger

process in a general way, but…• Qiu and Zhou (2007) attempt to model

endogenous mergers more completely: assume an arbitrary number of firms, differing in their marginal costs, and endogenize the order of mergers.

Merger Waves: A Model of Endogenous Mergers

RAND Journal of Economicsforthcoming


Firm 1

Firm n

Foreign firm

Merger incentives

Welfare

Trade policy

Competition policy

Methodology?

Exogenous vs endogenous

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Related Literature

Despite their importance in the business world, M&A have been modeled in the economics literature in overly simplified ways.• Single merger among a given number of firms• No response

Our paper• Heterogeneous firms• Many rounds of mergers• Equilibrium merger configuration: merger

structure and merger sequence


Example

Four largest firms in the US carbonated soft drink industry in 1986: • Coca-Cola (37.4%), • Pepsi (28.9%), • Seven-up (5.7%) • Dr Pepper (4.6%).

Merger announcementMerger configuration as predicted in our model


Preview of our results

Negative demand shocks trigger mergersFor the M-shocks, there is a unique equilibrium merger configurationMergers are efficient: The most efficient firms surviveIn the final round: firms 1 and n merge Heterogeneity: no merger if identicalMergers may be strategicMerger waves


Our contribution

First to give the most comprehensive model and analysis on endogenous mergersMultiplicity of equilibria vs. unique equilibriumMethodologyOthers• Kamien and Zang (1990)• Barros (1998)• Gowrisankaran (1999)• Fauli-Oller (2000)• Gowrisankaran and Holmes (2004)


The model

n heterogeneous firms, constant mc

Produce homogenous good, demand:

Each merger involves only two firms A firm can participate in multiple mergersEach merger (takeover/acquisition) eliminates the less efficient firm (technology) from the industryA two-stage game: merger stage and production stage

Qp −=α

nccc ≤⋅⋅⋅≤≤ 21


The merger game

One firm is drawn

Pass Another drawn

Propose a merger

EndMerger partner

End of first round

Reject

Accept

Second round

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Mergers occur sequentially with no time discounting Mergers can proceed up to a duopoly, full monopolization is not allowedAfter the merger stage, remaining firms start to produce


Analysis and methodology

A merger is profitable if the merged entity’s expected payoff is greater than the two firms’current Cournot profits

A profitable merger may or may not take placeProfitability becomes a sufficient condition for the i+jmerger if the merger is the only profitable merger in M and if no further mergers will take placeGiven M, there is a critical level such that i+j is profitable iff

Mj

Mi

jiMjiv ππ +>},max{\},min{

Mji,α

Mji,αα <


Steps to identify/construct the equilibrium merger configuration for a given number of rounds• Identify all possible last-round mergers• Sorting all and rank them• We will obtain a range of and a unique

merger such that the merger is the unique equilibrium in the last round if falls into that range

• Move backward and look at the second-to-last round

• Backward…

Mji ,α

α

α


Results

Observation I (free riding): A firm always benefits from mergers among its competitors.Observation II (free riding when the target is fixed): A potential acquiring firm prefers to stay aside if its intended target will be acquired by a third firm.Observation III (target’s preference): A target firm always prefers a strong acquirer to a weak acquirer.Observation IV (acquirer’s preference): an acquiring firm generally prefers a weak target to a strong target.


Proposition

We can define and . Then, a necessary condition for any merger to occur is . If is slightly below , the equilibrium merger configuration, if exists, must have the following features

(i) There are rounds of mergers;(ii) The least efficient firms in N are acquired; and(iii) The last-round merger is between firm 1 and firm n.

Strategic mergers and merger waves

*α *k*αα < α

*α

*k*k


Special case: n=3

α6.6 6.9 29

1+2 1+3 1+3 no merger

1+2

Equilibrium strategies for 6.9< α < 29:

Firms 1 and 3 propose merger to each other when they are drawn, firm 2 passes.

Firms 1 and 3 accept the proposal.

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Special case: n=4

29 44

α2+3 → 1+4 no merger

Feature:

2+3 is a strategic merger

Merger wave: 1+4 will not occur if 2+3 does not


Special case: n=5

44 59

α

1+4 → 2+3 → 1+5 no merger

In 2 mergers

Last round


Special case: n=6

74 α

2+i → 1+j → 2+3 → 1+6 no merger

Last roundIn 2 mergers


Conclusion

We study endogenous mergers in industries with heterogeneous firmsMergers can be caused by negative demand shockUnique merger configurationMergers are efficientStrategic mergers and merger waves


Other IO models

Bertrand model: Deneckere and Davidson (1985).Capital model: Perry and Porter (1985)

Stackelberg model: Levin (1990)Competition effect: Farrell and Shapiro (1990)Delegation model: Gonzalez-Maestre andLopez-Cunat (2001)


Outline


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The literature usually concerns• the implications of trade liberalization for the

profitability of cross-border mergers (Long and Vousden, 1995).

• the rationales for cross-border mergers (Horn and Persson, 2001, Lommerud et al. 2005, Neary, 2004, Qiu and Zhou, 2006)

• the various effects of cross-border mergers.

Literature


Trade liberalization model

Long and Vousden (1995) investigate the profitability of cross-border mergers in the presence of trade liberalization. The result depends on whether the trade liberalization is unilateral or bilateral and on how large the cost savings generated from the mergers can be. Unilateral tariff reduction encourages mergers that gain market power, and discourage mergers that reduce cost, while bilateral tariff reduction has the opposite effect.Domestic mergers vs. cross-border mergersModel and intuition


Cooperative game model

Horn and Persson (2001) use the coalition formation approach to analyzing international mergers.

They show that international mergers may arise due to lower trade costs, contrary to the "tariff jumping" argument.

International merger leads to a trade-off between duplicating fixed cost and saving trade cost.


Bargaining model

Das and Sengupta (2001) consider asymmetric information and bargaining in a model of cross-border acquisition.

The model

Demand uncertainty increases the likelihood of merger, while cost uncertainty decreases the likelihood.


Comparative advantage model

Neary (2004) uses a general equilibrium model to show that international differences in technology generate incentives for cross-border mergers in which low-cost firms from one country take over high-cost firms from another country.

Such mergers serve as instruments of comparative advantage.


Labor union model

Lommerud, Straume and Sorgard (2004a, b) explain international mergers as a result of oligopolistic competition in the presence of plant specific unions.

They argue that unions are plant specific in the international setting and, hence, international mergers are profitable because wages decrease after the mergers.

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Information sharing model

Qiu and Zhou (2006) give a different explanation for cross-border merger incentives: information sharing

International Mergers: Incentives and Welfare

Journal of International Economics Vol 68, 38-58


Value of World M&As as % of GDP (UNCTAD)

9.0

1.0

7.0

5.0

3.0

1980 1990 2000

All M&As

Cross-border M&As


Cross-border M&As as % of all M&As(UNCTAD)

25

5

20

15

10

1980 1990 2000

30

35


Examples of International Mergers

Automobile• Daimler-Chrysler• Ford-Mazda• Renault-Nissan• General Motors-Saab

Oil exploration, refining and retailing• BP-Amoco


Questions

Why do firms merge?• Create market power (reduce competition)• Achieve cost synergy (reduce cost)

2000 World Investment Report• Cross-border mergers and acquisitions and development,

p.101:

“By consolidating their resources, the merging firms aim to achieve synergies and often greater market power.”

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General Conclusion

Salant, Switzer and Renolds (1983, QJE): When• Firm competes in quantity (cournot), and• There are no cost savings (constant and identical

marginal cost)Then a merger is profitable only when it involves 80% of the

firms

Reason: in cournot competition, a merger has two effects:

• Good for merging firms: they internalize the competition between themselves, by reducing their products

• Bad: non-merging firms take the opportunity to expand


Solutions in the Literature

When firms compete in price, the two effects reinforce each other, so a merger is always profitable (Deneckere and Davidson, 1985).A merged entity should be larger than a non-merging firm, in the sense that it becomes a Stackelbergleader (Daughety, 1990; Levin, 1990).For certain cost formulation (increasing mc), the expansion by non-merging firms is not that severe (Perry and Porter, 1985).Endogenize merger decisions (Kamien and Zang, 1990): complete monopolization is limited.


Our Idea

Mergers may happen for the purpose of obtaining information.Firms possess asymmetric information. This is most likely when firms locate in different countries.Information is valuable.Merger may be the only way or the best way to obtain information.• The issue is not the presence in a foreign market (a choice

between FDI and direct export). Rather, it is about making more profit.

• Alternatives: conduct investigation by itself? Buy information?• Information sharing without mergers?


The information sharing literature: the incentive to sharing information:

+-Demand

-+Costs

BertrandCournot


Our Approach

Cournot competition in the domestic market.No cost savings. Constant marginal costs, assumed to be zero.Differentiated products.• If the products are homogeneous, a merger means the

elimination of the foreign firm. Information transmission wouldn’t happen.

• This is more profitable than keeping only one product.• The merger has the combined effects of output coordination

and information sharing.

Fluctuating demands.Asymmetric information:• The information is known only to domestic firms.


Major Findings

Asymmetric information facilitates mergers:

Absent information asymmetry, we can identify the parameter range for which a merger is profitable.

With information asymmetry, the parameter range is enlarged.

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Literature

Gal-Or (1988): Horizontal mergers may create informational disadvantage to merging firms.Each firm observes a private signal of equal precision.Although products are differentiated, after the merger only one product is kept.

Banal-Estanol (2002): Informational advantage only to merging firms.Cost structure is like in Perry and Porter (1985).Uncertain costs.The advantage comes mainly from cost savings.


Literature

Das and Sengupta (2001): Asymmetric information is always a barrier to mergers.

Context is the same as ours: asymmetric information by firms located in different countries.Two duopolists merge into a monopoly. So total profit should always rise.The merger is the result of a take-it-or-leave-it offer to take over a firm.The focus is that the merger may break down because of asymmetric information.


The Trade Literature

Trade and competition policies in the presence of mergers• Collie (2003, RIE)• Richardson (1999, OEP), Levinsohn (1997)• Ross (1988, IJIO)• Horn and Levinsohn (2001, EJ)

Incentives for mergers• Long and Vousden (1995, RIE)• Horn and Persson (2001, JIE)

Welfare implications of mergers• Head and Ries (1997, CJE)• Horn and Persson (2001)


The Model

In the domestic market, there are n domestic firms, i =1, 2, …, n, and a foreign firm, i = 0.The firms compete in quantity.The demand

• Random variable θ represents market fluctuation, with

mean and variance .

• Coefficient degree of product differentiation.All the domestic firms have complete information about the market demand, but the foreign firm knows only the distribution of θ.All firms have zero costs.

0)( =θE 22 )()( σθθ == EVar

)1,0(∈b

iii bQqap −−−+= θ


Consider a two-stage game:

In the first stage, a domestic firm (F1) and the foreign firm (F0) decide whether to merge.During the transition from stage 1 to stage 2, all domestic firms receive the market demand information, i.e., they know the exact value of θ.In the second stage, all firms compete in the market by choosing quantities, à la Cournot.

If F0 and F1 merge, then in the second stage they share information and coordinate their outputs to maximize their joint profit.


The model structure

Merger?Yes

NoMaximize joint profit

Output coordination

Information sharing

The usual n+1 firm Cournot competition

b=0 b=1??? ???

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Two Effects of the Merger

Output coordination: absent information asymmetry, the two firms will coordinate their outputs after the merger.

Information sharing: if the two firms remain independent after the merger, then the only effect of the merger is that F0 gets to know the market demand.

We are going to study the two effects one at a time.We will show that the information-sharing effect is

always positive.


Mergers Under Symmetric Information

Before the merger the foreign firm also has complete information. Then the only effect of the merger is output coordination.θ is known to all the (n + 1) firms. Before the merger,

and

After the merger,

i = 2, …, n

)2()(*

bnaqi ++

=θ

2

2*

)2()(

bna

i ++

=θπ

)2(2))(2(

210 bbnabqq CC

+++−

==θ 2

010 ))(1( CCC qb+== ππ

)2()(

2bbnaq C

i −++

=θ 2)( C

iCi q=π


Proposition 1:

(1) The merger is profitable iff 0 ≤ b ≤ b0, where

The merger is profitable when both b and n are small: products should be sufficiently differentiated, and competition should be sufficiently weak.

(2) When the merger happens, the two merging firms produce less than before, while the non-merging firms produce more and earn more.

)1 ,0()(0 ∈nb


Merger for Information Sharing

After the merger F1 reveals the information to F0 but the two firms remain independent.

All firms’ outputs are functions of θ except F0’s before the merger. In any case, a firm’s profit is a function of θ.

bnaq

bbnbnaq

bnaq

s

uu

++

=

−++

+=

+=

2

22

2

0

0

θ

θ


Propositions 2 and 3: (three conclusions)

(1) Before information sharing, a domestic firm’s expected profit is higher than the foreign firm’s.

Implication: information is valuable.Intuition: If a firm knows θ, its output will be an increasing function of θ. Because the firm’s profit is , and both pi and qi are increasing in θ, the expected profit is greater than when qi is fixed.

iii qp=π


(2) After information sharing, every domestic firm’s (including F1’s) profit is reduced, while the foreign firm’s profit is increased.

Implication: the foreign firm wants to acquire information, but no domestic firm wants to reveal the information without receiving any compensation.Intuition: The gain from demand fluctuation for an informed firm decreases in the number of informed firms.

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(3) The total profit of F0 and F1 is increased by information sharing.

Implication: merger will happen.


Mergers for Information Sharing and Output Coordination

Proposition 4. The merger is profitable iff

)1 ,()( where 011 bnbbb ∈<

0 bo b1 b

Complete info

Asymmetric info


Welfare Analysis

Proposition 5: The total industrial profit increases, under a reasonable assumption that the market is not too competitive (for example, when n < 20).


Consumer utility and surplus:

Conclusion: consumer surplus is increased if and only if b is small. The critical b depends on n and

∑

∑ ∑∑∑−=

−−+=≠

nii

i ij jii ii i

qpUCS

qqbqqaU

0

2

221)( θ

22 /aσ


Global welfare consists of consumer surplus and all firms’ profits. Since the production costs are zero, the global welfare is simply U.

Conclusion:• Information sharing has a positive effect, and

output coordination has a negative effect.• Net effect: increased if and only if b is small.


Welfare Summary

Mergers

Output-coordination

Information-

sharing

Full-fledged

Industrial profit

Consumer surplus

Global welfare

+

+

+++ for small b

+ for small b

+ for small b

- -

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Policy Implications

When demand uncertainty is large and market

competition intense (both n and are large),

there is a range of b for which the merger improves social welfare but is privately unprofitable.

Implication: international merger should be encouraged.

2

2

aσ


Policy Implications

When demand uncertainty is small and market competition weak, there is a range of b for which the merger is privately profitable, but it hurts social welfare.

Implication: international mergers should be discouraged.


Robustness

Information exchange through markets and contractsUncertainty about the slope of the demand curveNon-linear demandCournot vs. Bertrand competition


Conclusions

Major findings:Demand uncertainty and asymmetric information facilitates horizontal mergers in Cournot competition. So mergers may happen for the purpose of obtaining information.Welfare may improve after the merger even if there is no cost saving. The efficiency gain comes from information transmission.

Cross-Border Strategic Alliances and Foreign Market Entry

Qiu (2007)


The export-vs-FDI literature

This literature• The proximity-concentration tradeoff literature (Markusen,

Brainard, etc)• Helpman, Melitz and Yeaple (AER, 2004)

• Productivity and foreign entry• Nocke and Yeaple (2005)

• Export, green-field FDI and cross-border mergers (FDI)Our paper• Alliances’ effect on the choice of foreign entry mode• Distribution costs affect both export and FDI • Cross-border strategic alliances are not FDI• Oligopolistic competition vs. monopolistic competition

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The cross-border merger literature

This literature• Merger incentives• Merger effects• Trade liberalization on mergers

Our paper• Cross-border alliance incentives• Alliances’ effect on the choice of foreign entry

mode


How to model strategic alliances?

Partial cooperation• the firms coordinate their production levels to lessen

competition, and • share their distribution networks to obtain synergies• However, they choose their international entry modes

independently (Yoshino, 1995)

Examples• Haier-Sampo strategic alliance• adidas-Reebok acquisition


Haier-Sampo

Before 2002, they had not sold their products to each other's markets.

In order to enter the new markets (through exports first), on February 20, 2002, they signed a strategic alliance agreement to market each other's productsin their domestic markets (People's Daily, February 25, 2002).


adidas-Reebok

In 2005, adidas announced its acquisition of Reebok.Mr. Herbert Hainer, the boss of Adidas, expected to cut costs by 125 euro in the next three years by sharing information technology, synergies in sales and distribution, and cheaper sourcing. However, the new combined company will continue to run separate headquarters and sales forces, and keep most distribution centers apart (The Economist, August 6, 2005, p. 50).


Preview of the findings: incentives

A firm has a larger incentive to form a cross-border alliance with some other firms when • the products are more differentiated• the synergies derived from the alliance are stronger, and • it chooses FDI, as opposed to export, as its international

entry mode • cross-border alliances are strategically complementary: a

group of firms have a larger incentive to form an alliance when other rival firms also form their alliances

Supported by stylized facts


Preview of the findings: effects on foreign entry modes

Cross-border strategic alliances are conducive to FDI

The allied firms are more likely to choose FDI than the non-allied firms

The alliance's FDI-inducing effect in return raises the firms' incentives to form cross-border strategic alliances.

Empirical support: MERIT-CATI database

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The result is not trivial

Export FDI

MC MC

Distribution cost

Distributioncost

Export cost Fixed plant setup cost

proximity-concentration comparison

Alliance

Prop 1Cross-border M&A © Larry Qiu 98

The model

Country A Country B

Firm 1

Firm 4Firm 2

Firm 3

Foreign entry

Same tech, Differentiated products


Costs

Fixed plant setup cost: sProduction cost: constant MC=0Export cost: tDistribution cost (Maurin et al, 2002, Chen, 2003, Nocke and Yeaple, 2005)


Demand

Degree of product differentiation


Sequence of moves

At the first stage, the firms make their strategic alliance decisions.

At the second stage, each firm chooses between export and FDI as its international entry mode.

At the final stage, the firms produce and sell their products to both markets. • The firms compete in the Cournot fashion in each

market.


Analysis: Without strategic alliances

Firm 1 compares its profit with FDI ( =0) and profit with export ( =1)

4 remarks

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Lemma 1. A firm's international entry mode depends on its domestic competitor's international entry mode, but not on those of the foreign firms. (see fig next slide)


s


Analysis: With strategic alliances

Country A Country B

Firm 1

Firm 4Firm 2

Firm 31+3 alliance

2+4 alliance


Synergies

According to the OECD Report (2001, p. 50), approximately 27% of cross-border strategic alliances (18,939 in number) in the 1990s were for marketing and distribution purpose


The symmetry case: When all firms form strategic alliances

Lemma 2: (similar to Lemma 1)The equilibrium regions


Entry mode comparison

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Proposition 1.Suppose the market size is large such that (4) is satisfied. In addition, the alliance synergies are sufficiently strong and the products are not very close to homogeneous such that (5) is satisfied. Then, the cross-border strategic alliances induce more FDI.

Intuition: Non-trivial


The asymmetry case: Some firms form a strategic alliance but others don’t

Lemma 3: In the case of one strategic alliance, a firm's international entry mode depends on its domestic competitor's international entry mode, but not on those of the foreign firms. A larger market size and lower (marginal) distribution costs raise the relative attractiveness of FDI for all firms. Stronger alliance synergies raise the relative attractiveness of FDI for the allied firms, but reduce that for the non-allied firms.


Proposition 2.Suppose the market size is large, the alliance synergies are sufficiently strong, and the products are sufficiently differentiated. Then, a cross-border strategic alliance at the first stage makes all firms to adopt FDI under more circumstances than without the alliance. However, the allied firms adopt FDI under even more circumstances than the non-allied firms.


Analysis: Cross-border strategic alliances

Strategic alliance incentives: profit comparisonLow setup cost (FDI):


Lemma 4.Suppose the plant setup costs are low. The firms have incentives to form strategic alliances when b is sufficiently small or is sufficiently large; They have no incentives to form strategic alliances when both b and δ are sufficiently large.


High plant setup cost (export):

Lemma 5: The strategic alliance incentives are lower under export than under FDI.

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Medium plant setup cost (switching):

Lemma 6.Suppose the plant setup costs are at some medium levels. Then, the firms have FDI-inducing alliance incentives.


Complementarities in strategic alliance incentives

Will the 1+3 alliance incentives be higher when the 2+4 alliance is formed than when there is no 2+4 alliance?

Lemma 7. For sufficiently large or sufficiently small setup costs, two firms' strategic alliance incentives are higher when their rivals also engage in a strategic alliance than when their rivals do not engage in a strategic alliance.


The strategic alliance equilibrium

Proposition 3. Given d and δ and suppose the setup costs are either high or low, there exist 0<b₀≤b₁≤1 such that for b≤b₀, the 1+3 and 2+4 strategic alliances are formed, and for b>b₁, no strategic alliance will be formed.

0 b0 b1 1

1+3 & 2+4 NoMultiple

equilibrium


Concluding remarks

Cross-border strategic alliances affect the firms’choice between export and FDI, and vice versa. Marketing and distribution alliances vs. production alliances.Asymmetry in alliance: firm heterogeneity.


Outline



Conclusion

M&As have become very popular business activities, but we do not have very good understanding about the economics of M&As, not to mention cross-border M&As. There exists a large merger literature in the IO field. However,many important issues, such as endogenous mergers, have not been studied thoroughly. Applying the existing theories and research methodologies to cross-border mergers is useful. However, cross-border mergers have their own incentives and implications and therefore furtherresearches on crossborder mergers necessary. This new literature has received more and more attention in academia and policy debate. We expect that the literature will grow very fast in the next decade and how researchers in China can make good contribution to this field, both theory and empirics.

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