RESTRICTEDWORLD TRADE
ORGANIZATIONWT/WGTCP/W/180
28 September 2001
(01-4653)
Working Group on the Interaction
between Trade and Competition Policy
INFORMATION NOTE ON THE IMPACT OF CROSS-BORDER
MERGERS AND ACQUISITIONS ON DOMESTIC COMPANIES,
PARTICULARLY SMALL AND MEDIUM-SIZED ENTERPRISES
Note by the Secretariat
I. INTRODUCTION
1. This note has been prepared by the Secretariat in response to a request made during the
Working Group's meeting of 5-6 July 2001 (WT/WGTCP/M/15, paragraph 105) for an information
note on documentation relating to the impact of mergers and acquisitions on domestic companies,
particularly with respect to the small and medium-sized business sector.  As stipulated in the request,
the coverage of the note is limited to documentation prepared by other intergovernmental
organizations, notwithstanding that there also exists a voluminous academic literature relevant to thissubject.
1  In fact, the document relies primarily on the UNCTAD World Investment Reports (WIR)
for 2000 and 1997.
2. The impact of cross-border mergers and acquisitions (M&As) on "domestic firms" can have
various dimensions.  The most direct impact is on the firm that is acquired or merged with a foreign
entity.  However, as is well-recognized in the available sources, M&As often have spillover effects on
other firms operating in the domestic economy.2  These include both competing firms and the
suppliers and users of the acquired firm.  There may also be even broader spillovers that affect theoverall functioning of host economies, and all particip ating firms.  Notwithstanding that these effects
may be differentiated at a conceptual level, the information that is available does not systematically
reflect this distinction, in many cases.  Rather, it tends to make broad observations relating sometimes
to direct effects on acquired firms and sometimes to industry or economy-wide effects.  Since the
points incorporated in this note are derived directly from the source documents, the same is true forthe points below.  It should also be noted that, for the most part, the available sources do not
distinguish between the impact of M&A activity on small-and-medium-sized enterprises (SMEs) and
their impact on other domestic firms; little information seems to be available on the impact of cross-
border M&As on SMEs per se .
3. The point should also be made that, to a significant extent, the subject of this note overlaps
with work that has been undertaken in the Working Group on the Relationship between Trade and
Investment.  The latter includes more comprehensive surveys of relevant literature, in some cases
prepared with the assistance of academic experts, dealing with issues such as M&A activity and the
balance-of-payments (WT/WGTI/W/103), the effects of foreign direct investment (including M&As)
on development, including technology transfer and spillovers (WT/WGTI/W/65) and general analysis
                                                     
1 See List of References included in World Investment Report (2000), pages 211 - 222.
2 WIR 1997, pp. 227-33.  See also The Effects of Foreign Direct Investment on Development:
Technology and Other Know-how Transfers and Spillovers (WT/WGTI/W/65).WT/WGTCP/W/180
Page 2
of the links between foreign direct investment and development (WT/WGTI/W/38).  To help
minimize duplication with these analyses, this note pays particular attention to aspects of the source
documents that have a competition policy dimension.  Nonetheless, some degree of overlap has been
unavoidable, and readers may wish to refer to the above-referenced notes prepared for the WGTI for
more extensive coverage of literature and particular issues than is provided in this note.
4. As reflected in the points below, the significance of competition and competition policy for
domestic firms affected by cross-border M&As has a number of dimensions.  The first derives from
the fact that an important aspect of the effects of M&As on domestic firms and host economies
consists in their direct effects on market structure and firm behaviour and the role of competition
policy in responding to these effects.  The second is the influence of the degree of competition
prevailing in the markets entered on other aspects of M&A performance.  For example, the degree of
competition prevailing in the relevant markets can have an influence on the extent to which cross-border M&As generate beneficial technology transfers and other positive (or negative) spillovers.
3
The third is the "feedback effect" that technology transfer and other effects of M&A entry have on thestate of competition and dynamics of the market in which domestic firms compete.
II. CONTENTS AND HIGHLIGHTS OF RELEVANT SOURCES
1. UNCTAD, World Investment Report (2000):  Cross-border Mergers and Acquisitions
and Development
5. The WIR (2000) provides a broad survey of issues regarding trends in M&A activity and the
implications of such activity for development.  Trends are assessed at both the global and regional
levels.  Among other issues, the following general characteristics of M&As are discussed:
performance, motivations and outlook, including post-acquisition corporate performance and theimplications of factors such as technologica l change and the evolving policy and regulatory
environment.  In addition, a key feature of the document is an assessment of the comparative
performance of M&As and "greenfield" investment (creation of new production and other facilities)
as modes of FDI entry.  In this regard, the report provides empirical information relating to the
comparative effects and significance of FDI and greenfield investments with respect to:  (i) access toexternal financial sources and implications for capital accumulation; (ii) technology transfer, diffusion
and generation; (iii) their impact on the quantity and quality of employment opportunities and local
skill levels; (iv) export competitiveness and trade, including direct effects on the export
competitiveness of domestic firms and implications for reliance on imports vs. local sources of
supply; and (v) effects on market structure and competition, including anti-competitive practices.
6. A few of the conclusions to emerge from the report which would seem to be particularly
relevant for purposes of this note are as follows:
− Since cross-border M&As transfer ownership of local assets to foreign owners, resources in
the form of cash or disposable shares are pl aced in the hands of the former owners of the
acquired firm.
4  Proceeds from cross-border M&As are fungible and can be invested5 and/or
used for productive or other purposes.6
− Cross-border M&As tend to increase the level of productivity of the acquired firms.  This is
more likely in acquisitions involving developing countries and economies in transition, given
                                                     
3 See The Effects of Foreign Direct Investment on Development:  Technology and Other Know-how
Transfers and Spillovers (WT/WGTI/W/65).
4 WIR 2000, p 164.
5 WIR 2000, p 164.
6 WIR 2000, p 171.WT/WGTCP/W/180
Page 3
the greater technological strengths often possessed by foreign investors.7  In doing so, they
play an important role in restructuring firms and reorienting them so that they are better
equipped to deal with international competition.8
− In addition to their direct effects on the acquired firms, M&As put competitive pressure on
competing domestic firms.  There is evidence that  this leads to an increase in product quality,
variety and innovation in host economies.9
− Cross-border M&As are often followed by sequential investments by the foreign acquirers.
This contributes to progressive capital accumulation in the host country, which can also havespillover benefits.
10
− Cross-border M&As can be followed by transfers of new or better technology to the host
country, especially when the acquired firm is restructured with a view to enhancing efficiencyof its operations.
11  The rate of diffusion of technology from the foreign firm to the acquired
firm can be rapid in cases where good technological capabilities previously existed within the
acquired firm.  The degree to which M&As generate beneficial technology transfers also
depends on the degree of competition in the market, since competition provides a direct
incentive to more aggressively transfer up-to-date technologies and provide related training.12
− Where cross-border M&As are part of consolidation and rationalization efforts, they often
result in employment reduction, at least in the short run.13  In addition, they can be used to
renegotiate work conditions, which may ultimately lead to their downgrading.14  However, to
the extent that they result in higher productivity and beneficial technology transfers and
otherwise revitalize industries, they can increase employment in the long run.  In cases where
the acquired firm would have declined or disappeared entirely in the absence of cross-borderM&As, they can also provide the opportunity to conserve employment for a host economy,
even in the short-run.
15
− The transfer of ownership and control from domestic to foreign hands may lead to a reduction
in certain functional activities, such as R&D.16  While the risk of this occurring is greater in
countries where the state of R&D activity and innovation is lagging behind the rest of the
world, it may also occur in cases where efficient R&D activity is undertaken in the host
country.17
− M&As can reduce competition in domestic markets, potentially leading to market dominance
and giving rise to a range of anti-competitive practices, including predatory practices towards
other domestic firms (competitors of the acquired firm) and collusion.  Dealing effectively
                                                     
7 WIR 2000, p 174.
8 WIR 2000, p 192.
9 WIR 2000, p 193.
10 WIR 2000, p 197.
11 WIR 2000, p 197.
12 WIR 2000, p 175 – 177;  see also The Effects of Foreign Direct Investment on Development:
Technology and Other Know-how Transfers and Spillovers (WT/WGTI/W/65).
13 WIR 2000, pp 180 – 183.
14 WIR 2000, pp 185 – 187.
15 WIR 2000, p 188.
16 WIR 2000, p 159.
17 WIR 2000, pp 179 – 180.WT/WGTCP/W/180
Page 4
with these practices is important to ensure that the potential benefits of M&As are not
undermined.18
2. UNCTAD, World Investment Report (1997):  Cross-border Mergers and Acquisitions
and Development
7. The WIR (1997) provides a wide-ranging survey of the links between foreign direct
investment (including M&As), market structure and competition as well as the policy implications of
these links.  Some elements of this analysis include:  (i) the importance of competition in host
economies for inward investment and firm performance; (ii) specific anti-competitive practices that
are significant in the context of FDI and which may impede its potential benefits; (iii) the implications
of globalization for competition and efficiency in regional markets; and (iv) policy implications of
these developments, at both the national and international level.
8. A few of the conclusions to emerge from the report which would seem to be particularly
relevant for purposes of this note are as follows:
− The opening up of economies to inward FDI, including through M&As, can contribute
directly towards increasing the contestability of host country markets.  In general, this createspositive incentives for firms to improve product quality, productivity and distribution
systems.  Furthermore, multinational enterprises are often better able than domestic firms toovercome some of the cost-related barriers to entry that limit the numbers of firms in an
industry and the market for its products.
19
− The efficiency of foreign affiliates is often higher than that of domestic firms in host
developing countries.  The welfare implications of this in the host economy depend
importantly on the level of competition that is maintained when M&As or other forms of FDItake place.  If competition in the relevant markets is lacking, there will be scope for the
merged entity to engage in anti-competitive prac tices that are harmful to other domestic firms
and potential entrants, undermining the benefits that should potentially ensue from M&As.  In
addition, the benefits to consumers from the entry of more efficient foreign competitors, in
the form of lower prices, improved quality, increased variety, as well as innovation and theintroduction of new products, will be undermined.
20
− Specific anti-competitive practices that can undermine or negate the potential benefits of FDI
liberalization include: collusion among produ cers of the same product; monopolizing mergers
and acquisitions; exclusionary vertical practices; and predatory behaviour.21
− Reflecting the above effects and concerns, the WIR asserts that "There is a direct, necessary
and enlarging relationship between FDI liberalization and the importance of competitionpolicy."
22  In particular, while FDI liberalization enhances market contestability, the benefits
that should flow from this for domestic firms and host economies will be lessened or negated
if anti-competitive practices are allowed to take hold and persist.  The report also notes that,
in a globalizing economy, enhanced cooperation in the field of competition law and policy isdesirable since, increasingly, competition policy cannot be implemented effectively at the
national level alone.
23
                                                     
18 WIR 2000, pp 159, 192.
19 WIR 1997, pp 135 – 149.
20 WIR 1997, pp 150 – 158.
21 WIR 1997, pp 156 – 158.
22 WIR 1997, p xxxi.
23 WIR 1997, pp 156 – 158, 210 – 216.WT/WGTCP/W/180
Page 5
3. UNCTAD, World Investment Report (1999): Foreign Direct Investment and the
Challenge of Development
9. This report describes trends in international production, including the role played by cross-
border M&As.  It discusses challenges associated with such trends and outlines options regardingdomestic and international policies as to how the various positive and negative aspects can be
enhanced or mitigated respectively.
10. A few of the conclusions to emerge from the report which would seem to be particularly
relevant for purposes of this note are as follows:
− Foreign cross-border M&As are often followed by sequential investments by the foreign
acquirers.  This contributes in the long term to capital accumulation in the host country.
24
− Cross-border M&As can be followed by transfers of new or better technology to the host
country, especially when the acquired firm is restructured with a view to enhancing efficiency
of its operations.25
− Cross-border M&As may allow the survival of an incumbent (acquired) firm, particularly in
cases involving privatisation in transition economies and sales of firms in financiallydistressed developing countries.  In such cases, cross-border M&As may be the only way to
save and revitalise otherwise ailing firms.
26
− Where cross-border M&As are part of consolidation and rationalization efforts, they may
result in employment reduction in the short run.  However, to the extent that the firms
involved are made more efficient and competitive, employment may eventually increase.27
− M&As may, in some cases, reduce competition in domestic markets and may ultimately lead
to market dominance,28 particularly in cases where the M&A has been motivated by shrinking
demand and excess capacity in the relevant industry or where competition policy does not
exist or its implementation is weak.29
4. UNCTAD, Concentration of Market Power and its Effects on International Markets,
1993
11. This report deals with the effects of market concentration through M&As and, to a lesser
extent, joint ventures, on developing countries' domestic and export markets.  It assesses current
trends in this respect and considers the beneficial and adverse effects  that may ensue for developing
countries following concentration of market power  through M&As.  In particular, it considers such
effects in relation to M&As among local firms and in cases involving foreign-controlled firms, and
discusses related policy issues.
12. A few of the conclusions to emerge from the report which would seem to be particularly
relevant for purposes of this note are as follows:
                                                     
24 WIR 1999, p 102
25 WIR 1999, p 102.
26 WIR 1999, p 102.
27 WIR 1999, p 103.
28 WIR 1999, p 103
29 WIR 1999, p 103.WT/WGTCP/W/180
Page 6
− An M&A between a locally established firm and a new foreign market entrant is unlikely to
affect market concentration unless the new entity previously produced wholly or partly for thedomestic market or acted as a trading intermediary.  However, the new entry may lead to
future concentration where exposure of the domestic market to the superior competitive
ability of the acquirer leads to replacement of local firms by a more efficient foreign-
controlled entity.
30
− Where financing for an M&A by a foreign firm  comes from its local borrowings, this may
crowd out local companies and thus have an adverse impact upon local capital formation. 31
− Cross-border M&As will usually lead to the transfer of firm-specific assets including
organizational and managerial skills, which may lead to a diffusion of these skills within the
local economy.32
5. Nam-Hoon Kang and Sara Johansson, Cross-border Mergers and Acquisitions: Their
Role in Industrial Globalisation , STI Working Papers 2000/1, OECD, Directorate for
Science, Technology and Industry, 2000
13. This paper discusses changing patterns of industrial globalisation, the driving forces behind
the recent surge of cross-border M&As, and their impact on industry and implications for government
policies.  It includes a discussion of recent trends in cross-border M&As, examines the main featuresof international M&As and identifies the main driving forces of cross-border M&As.  It also considers
the potential impact of cross-border M&As on firm and industry performance and highlights
implications for government policies.
14. A few of the conclusions to emerge from the report which would seem to be particularly
relevant for purposes of this note are as follows:
− Cross-border M&As may entail expansion of the foreign acquirer's business in the host
country in the form of, for example, new investments in plant and equipment. This contributesto capital accumulation in the host country in the long term.
33
− Cross-border M&As undertaken for the purpose of consolidation, rationalization and/or
restructuring often incur layoffs in the short te rm.  However, they may result in employment
gains in the longer term after the acquired firm has been successfully restructured, newproduct or business lines have been developed and, in turn, employment opportunities have
been created.
34
− While cross-border M&As may initially decrease competition or, at best, leave the market
structure unaltered, with the help of financial resources and advanced management know-how
from the foreign acquirer, the acquired firm may be better placed to compete with incumbents
in the host country market.35
                                                     
30 UNCTAD (1993), p 34.
31 UNCTAD (1993), p 35.
32 UNCTAD (1993), p 35.
33 OECD 2000, p 34.
34 OECD 2000, p 34.
35 OECD 2000, p 34.WT/WGTCP/W/180
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− If an M&A increases efficiency and reduces production costs, it may well allow the survival
of an incumbent (acquired) firm that woul d have otherwise failed, thereby preventing a
reduction in the number of firms that would have, in turn, increased market concentration.36
− With regard to the impact of cross-border M&As on the level of competition in the relevant
markets, the documentation states that M&As may reduce competition in domestic markets
and may ultimately lead to market dominance.37
6. OECD, International Mergers and Competition Policy, (Paris) 1988
15. This report provides a summary of the determinants and effects of international mergers,
based on evidence from the 1980s.  It describes the legal framework prevailing in certain countries for
the control of international mergers and refers to instruments of international cooperation.  The report
also discusses certain competition issues that may arise in the context of international merger cases.
16. A few of the conclusions to emerge from the report which would seem to be particularly
relevant for purposes of this note are as follows:
− International M&As may serve as a means of introducing vigorous new competition into the
host country market.  For example, in oligopolistic markets where entry barriers for local
potential competitors are high, foreign enterprises possessing superior technology and
financial strength are often the most significant source of actual and potential competition.38
− On the other hand, M&As may, in some cases, reduce competition in domestic markets and
lead to market dominance, if adequate competition policies are not in place.39
                                                     
36 OECD 2000, p 34.
37 OECD 2000, pp 30, 34.
38 OECD 1988, p 14.
39 OECD 1988, pp 14 – 15.WT/WGTCP/W/180
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BIBLIOGRAPHY
1. Nam-Hoon Kang and Sara Johansson, Cross-border Mergers and Acquisitions: Their Role in
Industrial Globalisation , STI Working Papers 2000/1, OECD, Directorate for Science,
Technology and Industry, 2000
2. International Mergers and Competition Policy , OECD, 1988
3. UNCTAD World Investment Report 2000, Cross Border Mergers and Acquisitions and
Development
4. UNCTAD World Investment Report 1999, Foreign Direct Investment and the Challenge of
Development
5. UNCTAD World Investment Report 1997, Transnational Corporations, Market Structure
and Competition Policy
6. UNCTAD, Concentration of Market Power and its Effects on International Markets, 1993
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