Chinese Firms' Overseas M&A and Innovation
Activities: Empirical Analysis Using Patent Data (*)
Research Fellow: YUAN, Yuan (**)
In this research, by using a patent database we conducted an empirical analysis to focus on
inventors who transferred to Haier, and the change of transferred inventors’ performance. From
the results of this study, it was found that rather than young inventors who are active in the frontline, veteran researchers transferred to Haier. Furthermore, we also found that the inventors’
performance tends to decrease after transfer to Haier. Based on these empirical results, wereveal that Haier are mainly to acquire experienced veteran inventors to teach abundant
experience rather than let them to do active innovation activities.

I. Introduction
Until now, prior studies on foreign M&A conducted by China can be categorized into studies on
reasons and background for M&A, and research on effects after M&A. Regarding the reasons andbackgrounds, studies are mainly conducted from the aspects of market elements and corporate
elements, while the effects are mainly related to the effects of Chinese companies on their own
business performance, and to their target company. This study focuses on the impact on the
researchers of target companies.
Recently, M&A cases of Japanese enterprises by Chinese and Taiwanese companies are rapidly
increasing, and attention is being paid to the acquisition of Sharp by Foxconn, the acquisition of
Toshiba’s Home Appliances Business by Midea Group, and the transfer of Fujitsu’s PC businessunder Lenvo as major topics. As a background to this, the entire electronics industry is facing adecline in profitability, and Japanese major electronics companies, which have been leadingindustries to date, have been forced to select and concentrate their business.
On the other hand, when these companies sell a business, especially when the acquisition company
is a Chinese company, there are concerns about technology leakage, the impact of Japanese
researchers’ activities, etc. There are company-level analysis and researcher-level analysis on theinfluence of Chinese companies' M&A on target companies. In this study, we will analyze at theinventor-level using the case of Sanyo Electric’s acquisition by Haier. Specifically, we analyzechanges in research results using data on patent applications of Japanese inventors before and after
M&A. Large-scale M&A deals with Japanese companies by Chinese or Taiwanese companies in the(*) This is a summary of the report published under the 2016FY Industrial Property Research Promotion Project entrusted by theJapan Patent Office.

ielectronics industry are increasing. Concerning Sharp’s acquisition by Foxconn, which is becoming
a hot topic, it is too early in terms of data to conduct analysis on the influence after the M&A. Hence,
we study the case of Haier's acquisition of Sanyo Electric, because the amount of money is muchlarger among the acquisition of Japanese companies by Chinese companies, a certain number ofyears have elapsed since the acquisition, and there is useable data.
In recent years, the number of foreign M&As by Chinese enterprises has been rapidly increasing.
Figure 1 which is limited to listed companies, shows that the number of M&As is increasing.
Especially since 2006, it is increasing rapidly.
Figure 2 shows the change in the target industry of Chinese companies' external M&A. The upper
pie chart is the average of 2005-2010, and the lower pie chart is the one-year data of 2015.3-2016.4.
In the graph of 2005-2010, the energy accounts for 53%, but in the graph of 2015.3-2016.4, theenergy has been reduced to 10%. On the other hand, the share of industry has increased from 26%
to 52%, and for TMT it has increased rapidly from 1% to 19%. These changes indicate that M&A tocompanies with a high technology level is increasing.
Next, we will look at the status of application for inventions of Chinese companies that did overseas
M&A in 1998-2016. As shown in Figure ?, the number of enterprises with applications is 54%, which
is more than half of the total, but when looking at the total of Chinese industrial companies (Chart ?),companies with applications are less than 1%. Therefore, it can be said that companies conducting
overseas M&A are aggressive companies in innovative activities such as inventions.
Thus, we can summarize the trend of foreign M&A of Chinese enterprises into 3 points. First, thenumber of Chinese M&A transactions by Chinese companies is increasing. Second, in recent years,
the target industry of M&A of Chinese enterprises has been centered on industrial enterprises and the
IT communication industry. Third, innovative companies are mainly engaged in external M&A.
On the other hand, it is also true that Japanese companies have a strong sense of resistance to M&A
by Chinese companies, due to concerns of technology and researchers' leakage. For Japanesecompanies, M&A by Chinese companies has positive aspects such as easier access to the Chinese
market and diversification of funds, while they cannot wipe out any negative concerns such as leakageof technology and brands as a source of competitiveness. Therefore, it is a very important to analyze
what the effects on the Japanese researchers are if their companies are acquired by Chinese companies.
In this research, we will analyze the case of Sanyo Electric’s acquisition by Haier in 2012.

II. Previous Studies and Hypothesis
1．Previous studiesii

Access to external knowledge and technology has become one important objective of M&A, butthere are some studies that show negative effects of M&A. For example, more than 60% of M&A
projects fail (Market and Mirvis, 2001), and acquisition of technology brings lots of losses to theacquiring side (Betrand and Zitouna 2008, Moeller and Schlingemann 2005).
Ornaghi (2009) analyzed 27 M&As of pharmaceutical manufacturers between 1988 and 2004
using the PSM method. It was confirmed that in terms of the number of registered US patents andthe number of important patents with many citations, the M&A companies were lower thancompanies without implementing M&A. Joel Stiebale (2012, 2014) analyzed European companies'
cross-border M&A and innovation activities, and they show that M&As have a positive effect on
patent applications in the country where the acquiring company is located, and a negative effect on
patent applications in the country where the acquired company is located.
There are many studies that analyze the effect of M&A from the perspective of characteristics ofcompanies. Yamanouchi and Nagaoka (2010) conducted an empirical analysis on M&As of Japanesefirms in 1984-2002 and found that after M&As the number of patent applications decreased. In
addition, Yamauchi and Nagaoka (2010) showed that most of the reduction effect was due to a
decline in market share and a decrease in business assets. Cassiman et al. (2005) pointed out that
M&As between companies with complementary relationships in the technology sector will promote
R&D, but that would have been less effective if they were competitors.
Empirical studies on the leakage of technology by Japanese inventors are also a hot topic. Ingram(2000) points out that transferring technology by M&A mainly goes through researchers. Also,
Alnuaimi et al. (2012) and Hoisl (2007) show that acquisition of human capital is very important fortechnology transfer of M&A.
In recent years, there are also many studies on overseas M&A of Chinese companies. These studies
show that overseas M&A by Chinese enterprises has acquired brand, technology and management
know-how, and unlike developed countries, has unique characteristics. Specifically, these priorstudies can be divided into four main types. Here we make a brief summary of previous studies fromthe following five aspects.
First, there is a study on the purpose of Chinese M&A by Chinese companies and whether theyacquired strategic assets. Some studies show that the acquisition of strategic assets such as market
expansion and technical know-how are the purposes of Chinese M&A by using cases and aggregateddata (Boateng et al. 2008; Deng 2009; Sun et al. 2012). Indeed, acquisition of strategic assets is also
too difficult for industrialized countries. So, it is considered to be very difficult for Chinesecompanies because they have relatively little experience. Ramasamy et al. (2010) and Ramasamy etal. (2012) found that Chinese companies gained strategic assets by overseas M&A such as resourcesiii

and markets. On the other hand, Rugman and Li (2007) point out that absorption capacity isnecessary to obtain strategic assets.
Second, there are some studies that focus on whether Chinese enterprises can absorb the obtained
strategic assets or realize win-win relationships with overseas enterprises. By using event study,
Anderson et al. (2016) show that the innovation performance of Chinese companies is improved
after the M&A, but the acquired foreign companies' innovation performance did not change. Wu andSu (2014) analyzed Chinese companies' overseas M&A using seven cases, and they suggest that
Chinese companies realized technology catch-up by overseas M&As. There are also studies thatpoint out that it also affects the innovation activities and performance of companies acquired indeveloped countries. Buckley et al. (2014) pointed out that companies in developed countries thatare acquired by Chinese companies, can access the Chinese market and the obtained profits can beturned into innovation activities of companies acquired in developed countries. In other words, it isconceivable that the acquired companies in developed countries are utilizing the superiority of theChinese companies' market, etc.
Third, there is a study that pointed out that overseas M&As by Chinese companies have uniquecharacteristics. It has been shown that it is difficult for Chinese companies to utilize innovation assetsof acquired companies after acquisition, due to the large technical gap. Recent studies show that
Chinese companies have recognized weaknesses such as technology gaps with acquired companies
in developed countries, and give autonomy to acquired companies after acquisition. So, Chinesecompanies try to minimize acquired companies’ confusion (Estrin and Meyer 2011, Liu andWoywode 2013). For example, most Chinese companies will retain the manager of the acquiredcompany, and give autonomy to their management. Chinese companies are inactively involved inbusiness management of acquired companies. It is greatly different from acquiring companies fromdeveloped countries. Schuler-Zhou and Schuller (2013) point out that the role of autonomy has
recently been great for knowledge transfer from acquired companies to acquired companies in China.
Fourth, there are some studies focusing on the role of the Chinese government and differences
between state-owned enterprises and private enterprises. Most of them analyze how state-owned
ownership and the involvement of government effect companies’ overseas M&A. Xu and Meyer(2012), Cui and Jiang (2012), show that relative to private enterprises, the Chinese government ismore willing to safeguard the interests of state-owned enterprises. At the same time, the Chinese
government has a great influence on the strategic decisions of state-owned enterprises. In addition,
Li et al (2014), Wang et al. (2012) point out that the Chinese government uses a large amount of
resources to support state-owned companies from various aspects (capital raising and rationalizationof administrative procedures).

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Fifth, increasing the domestic market share is also the main reason for Chinese companies’
overseas M&A. According to a report of the World Bank, the most important reason for thegovernment to support foreign direct investment by Chinese companies is to raise their productivity.
Chinese companies aim to raise the competitiveness in the domestic market rather than to enhance
the competitiveness in the international market. Companies in developed countries are concerned
about losing intellectual property and they are reluctant to introduce advanced technologies andproducts into emerging markets. Therefore, companies in developing countries have to go abroad
and acquire such technologies and assets in foreign markets. Maintenance and acquisition ofdomestic markets is a major factor of M&A by companies from developing countries like China.
Chinese companies acquire technologies in developed countries and use them in the domestic market.
Ramamurti (2012) points out that Chinese companies have no interests in competition in international
markets and cutting-edge technology development.
2. Hypothesis
As explained in the previous section, M&A of Japanese companies by Chinese companies has been
rapidly increasing since the 2000s, and it is considered that the main purpose of such M&A is toexpand overseas markets and to develop strategic assets such as technology and know-how.
Meanwhile, with regard to the acquisition of Japanese companies by Chinese companies and otheroverseas companies, there is a concern of technology leakage by the movement of Japanese inventors
and engineers. In addition, more than half of the foreign direct investment in the manufacturingindustry is attributed to state-owned companies, and the influence of the Chinese government is
considered to be significant. Therefore, it is very important to analyze how M&A by Chinese
enterprises affects Japanese companies' inventors.
As mention earlier, prior studies indicate the purpose of foreign overseas M&A by Chinesecompanies is acquiring strategic assets, especially for know-how and technology. Based on theseearlier studies, we made the following two hypotheses to investigate in this study.
Hypothesis IA: Chinese companies have acquired veteran inventors from Japanese companies
by M&A.
Hypothesis IB: Chinese companies have acquired inventors who have many researchachievements from Japanese companies by M&A.
It is pointed out by Cohen and Levinthal (1990) that the effective utilization of strategic assets
and the transfer of technology depend on the capabilities of the acquired company's innovation. Forv

this reason, it is generally considered that it is difficult for Chinese companies with inferiorinnovation ability to make effective use of strategic assets. However, recent studies (Tan andMathews, 2014) on overseas M&A by Chinese companies have shown that knowledge transfer isgoing smoothly, technology catch-up has been realized, and Chinese companies have the ability tointegrate with the acquired company. In a word, these studies suggest that Chinese companies makeeffective use of strategic assets. Also, acquired companies in developed countries have easier toaccess the huge Chinese market, and they can reinvests earned profits into innovative activities, so
it is considered that the achievements of inventors may increase. In a word, there may be a positive
influence on the innovation activities of inventors from acquired companies. Therefore, based onthese earlier studies, we will set up another hypothesis to investigate in this study.
Hypothesis II: After the acquisition, the achievement of inventors of Japanese companies tends
to increase.
As mentioned earlier, previous studies show that overseas M&As of Chinese companies are aimed
at acquiring strategic assets and they make effective use of the foreign acquired companies. In
addition, studies also show that innovation of acquired companies has become more active. However,accumulation of prior studies is not enough in terms of the effect on Japanese companies, especiallythe effect on the innovative activities of Japanese inventors. In this study, we will analyze what kindof Japanese inventors were acquired by Chinese companies, and the change of the innovative
achievement of the Japanese inventors by using inventor level data.

III. Data
We will quickly look at the history of Sanyo Electric’s acquisition by Haier. Sanyo celebrated its
50th anniversary in 2000, and in 2002, two years later, Sanyo had a comprehensive alliance with
Haier in a wide range of fields. Thereafter, due to the management crisis, in December 2008, theacquisition by Panasonic began, and in March 2011 Panasonic held all shares of Sanyo and it was
delisted. In 2010, Sanyo Electric became a wholly owned subsidiary of Panasonic and transferred
the semiconductor division to On Semiconductor that is the US company. Subsequently, as part ofPanasonic's business reorganization in 2012, Panasonic transferred the white goods business such as
Sanyo's refrigerator and washing machine businesses to Haier. This study will focus on theacquisition of Sanyo Electric’s white goods division by Haier, that is, the acquisition of therefrigerator washing machine division. In order to highlight its features, as a comparison, we alsovianalyzed the acquisition by On Semiconductor Co., Ltd. Details of ON Semiconductor are describedin the Appendix.
This research uses the IIP patent database (up to FY 2013) provided by the Intellectual Property
Research and Education Foundation. First, we extract the name of the inventor who filed at Sanyo
Electric from the IIP patent database. Then, using the extracted inventor's name, we picked up all patentapplications of these inventors from the IIP patent database. Utilizing the change of the applicant that
we picked up, we confirmed the inventor's transfer situation. The achievement greatly depends on thetechnology field. Therefore, for example, inventor's achievements with regard to refrigerators cannot
be compared in the same framework as the achievements of inventors in the battery field. Thus, in thisstudy, we limited the sample to the inventors of the refrigerator or washing machine sector.

Ⅳ. Empirical Model
1. What kind of inventor will transfer to Haier?
First, we analyze what kind of Sanyo researchers moved to Haier by using the logit model. The
dependent variable is a dummy variable of whether or not the researcher was transferred to Haier.
The main explanatory variables are the invention age, the number of patent applications in theprevious year, the average number of claims in the previous year, the average percentage in theprevious year's other fields and the average number of citations in the previous year.
The actual age data of the researchers does not exist. Instead of using the age, we use the invention
age. The age of invention is the first patent application year since the year of patent application. In
this paper, it shows the age as inventor.
As indicators for measuring the performance of researchers, four indicators are used: number ofpatent applications, average number of claims, percentage of other field citations, and average citednumber. The number of patent applications is the number of patent applications per person per year.
The average number of claims is the number of average claims per person per year. Average otherfield quotation percentage is the number of cited documents with different IPC codes among cited
documents. The average cited number is the cited number of the patent applied for.
The control variable is a technical field dummy of the researcher and an annual dummy. In addition,
due to the robustness of the results, we analyzed using the average of the above three major variables
over the previous 3 years.
2. How did the transfer influence inventor's performance?

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(1) Regression Analysis
Next, we analyze the effect of transfer to Haier on the performance of inventors. The dependent
variables are the number of applications, the average number of claims, and the average quotation
ratio of other fields. The explanatory variable is a dummy variable as to whether or not the person
moved to Haier. To compare the effect of transfer to Haier, dummy variables of transfer to othercompanies in Japan were also added to the estimation. Control variables are invention age,researcher's skill and annual dummy. In this analysis, the variables that I want to pay attention tomost are the dummy variable of transfer to Haier and dummy variable transfer to other companies
in Japan.
(2) Propensity score matching
In addition to the method of regression analysis, the PSM method (propensity score matching) isalso used in this research to make the analysis results robust.
Since transfer to Haier is not chosen in a random manner (for example, inventors with better
performance are likely to transfer to Haier), selection bias will occur when we estimate the effect oftransfer to Haier on the innovation activities. Therefore, it is necessary to use a propensity scorematching method (propensity score matching).
In this study, first we estimate the probability of transfer to Haier, and then analyze the averagetreatment effect of the transfer to Haier by Kernel matching.

Ⅴ. Empirical Results
From Figure?, we found that the invention age of inventors transferred to Haier is higher than otherinventors. Before transfer to Haier, the number of patent applications is a bit larger than inventors
who transferred to Panasonic or other Japanese companies. Meanwhile, in terms of the number ofclaims, the percentage of other citations quoted and the number of citations, inventors whotransferred to Haier are lower than the inventor who transferred to Panasonic and other companies
in Japan.
Figure? shows that the inventors who transferred to Haier tend to decrease the number of patentapplications after transfer, but the average number of claims and the proportion of citations in otherfields increase slightly.
Next, Figure? shows the results of logit analysis on which factors affect the change of the affiliation.
Regarding the invention age, there is a significant positive effect in the transfer to Haier. Regardingviii

the number of applications, although it is not significant for the change to Haier, there is a negative
effect. The average number of citations and average number of claims are significantly negative. Tosummarize the above analysis results, it can be seen that inventors with low average citations,average number of claims and inventors with higher age of invention tend to transfer to Haier.
Because of robustness, we also use the average values of key explanatory variables over the past
three years to analyze. The results are similar to the above results, showing that inventors with alower average number of citations and inventors with a higher age tend to move to Haier. In otherwords, it turned out that veteran inventors tended to transfer to Haier rather than those who invented
abundantly.
Next, Figure? shows the analysis result for the effect of transfer on the inventors’ achievement.
Here, the number of applications, the number of claims, and the quotation ratio of other fields areused as indices of invention achievement. Regarding transfer to other companies in Japan, thenumber of applications and the number of claims increased significantly, but the transfer to Haierwas not significant, and the results tended to decline. In order to make this result robust, we analyzed
FE and RE besides OLS, and we got similar results.
In order to obtain robust results, we also analyzed the effect of transfer to Haier on the inventors’
performance by using PSM, and the results are shown in Figure?. Regarding transfer to Haier, there
is significant negative effect on the number of applications and the average number of claims.
Indeed, it is necessary to see the long-term effect of transfer. In other words, it is better to analyzechanges in the number of applications in the 3rd and 4th periods after transfer, but due to data
constraints, this study could only analyze up to the second year after transfer. However, from theresults of the above analysis, it shows that at least in the short term, the Japanese inventor'sachievements declined after transfer.
Here, we summarize the results of empirical analysis so far. First of all, as to what kind of inventor
transferred to Haier, it was found that inventors’ achievements in the previous term were not so
excellent and inventors with a high age of invention tended to transfer to Haier. In other words, rather
than inventors who are active in the front line, veteran inventors separated from the front linetransferred to Haier. This result supports the hypothesis Ia.
Next, we analyzed whether the transfer to Haier affected the inventor's research achievements.
There was negative effect on inventors in the transfer to Haier in terms of the number of applications
and the number of claims. These results are in agreement with the analysis results of regression
analysis and the PSM method. Therefore, the second hypothesis is not supported.

VI. Conclusionix

Recently, overseas M&A by Chinese companies aiming to acquire strategic assets such as knowhow and technology are becoming active. Regarding the influence of M&A on employees ofJapanese companies, studies at the company level have been mainly conducted so far, but analysis
at the employee level is very small. In addition, until now very few studies have focused on theimpacts of M&A on the performance of Japanese inventors, especially the impact of M&A by
Chinese companies.
In this research, by using a patent database we conducted an empirical analysis to focus on
inventors who transferred to Haier, and the change of transferred inventors’ performance. From theresults of this study, it was found that rather than young inventors who are active in the front line,
veteran researchers transferred to Haier. Furthermore, we also found that the inventors’ performancetended to decrease after transfer to Haier. Based on these empirical results, we reveal that Haier are
mainly to acquire experienced veteran inventors to teach abundant experience rather than let themto do active innovation activities
Furthermore, the common point between Japanese inventors who moved to Haier and inventors
who transferred to US company On-Semiconductor at the same time is that it is difficult to acquire
inventors with excellent achievement results, and achievements of transferred inventors declined.
This result is consistent with "destruction of trust" proposed by Shleifer and Summers (1988). On
the other hand, regarding the differences, inventors who transferred to Haier are relatively
experienced veteran inventors, and inventors who transferred to ON-Semiconductor are relatively
young inventors.
Today, the electronics industry in Japan is facing a decline in profits, and Japanese major electronic
companies that have been leading the industries so far are also being forced to select and concentrate
their business. On the other hand, when these companies sell the business, especially when theacquisition company is a company from an emerging country, concern is raised on technical outflow,
the impacts on research activities of Japanese researchers, etc. This study shows that the aim ofChinese consumer electronics companies is for rapid catch-up and introduction of value added
products in the short term, rather than the cutting-edge technology development in the long term. In
other words, because Chinese enterprises are still in the process of catch-up, they want the Japanese
inventors to teach from their abundant experience rather than conducting active innovation activities.
Therefore, we think that the possibility of cutting-edge technology leakage is low at present.
However, acquiring know-how should be a source of future catch-up of companies from emerging
countries in the future. In order to avoid price competition with Chinese electronics manufacturers
in the future, Japanese companies need to focus on cutting-edge technology development at all times.
At the same time, it is necessary to delay the speed of catching up by competitors. Specifically, forexample, it is necessary to prevent the leakage of inventor's know-how, which was formed by thexinventor, due to M&A inventor's transfer. In addition, after companies from emerging countries catchup to a certain level, they will not only put effort into rapid catch-up and introduction of value added
products in the short term, but also cutting-edge technology development in the long term. Then, inorder to prepare for the possibility of cutting-edge technology leakage, it is necessary to develop asystem related to industrial property rights such as improvement of laws related to M&A andimprovement of treatment of Japanese inventors.
There are some problems which were not solved in this study. For example, it is necessary to lookat the long-term effect of inventor's transfer, but due to data constraints, this study analyzed until thesecond year of transfer. In addition, although this study focused on the acquisition of Sanyo ElectricCo., Ltd. By Haier, which is a representative M&A by Chinese home electronics manufacturers, itis necessary to analyze many more cases of acquisitions of Japanese companies by Chinesecompanies to acquire robust results. I would like to make this point a future issue.

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