Academic journal article Management International Review

What Drives Overseas Acquisitions by Indian Firms? A Behavioral Risk-Taking Perspective

Academic journal article Management International Review

What Drives Overseas Acquisitions by Indian Firms? A Behavioral Risk-Taking Perspective

Article excerpt

Abstract Overseas acquisitions as a mode of international expansion entail a high level of risk, especially for firms from emerging economies which face considerable liabilities of foreignness and newness in international markets. Building on the behavioral risk-taking perspective, we examine the role of ownership characteristics on the propensity of Indian firms to make foreign acquisitions. Empirical results from a sample of BSE 500 Indian firms during the 2002-2011 period show that after controlling for firm level resources and capabilities identified in the prior literature, international experience of firm CEOs, promoter shareholding, and ownership share of foreign institutional investors positively influence firms' acquisition propensities in foreign markets. Furthermore, our results show that the effects of these determinants on overseas acquisitions are stronger for stand-alone independent firms than for those affiliated to business groups.

Keywords International acquisitions * Risk-taking propensity * Business groups * Ownership * India * Emerging economy multinationals

1 Introduction

The past decade has marked a rapid increase in overseas expansion of Indian firms across various industries and countries, with acquisitions as a primary mode of expansion (Gubbi et al. 2010; Nayyar 2008; The Economist 2012). Acquisitions by Indian firms of well-known and branded companies in advanced economies form a part of an overall trend of the emergence of a number of firms from developing countries as important players in global markets (BCG 2009; Guillen and Garcia-Canal 2009). (1) The rapid internationalization of these firms (also referred to as emerging multinational enterprises or EMNEs) is intriguing because these firms are beset by many disadvantages that hinder their international expansion (Aulakh 2007; Gaur et al. 2014; Guillen and Garcia-Canal 2009; Khanna and Palepu 2006). EMNEs have to not only deal with the liability of foreignness faced by internationalizing firms (Zaheer 1995), but also overcome the late mover disadvantages (Guillen and Garcia-Canal 2009) by competing with established multinational firms from the most advanced economies that are endowed with superior resources and capabilities (Guillen 2002). In addition, EMNEs hail from economies with underdeveloped institutional environments, due to which their costs of accessing resources and doing business in general are higher (Khanna and Palepu 1997). There has been, therefore, an increasing interest among scholars (Aulakh 2007; Guillen and Garcia-Canal 2009; Khanna and Palepu 2006; Luo and Tung 2007; Ray and Gubbi 2009) as well as practitioners (BCG 2009; Business Week 2006; OECD 2006; The Economist 2008), to explore and understand the unique internationalization behaviors of these emerging multinationals (EMNEs).

Past research on acquisitions, both domestic and cross-border, as well as internationalization behavior of firms shows that this mode of international expansion entails numerous risks (Barkema et al. 1996; Reuer et al. 2004). Thus natural questions arise as to why emerging economy firms, which are relatively in the early stages of internationalization and face liabilities of newness and foreignness in international markets, undertake risky foreign expansion paths through overseas acquisitions. Anchoring our research in behavioral risk taking theory (Carpenter et al. 2003; Coles et al. 2006; Pablo et al. 1996; Sanders and Hambrick 2007; Sitkin and Pablo 1992), we identify a set of drivers or determinants of overseas acquisitions of Indian firms and test our predictions using a longitudinal dataset of overseas acquisitions of publicly listed Indian firms during the 10-year period from 2002 to 2011. Specifically, we argue that international experience of a firm's Chief Executive Office (CEO), ownership concentration, and extent of investments by foreign institutional investors influence risk-taking behavior by key decision-makers which in turn increase firms' propensity to engage in cross-border acquisitions. …

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