# **1 Introduction**

The shift of global financial investment activity away from the advanced world toward emerging economies has been widely documented, and nowhere is this shift more evident than in recent patterns of cross-border mergers and acquisitions (M&A) deals. Between 1997 and 2003, companies based in emerging economies engaged in outbound cross-border M&A deals worth $189 billion, or 4 percent of the total value of all global cross-border M&A investment. In the equivalent period from 2004 to 2010, that amount had increased to $1.1 trillion, or 17 percent of the global total. This sharp rise in emerging economies’ share of cross-border M&A has been accompanied by a deepening reach of emerging-market firms in international capital markets overall, not just via foreign direct investment (FDI) but also through equity cross-listings, participation in international loan syndicates, and debt issues on international bond markets.

Given the rising importance of emerging economies in international M&A, the question of what forces drive their investment activity becomes ever more important. In particular, do cross-border M&A choices by emerging market firms differ systematically across destination markets, and if so, what are the dimensions in which these choices differ?

This question is increasingly pertinent as government regulators grapple with the dramatic pickup in M&A investment by Southern firms in both Northern markets—exemplified by Chinese carmaker Geely’s high-profile acquisition of Sweden’s Volvo from Ford in 2010—as well as (and perhaps more importantly) their purchasing activities in the other developing economies of the South. Indeed, the trend of rising South-North and South-South M&A activity suggests yet another wrinkle to the Lucas (1990) paradox of “uphill” South-North capital flows: It is not sufficient for theoretical explanations to merely explain why emerging market firms may be investing in (ostensibly) less risky Northern markets, but also why they may choose to invest in other economies that are otherwise very similar to their own (insofar as their level of development is concerned), rather than investing at home.

This paper seeks to examine the factors associated with the flow of M&A investment originating in emerging market economies.<sup>1</sup> The empirical analysis relies on bilateral outbound cross-border M&A data for firms based in 61 emerging markets, collected for the period between 1997 and 2010. This coverage includes economies from all major developing regions, which makes this, to our knowledge, one of the most comprehensive analyses of bilateral M&A activity by the Global South.

The picture of Southern cross-border M&A that emerges from our paper is a fairly sophisticated one. Consistent with other forms of cross-border economic activity, M&A deals reflect standard gravity components, such as economic size and distance. But the strength of existing trading and investment relationships also matter, and for acquisitions in advanced economy targets, the informational advantages gleaned from such prior economic relationships appear to overcome frictions due to physical distance. Moreover, deals in advanced economies tend to

> 1For the purposes of this paper, emerging economies are defined as 61 (mostly middle-income) economies traditionally classified as emerging markets by the financial community. The full list is provided in the annex.

2