1. Introduction
China’s economy has been globalizing since it entered the World Trade Organization in 2001. Guided by the opening strategy of “go global” pursued by the Chinese government, Chinese companies’ cross-border mergers and acquisitions (CBM&A) entered a period of rapid growth. The financial crisis in 2008 severely impacted economic development and financial systems in both Europe and the United States. Recognizing this precious opportunity, Chinese companies have begun to actively look for investment and acquisition opportunities in overseas markets.
After the 2008 financial crisis, the number and size of Chinese enterprises’ CBM&A increased rapidly. A report released by McKinsey in 2017 shows that Chinese entrepreneurs have completed more than 650 overseas M&A transactions in the past decade [
1]. According to the DealGlobe Hurun China Cross-border M&A Report, only 88 cross-border transactions were announced by Chinese companies in 2007, with a value of USD 23.02 billion. In 2016, China had 438 overseas M&A investment transactions, an increase of more than 20% over the 363 transactions completed in 2015. Cumulative transactions totaled USD 215.794 billion, a significant increase of 147.75% over the 2015 total. In 2017, the scale of CBM&A declined, but the number of transactions is expected to maintain a steady growth trend.
Although a great leap forward in the overseas M&A of Chinese-funded enterprises has been made, their profitability is not satisfactory. The McKinsey report shows that the CBM&A performance of Chinese companies has not been ideal over the past decade. Approximately 60% of the transactions (i.e., nearly 300 transactions), totaling about 300 billion US dollars, did not create real value for the Chinese buyers. Meanwhile, the 2017 Chinese Enterprises Overseas Sustainable Development Report also indicates that among the overseas investment of 506 Chinese companies in the questionnaire survey, although 56% of them are profitable and 13% of them achieved good profitability, 18% of them remain the same, and 26% are experiencing a temporary loss. Hence, given that the CBM&A of most Chinese companies are unsuccessful, it is important to examine the economic benefits and determinants of CBM&A performance. National institutions and culture are important factors in the success or failure of CBM&A [
2,
3,
4], and the One Belt, One Road initiatives (BRI) is gaining increasing worldwide attention. Thus, it is very important to examine the factors that influence the success or failure of CBM&A from the perspective of institutions and culture.
China’s economic growth over the past few decades has been largely driven by exports and investment, both of which have been fostered by the rapid development of manufacturing. Labor and production costs continue to rise, however, and these two economic drivers are gradually losing power [
5]. From 2011 to 2013, China’s Gross Domestic Product (GDP) growth continued to decline, and the nation’s economic development showed an L-shaped growth trend, which appears to have reached a bottleneck. Therefore, it has become a task for the Chinese government to overcome the development bottleneck and solve its development dilemma [
6]. Against this backdrop, in 2013, while visiting countries in Central and Southeast Asia, Chinese President Xi Jinping proposed the “Economic Belt of the Silk Road” and the “21st Century Maritime Silk Road” strategies, which were eventually combined into the BRI, with China serving as its hub [
7].
As the BRI enters a new stage of substantive construction, it impacts the sustainable development of China and other countries along the route. Zhang and Zhang [
8] showed that the BRI policy helped the isolated economies such as Afghanistan and DPRK to be more integrated with other economies. On the other hand, Benintendi et al. [
9] found that China’s BRI policy’s slow and complex globalization process led the country to the world’s first coal production and second oil consumption in 2014, and China’s carbon emissions in 2015 were 1.8 that of the United States. Additionally, Chinese CBM&As are significantly increasing in BRI areas. Before 2013, BRI-related countries were not the main destination for Chinese Outward Foreign Direct Investment (OFDI), accounting for an average of only 10.8% of total Chinese OFDI flow. After 2013, BRI-related countries became a hot destination for investment in construction projects [
10]. The Statistical Bulletin of China’s OFDI states that China’s outward foreign direct investment stock in BRI-related countries was
$92.46 billion and accounted for 10.5% of China’s OFDI flow in 2014. In 2018, the amount of China’s OFDI reached a record high of
$17.89 billion and accounted for 12.5% of all newly signed foreign construction projects.
Data provided by the DealGlobe Hurun China Cross-border M&A Report show that CBM&As have not only entered the United States, Europe, and other developed countries but have also flowed to developing economies. Given this diversity of investment objects, Chinese companies pursuing overseas M&A not only face the challenges of institutional differences such as between legal norms and judicial systems but are also subject to the influence of cultural factors. The cultural problem is particularly prominent for BRI, as this project covers Central Asia, Southeast Asia, the Middle East, Europe, and East Africa, involving diverse cultures [
3]. Due to a large number of countries along the route, China also faces political and security risks in advancing the construction of the BRI [
11].
At the micro-level, differences in culture and institutions will lead to difficulties in cross-cultural management in companies’ transnational operations, and will also affect the acceptance of target companies, which can hinder the smooth implementation of the go-global strategy. The Confucius Institutes project, an important global strategy of the Chinese government, has become an important engine for promoting Chinese OFDI by providing training in Chinese culture and language and by sharing information [
12]. To deepen the go-global strategy, the BRI, which differs from the traditional regional cooperation system, can help remove the technical and implementation obstacles in international trade issues and reduce transaction costs [
13]. It has received a positive response from countries and regions along the route and has created the conditions required for Chinese enterprises to truly go global. Therefore, through empirical research on Chinese listed companies that implemented CBM&A from 2010 to 2015, this study examines the performance of Chinese companies’ CBM&A and analyzes their impact on corporate performance from both institutional and cultural perspectives. This study highlights the role of Confucius Institutes and the BRI in offsetting the costs and problems induced by the institutional/cultural distance between home and host countries concerning CBM&A, thus contributing to cross-cultural research in the international investment context. The results of this study provide new insights into the impact of cultural and institutional factors on CBM&A and offer decision-making guidance on the implementation of the go-global strategy.
This study provides some of the first large-scale evidence that national cultural convergence policies have substantial impacts on CBM&A performance. Specifically, we find the following. First, we find that greater cultural and institutional distance between merging firms exerts a negative impact on long-term acquirer returns, which suggests that cultural and institutional differences could make post-merger coordination more difficult and the realization of synergies less likely. By contrast, national cultural convergence policies such as the cultural export of Chinese Confucius Institutes and BRI have a significant and positive influence on the value creation of acquirers over the long term. We conduct a more thorough exploration of the proposed relationship by considering the moderating effect of Confucius Institutes and BRI on the negative effect of cultural and institutional distance. Multiple regression models using the joint variables show that cultural convergence policies mitigate the negative effects of merger outcomes due to cultural differences. Confucius Institutes and BRI can overcome potential cultural barriers to CBM&A by improving international friendship and cooperation and reducing communication costs. Moreover, the optimal complementary effect of BRI is reflected mainly in the institutional distance, whereas the interaction between cultural distance and BRI is not significant. We conclude that the BRI remains focused on intergovernmental cooperation and exchange and lacks non-governmental cultural exchange and communication. In subsequent robustness analyses, we show that our results are robust to alternative definitions of cultural distance.
This study provides three important contributions to the literature. First, it extends the literature on the effects of cultural and institutional distance on acquirer returns. Most studies on the effect of institutional factors on CBM&A outcomes have focused on the institutional and cultural distance between the home and target countries from a static perspective. Few studies have analyzed the determinants of CBM&A from the dynamic perspective of institutional and cultural differences, and even fewer have analyzed the complementary effects of Confucius Institutes or the BRI in terms of institutional and cultural distance. Our results demonstrate that Confucius Institutes can reduce the negative effects on China’s CBM&A due to cultural and institutional distance. We also find that the BRI can provide extra protection against the risk of institutional distance and create an institutional environment conducive to Chinese CBM&A.
Second, this study enriches the research on the cultural exports of Confucius Institutes. Most studies have focused on the effect of Confucius Institutes at the national macro level, such as on higher education, tourism, and FDI. The impact of Confucius Institutes on the performance of CBM&As has not received extensive attention. As a vehicle for language promotion, cultural exchange, and diplomacy, Confucius Institutes are examined in this study to investigate their influence on CBM&A value creation. Thus, this study supplements the cross-border acquisition literature by exploring China’s cultural exports.
Third, the existing studies on the BRI focus on discussing the economic, trade, and investment benefits from the perspective of countries and regions, while its impact of the BRI on enterprises has rarely been examined [
14]. This study enriches our knowledge of how BRI affects Chinese CBM&A by combining cultural and institutional factors and identifying the complementary effects of BRI and institutional distance. We provide effective policy recommendations on how to promote regional investment cooperation along the BRI route as well as regional economic integration and sustainable development.
The rest of this study is organized as follows.
Section 2 reviews the relevant literature.
Section 3 develops the study’s hypotheses.
Section 4 discusses the study’s data and methodology.
Section 5 presents the results and discusses the factors influencing acquirer returns. The final section provides a summary of the conclusion and discusses the implications of the study.
6. Conclusions
This study investigates the role of national cultural policies such as Confucius Institutes and BRI on the values of cross-border merger activity using a sample of 192 acquisitions conducted from 2011 to 2015 by Chinese listed firms. The results indicate the following.
We find that institutional distance and cultural distance exert a significantly negative impact on post-acquisition returns. This indicates that, before engaging in a merger, Chinese enterprises need to fully understand the institutional environment of the target country and the cultural differences between the two countries. Furthermore, entrepreneurs should think about how these factors affect the risks to CBM&A performance.
We also find that the cultural export activities of Confucius Institutes have a positive effect on post-acquisition returns. A multivariable regression with joint variables shows that the interaction between cultural distance and institutional distance and Confucius Institutes have significant and positive impacts on firm value, confirming that the cultural output of Confucius Institutes can reduce the negative impact of cultural distance and institutional distance on CBM&A performance. Confucius Institutes can also provide protection in the target country and reduce potential institutional risk and enhance cultural exchanges, allowing them to promote Chinese CBM&A.
The BRI is a national strategy for promoting international economic integration implemented via a state capitalist model under an authoritarian regime [
25]. Our study finds that the interaction between BRI and institutional distance has a significant and positive impact on post-acquisition returns. Regarding the interaction between cultural distance and BRI, the coefficient is positive but not statistically significant, indicating that BRI focuses on intergovernmental cooperation and exchanges; thus, non-governmental cultural exchanges and communication need to be strengthened.
From these results, some rational recommendations can be given. First, our results show that BRI can effectively improve the performance of CBM&A. The Chinese government should thus continue to strengthen the depth and breadth of exchanges and cooperation with BRI-related countries to provide long-term policy support and system guarantees for Chinese enterprises’ international investments in BRI countries. Chinese enterprises, especially large traditional enterprises with development bottlenecks, should implement the go-global strategy, not only to improve domestic demand levels, thus improving the company’s investment and business environment, but also to help them integrate foreign resources.
Second, the results also show that the BRI positively moderates the relationship between institutional distance and long-term value creation, whereas the coefficient of interaction between BRI and cultural distance is positive but not statistically significant. This may be because cultures are extremely slow-changing objects, the BRI began in 2013 and is in the early stage of implementation. The Chinese government should therefore actively explore the communication mode of international friendship cities, expand the fields of exchange, and engage in more forms of interaction so as to deepen mutual understanding and friendship between nations. The Ministry of Culture could also use Confucius Institutes as a channel through which to cultivate a group of cultural emissaries with international communication ability and social influence who could frequently communicate with BRI-related countries in academic exchanges and cultural research, which could help promote the effectiveness of overseas investments. In terms of project investment and construction, Chinese enterprises should strive to bring long-term benefits to local people in order to ensure that the BRI will take root among them and to enhance their trust in and openness to the project.
Third, entrepreneurs should focus on the cultural and institutional aspects of CBM&A, rather than focusing only on capital. Before initiating CBM&A, companies should strengthen exchanges of personnel, and use third-party platforms such as the Confucius Institute to gain an in-depth understanding of the target company’s corporate culture and institutional environment, and then formulate an effective risk plan accordingly. During the CBM&A, enterprises should send employees who are familiar with the system and culture of the target company to communicate with each other in order to reduce the failures and losses caused by institutional and cultural distance and accelerate the integration of the firms’ cultures, managements, and businesses.
This study also has several limitations that could drive future research. First, we use national-level data to investigate how Confucius Institutes and the BRI in host countries affect the performance of Chinese M&A from a macro perspective, ignoring the effects of firm-level characteristics (e.g., ownership, industry). Future studies could divide enterprises into sub-samples according to firm characteristics and conduct a comparative analysis of CBM&A in BRI-related countries. Second, many giant Chinese companies, such as Alibaba, Tencent, and JD.com, have acquired foreign technologies and assets, but these were not studied in detail [
68]. Future research could include these Chinese enterprises’ CBM&A in the analysis to produce more convincing results. Third, we use the methods developed by Kogut and Singh [
41], which is widely used by scholars, to measure the cultural distance and institutional distance. This approach used the variance of the scores along the dimension to weight the squared deviation, but ignores the role of covariances between the cultural dimensions. Besides, Shenkar [
69,
70] suggested that the Kogut and Singh [
41] index can be supplemented by Long Term Orientation especially where East-Asian countries are involved. Further research could improve the measurement methods of cultural distance and institutional distance.