A casual examination of the actual transactions data suggests that the overall pattern of cross-border M&A investment by emerging-market firms is consistent with the typical international growth strategy of individual corporations. When companies venture abroad, they often first establish a small foothold in new markets through branch or representative offices, small distribution networks, or maintenance centers. Such small greenfield investments can be the first step toward execution of a firm’s globalization strategy, allowing companies with limited international exposure to gain experience and local knowledge before making a major commitment to a particular market through an outright acquisition or large-scale investment via mergers.<sup>6</sup> In carrying out M&A transactions, companies often appear to seek more immediate access to local markets.

Firms may potentially capitalize on technological and informational advantages that may be gained by their foreign acquisitions, or when they can apply their unique expertise to the same industries abroad. In particular, emerging-market firms with expertise overcoming the difficult institutional environment in their home countries may be eager to apply this informational advantage to similar environments in other emerging markets. Some M&A may also be motivated by the desire to exploit factor cost differentials in target markets (relative to their own). Finally, international M&A activity may demonstrate some persistence, when initial investments lead to additional cross-border investments through the necessity of the restructuring or upgrading of acquired assets, or as part of acquiring other firms’ vertical- or horizontal-integration growth strategies.

# **3 Potential Factors Related to M&A Activity**

Economic models of bilateral trade flows have most successfully been modeled on the basis of an empirical gravity equation, which has more recently been contextualized in the form of a broad variety of theoretical models (Anderson & van Wincoop 2004). We therefore rely, as a point of departure, on a gravity equation, where cross-border M&A flows are positively related to the pair’s respective output and negatively related to the bilateral distance between them. Bilateral country distances capture not only explicit trade costs associated with shipping and transportation, but could also embed implicit transactions costs related to the deteriorating quality of an investor’s (or acquirer’s) knowledge of, and ability to obtain information about, a potential acquisition target as physical distances between the two countries increase (in line with the argument made by Loungani, Mody & Razin (2002)). Naturally, existing bilateral trade flows are also likely to be associated with bilateral M&A flows.

> sectors such as professional and technical services, and electronics manufacturing featuring more prominently in emerging market M&A deals. However, the pattern of overlap in South-North and South-South remains the same.

> 6Such staged investment strategies emphasize the real-option aspects. Consequently, the initial greenfield investment serves is a stepping-stone to understanding a local economy. As uncertainties about demand and supply become resolved over time, follow-up investments then create a permanent presence in the foreign market by extending the scope and reach of the initial unit. Gilroy & Lukas (2006) provide the theoretical justification for this phenomenon, while Brouthers & Dikova (2010) establish empirical evidence.

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