An Empirical Analysis of Factors Affecting Cross-Border Acquisitions1: U.S.- Japan

Introduction One of the prominent aspects of the debate concerning American competitiveness in world markets is the marked increase in cross-border mergers and acquisitions involving American firms. Heigthened awareness occurs when a Japanese company is the acquirer, especially if very large sums are involved. The purpose of this research is to examine these cross-border mergers and acquisitions involving American and Japanese firms, particularly in the last decade. Several factors make the U.S. markets attractive to Japanese investors. For instance, the size of the American economy, the largest in the world, implies vast consumer markets. In a discussion of motives for Japanese foreign direct investment, Chernotsky singles out "the size, importance and accessibility of the U.S. market" as one of the major "pull" factors attracting Japanese investment. (2) Yet size alone cannot explain this extraordinary attraction of U.S. markets for foreign investors. After all, there are other large economies and consumer markets. Fears of a surge in protectionism in the United States has become another common theme in the debate concerning foreign direct investment. The case of the establishment of subsidiaries of major Japanese automobilie manufacturers in the U.S. during the 1980s is a visible example of a strategy designed to fend off protectionist threats. In addition, for foreign investors as a whole, the political stability offered by the U.S. marketplace, evidenced by a generally benign set of rules and regulations concerning foreign businesses, is a factor of attraction which ranks second only to the sheer size of the U.S. economy. The United States has consistently enjoyed a very hospitable climate for foreign investment. Indeed, Yoshida (1987) reports that "to look for the political stability" is one of the main reasons for Japanese manufacturing investment in the United States; not only that, "special tax incentives" and "other state and local government incentives" rank among the most important factors influencing location decisions within the United States. (3) In sum, the attractiveness of the large U.S. markets, the traditionally liberal U.S. business environment and pervasive fears of a rising tide of protectionism have figured predominantly as issues to be carefully considered by current and prospective foreign investors, especially by companies contemplating a merger or acquisition of a U.S. concern. There are, however, other major factors in this complex decision, which have received increased attention. They relate to corporate restructuring, technology transfers, corporate culture, and the investment horizon. (4) This general rationale for the attractiveness of the United States for cross-border mergers and acquisitions by Japanese businesses is only part of the picture. It seems important to identify certain variables that affected the flows of U.S.-Japan acquisitions during the 1980s. Accordingly, in the next section, we discuss macroeconomic variables that may apply to any cross-border activity, but are particularly relevant to the U.S.-Japan case. This is followed, by our empirical analysis which contains our statistical models, a description of the data and our results. Finally, the implications of our results -- that the drive for cross-border acquisitions is explained both by macroeconomic as well as by industry and firmspecific variables -- are summarized in the last section. Cross-Border Mergers and Acquisitions: Developments in the 1980s and their Rationale Since the end of the 1981-1982 recession in the United States, there has been a marked increase in domestic and cross-border merger and acquisition activity. This cross-border acquisition wave receded only with the onset of recession in the U.S. and the U.K. during the late 1980s and early 1990s, the dislocations imposed by the German reunification and more recently with the marked slowdown of the Japanese economy. …