Cross-border acquisitions vs. Greenfield investment: A comparative performance analysis in Greece

Transcription

1 1 Cross-border acquisitions vs. Greenfield investment: A comparative performance analysis in Greece ABSTRACT This paper compares cross-border acquisition with Greenfield foreign direct investment (FDI). It investigates the impact of these two FDI modes on the long-term performance of foreign subsidiaries. By focusing on the performance of the foreign affiliate, it departs from the rich survival literature and for the first time explores the precise performance of these ventures over a longer period of time. In particular, by drawing on the theory of industrial organization (IO), we empirically examine to which extent the two different forms of market entry help to explain the development of leading positions of affiliates in the host country. Our field research is based on a wide original sample of 179 manufacturing subsidiaries of foreign transnational corporations (TNCs) located in Greece. The econometric results indicate that acquisitions exhibit specific signs of excellence in terms of market share, firm size, capital intensity and product differentiation. We ascertain that at least as far as market share and capital intensity are concerned, the superiority of the cross-border acquisitions rests on both the fact that TNCs are eager to acquire the most efficient firms in the host country, and actively engage in assisting these firms in their up-grading procedures. Keywords: Transnational Corporation, Mode of Entry, Cross-border acquisition, Greenfield FDI, performance.

2 2 Cross-border acquisitions vs. Greenfield investment: A comparative performance analysis in Greece * 1. Introduction Foreign TNCs have the option to choose between two competing modes of FDI in order to penetrate foreign markets. One is Greenfield investment, the other one is taking over an existing local firm. TNCs opting for Greenfield FDI and international acquisition respectively are facing different types of implementation costs and may show different degrees of economic performance in the host country during the post-entry period (Caves and Mehra, 1986; Dunning, 2000; Harzing, 2002). The aim of this study is to shed some light on the question whether one of the two modes of entry is associated with a better performance of the affiliate on the local market later on. By offering a comparative performance evaluation of the two FDI modes at the affiliate level, we add a new aspect to the existing bibliography. In contrast, most of the international business literature approaches the Greenfields vs. acquisitions issue from the point of view of the parent company and its decision-making procedures (e. g. Demirbag, 2008; Elango and Sambharya, 2004; Larimo, 2003; Harzing, 2002; Mutambi and Mutambi, 2002; Brouthers and Brouthers, 2000; Barkema and Vermeulen, 1998; Hennart and Park, 1993). Another novelty is that we depart from the common survival literature which concentrates on the subsidiary level and analyses survival vs. failure (e.g., Li and Guisinger, 1991; Pennings et al, 1994; Li, 1995; Caves, 1996; McCloughan and Stone, 1998; Shaver, 1998; Mata and Portugal, 2000). Following the critique of this literature (e.g., Pennings et al, 1994; Mitchell et al, 1994; Li, 1995; Reuer, 2000; Delios and Beamish, 2001) which maintains that survival is a relatively weak and one-sided indicator of lasting success, we propose to directly investigate the conditions of outperforming affiliates. * We gratefully acknowledge the comments of two anonymous referees.

3 3 Based on the IO approach, we start from the notion that firm-specific advantages (FSAs), no matter how powerful they are at the corporate level, are not a priori a guarantee for a strong economic performance of a foreign affiliate. The crucial point is that specific economic, cultural and political features of the national environment act as entry barriers and affect the performance of the foreign affiliate during the post-entry stage. We investigate whether, under the different entry modes, the chances for acting successfully in the long run on the foreign market differ in fact systematically. In order to measure performance, we employ several firm-specific indicators of economic success such as market share, size, profitability, capital intensity, and product differentiation. An affiliate, which is able to realize these attributes of success will also be capable to erect substantial barriers to entry on its markets, which in turn makes it easier to defend the present (leading) position more forcefully. In our econometric models we shall use these qualifying indicators of a leading affiliate as dependent variables (see also such relevant studies as Slangen and Hennart, 2008; Dikova, 2009; Demirbag et al, 2007). To our knowledge, only very few studies have focused on this topic and they offer controversial results. Woodcock et al (1994) analysed the financial performance of Japanese Greenfield and acquired affiliates and concluded that Greenfields perform better than acquisitions. Slangen and Hennart (2008) investigated foreign affiliates of Dutch TNCs and found that acquisitions outperform Greenfields at low and intermediate levels of affiliate integration, but Greenfields outperform acquisitions at higher integration levels. However, this latter study only analyzes short-term performance. Our study makes several contributions to prior research using long-run performance estimates. To measure this performance, we analyze an original sample of 179 foreign affiliates which have been established or acquired in Greece. After several years of operation, we check their performance during the period. Our paper also explores at which

4 4 time foreign affiliates manage to become an excellent performer in the specific host market. In particular, in the case of acquisitions, we investigate whether the takeovers had been outperformers on the local market already at the time when the acquisition took place and/or whether they became leading affiliates later. The investigation of TNC operations in Greece is important for several reasons. After joining the EC in 1981, Greece has become a relatively open economy, subject to strong international competition and particularly sensitive to developments in the global and European markets. While the global developments apply to almost all FDI after the 1970s, we will focus on the specific factors that have influenced the activities of TNCs on the Greek market under these conditions. In particular, the share of total FDI stock in gross domestic product continually rose from 1990 (6.2%) to 2000 (11.2%) and to 2007 (16.9%) (various UNCTAD issues), while the rate of foreign participation in the total domestic industry remained relatively stable at about 25%-30% (as measured by sales, employment and exports). However, it grew much higher in distinct product markets (e.g., foods, beverages, cement, petroleum products, chemical products). Following our theoretical considerations we shall hypothesize that cross-border takeovers have become the superior choice of entry mode of TNCs in Greece as compared to Greenfield FDI. Our empirical results confirm this hypothesis. Thus, this particular study offers new insights on the comparative performance analysis of Greenfields and acquisitions. 2. Theoretical background and hypotheses In the following, we shall draw on the IO theory, and discuss the effects on excellence of a local affiliate that might arise from the decision of a TNC to undergo a Greenfield FDI or a cross-border acquisition respectively. We start from the notion that TNCs possess FSAs (e.g., differentiated products, brand names) which they exploit nationally and internationally

5 5 (e.g., Hymer, 1960; Caves, 1971; Caves and Mehra, 1986; Caves, 1996; Dunning, 2000). Greenfield FDI is one particular form of a market penetration. TNCs consider this option when their FSAs are strong enough to cover the additional transaction costs arising from the operation in the foreign market, and when location advantages are abroad. Nevertheless, the fact remains that the additional costs of the liability of foreignness (Zaheer, 1995) still have a negative impact on the performance of the Greenfield venture. Slangen an Hennart (2008) argue that Greenfields, unlike acquisitions, increase substantial external conformity costs (due to the need to adaptation to the local environment) because they suffer from both a liability of newness and a liability of foreignness. According to Pennings et al (1994), Greenfield investments are more risky as compared to acquisitions, because as new projects they start at the beginning of the learning curve (the liability of newness argument). The situation might change for the better, if the TNC, instead of practicing Greenfield FDI, acquires an existing local firm that is well-established in the market (e.g., Demirbag et al, 2008). It may then try to combine the subsidiary s advantages with its own core abilities, thereby augmenting its overall FSA-system (Dunning, 2000). The new combined entity may then be able to use these synergies to better overcome the transaction cost barrier and to improve its position on the local market (e. g. Dunning, 2000; Anand and Delios, 2002). In the case of Greenfield FDI, the parent company is relying entirely on its own capabilities. As such, the typical Greenfield subsidiary is determined by the parent company s FSAs and the its organizational routines (Barkema and Vermeulen, 1998; Hennart and Park, 1993). Cross-border acquisitions, by taking advantage of the FSAs of the local firm, might also be able to react more quickly to changing market conditions and to strategic moves of the competitors as the Greenfield venture could. At the time of market entry, in particular, Greenfield investments use to need more time for planning, construction and market positioning than takeovers. That way, they are loosing precious time in relation to cross-

6 6 border acquisitions before they can develop their operations (Carow et al, 2004; Larimo, 2003; Anand and Delios, 2002; Hennart and Park, 1993). Thus, foreign rivals opting for cross-border acquisition are gaining time to react and to challenge market entry of the competitors. That way, a foreign rival coming in second may still be able to outperform the first mover. Alternatively, the first mover in an acquisition venture is hard to outpace and enjoys the additional benefit of being able to select from among the "best targets". 1 These arguments clearly favor takeovers in relation to Greenfield investments, and this superiority is evident in the competitive advantages of foreign affiliates. In fact, econometric studies support the view that foreign affiliates created by acquisition exhibit specific signs of excellence. Reviewing the literature on this topic reveals that there are basically two parameters for the explanation of the excellence of cross-border acquisitions. One parameter is the strong position of the acquired local firm at the time of entry. 2 The second parameter represents the dynamic effects of synergy creation, responsiveness and speed during the postacquisition period. 3 Based on these considerations we shall formulate distinct hypotheses of the impact of the mode of entry on the evolution of affiliates as leaders in the Greek economy. In general, Greenfield FDI placed in the small Greek economy in the past tend to be directed to new local product markets which were initially rather small 4. Locality, under these conditions, implies that the growth potential of the Greenfield investment is closely linked to the expected rate of growth of the overall economy and the elasticity of income of the respective commodity. 1 Yet, the analysis should not ignore the significance of learning effects resulting from the post-entry period. 2 International studies based on the IO approach, which primarily investigate pre-acquisition characteristics of target firms conclude that foreign buyers mainly pick the more productive and more profitable target firms (i.e., cherries and not lemons ) (e.g., Goethals and Ooghe, 1997; Harris and Robinson, 2002; Fukao et al, 2005; Ruckman; 2005; Bellak et al, 2006). 3 Studies drawing also on the economics of IO theory associate economic success in the post-acquisition phase with the prominent position of the target at the time of takeover. They conclude that acquisition candidates use to possess specific characteristics of economic success that the foreign buyer can exploit and successfully combine with his own core abilities (Buckley and Casson, 1998; Caves, 1996; Goerg, 2000; Uhlenbruck, 2004; Girma, 2005). 4 Though this argument primarily applies to the time before Greece entered the EU, it also has general validity even in times of EU-integration as the overwhelming majority of FDI continue to be inward-looking in character.

7 7 Thus, Greenfield FDI usually takes place in a step-by-step growth process starting from relatively small production units. In as much as economies of scale apply, this puts a heavy cost burden on these firms. Foreign acquirers, in turn, tend to focus on relatively attractive existing firms (Jensen, 1988) operating in well-developed oligopolistic local markets (UNCTAD, 2000). Thus, the cross-border acquisitions are better prepared than Greenfield FDI to attract sufficient demand on the local market from early on, and to reap economies of scale. Also, large firm size implies that the target firm might offer favorable conditions for the development of new FSAs. Thus, we hypothesize: H 1 : foreign affiliates created by acquisition are more likely to be leading companies with large market shares than foreign affiliates created by Greenfield FDI. H 2 : foreign affiliates created by acquisition are larger in size than foreign affiliates created by Greenfield FDI. In Greece, many of the well established industries show deliberate signs of oligopolistic behaviour even after joining the EU. As a consequence, firms holding large market shares in these industries can be expected to be able to reap monopolistic profits. This should also apply to the foreign affiliates, which are holding a leading position in the Greek market. In addition, foreign acquirers can successfully exploit and further develop the prominent market position of the target firm by adding own specific advantages. That way they might also be able to positively influence long-term performance. In turn, Greenfield investments, due to their start-up situation in new product markets, are in a quite different position. They might well be able to take premium prices, if their new products are protected by FSAs. Nevertheless, the small size of the new market and the specific costs of market creation form a major obstacle for the generation of profits in the short run. Hence, foreign acquisitions, as compared to Greenfields, may not only exhibit a better performance, in the short and medium run, but also in the long-term. Thus we consider that international

8 8 takeovers are more profitable than Greenfield investments (Caves, 1996; Goethals and Ooghe, 1997; Elango and Sambharya, 2004) and hypothesize: H3: foreign affiliates created by acquisition will have higher Return on Equity (ROE) than foreign affiliates created by Greenfield FDI. An important criterion for successful FDI in foreign markets derives from specialization in industries which dispose of a competitive advantage in the local economy. Drawing on conventional theories of international trade, competitive advantage is driven by unit labor costs. That is, if unit labor costs are rising comparative advantage in labor intensive industries is getting lost. Promising target industries, then, are those which apply capital intensive technologies. In Greece, unit labor costs have risen substantially during the last 25 years. As a consequence, comparative advantage in labor intensive production has ceased to exist. International acquisitions in Greece, due to their focus on large firms in well established industries, tend to be characterized by a relatively high intensity of capital in production. This should contribute to the economic success of this strategy. Greenfield investments, in turn, use to be concentrated in industries where more labor intensive production prevails. Therefore, we hypothesize: H4: foreign affiliates created by acquisition have a higher capital intensity than foreign affiliates created by Greenfield FDI. Proceeding beyond the traditional model of price competition, product differentiation emerges as an important parameter of economic success in advanced markets. In particular, leading firms are eager to maintain and improve their market position by developing new product varieties and creating brand names. The creation of variety enables price differentiation, allows for the creation of entry barriers, fosters market concentration and eventually generates monopolistic profits (e.g., Caves, 1971). These market conditions gain importance with rising per capita income.

9 9 Greece, because of its historical heritage and its geographic position at the periphery of Europe exhibits some specific signs of consumer behaviour, which gave rise to the evolution of differentiated brands. These specific consumer brands have originally been created and developed by Greek firms for the local market. TNCs might find it attractive to incorporate these firms and their products into their (global) product differentiation strategy, either for exploiting the local Greek market or by creating new global (regional European) brands. That way, some highly developed Greek consumer industries have found attention of TNCs as candidates for cross-border takeovers. Hence, we hypothesize: H 5 : foreign affiliates created by acquisition offer more differentiated products than foreign affiliates created by Greenfield FDI. Foreign acquirers would appear to prefer entry into markets with low degree of competition inter alia because competitive markets may increase the likelihood of mobility and mortality. According to the conventional structure-conduct-performance approach this would mean that TNCs prefer to engage in industries which are highly concentrated and operate significant entry barriers. In fact, foreign entry by acquisition has been observed to be more common in industries that are already concentrated, exhibit high barriers to entry (Caves and Mehra, 1986; Buckley and Casson, 1998; UNCTAD, 2000; Goerg, 2000), and have a relatively stable market structure. In contrast, Greenfield investors use to avoid entering structurally stabilized markets. In these markets they expect to face major difficulties regarding market penetration with new products and in the face of powerful local market leaders. Thus, we hypothesize: H 6 : foreign affiliates created by acquisition operate in more concentrated industries than foreign affiliates created by Greenfield FDI. 3. The Empirical Analysis

10 Data To test the above hypotheses, interviews were conducted among foreign affiliates located in the Greek manufacturing sector. The sampling creation process was as follows. The industrial population of Greenfield FDI (N 1 = 170 subsidiaries) was taken from a research study carried out in the foreign commercial-industrial chambers that have their registered offices in the country and from previous field research. The corresponding population of international acquisitions (N 2 = 93 subsidiaries) was primarily obtained from TOPINVEST, a management consultancy company specializing on mergers and acquisitions, and the foreign commercial-industrial chambers. From a total 263 subsidiaries, 220 were selected for study. The selection of subsidiaries from each total (N 1 & N 2 respectively) was made proportionately on the basis of internal sector dispersion, so that a statistical bias at industry level is avoided in the sample. The firms were asked to answer a questionnaire (see appendix) that consists of three groups of questions. One group concentrates on some basic characteristics of the subsidiary, the second one asks for subsidiary performance and the third one sheds light on the managers general assessment of the performance of his firm under the selected entry mode. Following our initial communication by and repeated telephone calls thereafter, 179 subsidiaries responded to our questionnaire (participation rate: 68% of the total Ν). Thus, the study draws on an original sample of 179 foreign affiliates that includes almost all the most important units, which are presently operating in Greece; 124 of these establishments are Greenfields, and 55 are cross-border acquisitions. This is a particularly high participation rate. It could be realized, because most of the central offices of the foreign affiliates were located in the area of Athens, so that personal communication was relatively easy. These favorable conditions were also helpful for completing the questionnaire with detailed interviews (about 90 minutes) carried out with the

11 11 respective financial managers. Firm-specific data were obtained from the directors of accounting departments. Table 1 presents some main characteristics of our sample concerning nationality of foreign investor and industry of foreign subsidiaries. All data of firm specific variables used in the study originates from this field research, a small part of which was published recently (Georgopoulos and Preusse, 2006). Data for the industry-specific variables are gathered from the Bulletin of Conjunctural Indicators (Bank of Greece), the Annual Industrial Surveys (National Statistical Service of Greece), and the annual publications on Greek Industry (Confederation of Greek Industries). The data cover two periods: the period (observation period) and the first two year period immediately after starting operations (establishment period). This opens up the chance to detect the development of the affiliates fate during its operation period. That way, in the case of acquisitions, the model evaluates the result of the acquisition as a combination of pre-acquisition advantages (of the Greek firm at the time of acquisition) and the gains of reorganization during the whole post-acquisition period (up until the period). It is worthwhile stressing that the overwhelming majority of acquired subsidiaries had been operating under the new ownership regime for at least ten years. Thus, it is reasonable to conclude that any reorganization procedure after takeover had been completed at that time. We use average values for all quantitative variables. Put Table 1 about here 3.2. Models and Variables

12 12 In order to test our hypotheses, a series of regression models were estimated with the dependent variable being each of the performance measures. Consequently, we employed six corresponding regression models to regress the seven independent variables on subsidiary performance. More precisely, we employed a binary logit model with the dependent variable (PDIFF) as a dummy variable, and five ordinary least-squares (OLS) models, in which the corresponding dependent variables (MSHARE, SIZE, CAP, PROF and CONCET) were continuous. Such linear regression models are econometrically appropriate, when the performance of affiliate is treated as the dependent variable (e.g., Slangen and Hennart, 2008; Dikova, 2009; Demirbag et al., 2007). The logistic regression links the dependent and the independent variables by the following function: P Y ln 1 ( = 1) P( Y = 1) = β 0 + β 1 Χ 1 + β 2 Χ 2 Correspondingly, the OLS regressions are of the following form: Y i = β 0 + β 1 Χ 1 + β 2 Χ 2 + ε i In each of the six models, the dependent variable is explained by two sets of independent variables: firm-specific (X 1 ) and industry-specific variables (X 2 ). X 1 is a vector 1 * κ and X 2 is a vector 1 * λ, where κ + λ = 7. That is, in each model the dependent variable is explained by five firm-specific variables and two industry-specific variables. Literature suggests the use of a combined measure of affiliate performance in order to capture its multi-dimensional character. E.g., Pennings et al (1994, 635) argue that an ideal research design would incorporate multiple indicators of performance. Li (1995) recognizes that many criteria must be considered when evaluating the long-term potential of business. Following these suggestions, we employ six (6) dependent variables as proxy for performance. These variables are market share (MSHARE), "firm size" (SIZE), "profitability" (ROE), "capital intensity" (CAP), "product differentiation" (PDIFF), and

13 13 industry concentration (CONCET). MSHARE is calculated as the market share of the foreign unit on the local product market (at 4-digit industry level, NACE classification). A foreign affiliate is supposed to have a leading position on this market if it holds the largest market share of all firms operating on this market. Firm SIZE is measured by sales (millions of Euro). PROF is calculated as the return before taxes on equity capital. CAP is measured as the ratio of fixed assets per employee (thousands of Euros). PDIFF is a dummy variable which takes the value one if the majority of the products of the affiliate are brand names, and zero if they are not. 5 CONCET is measured as the four-firm assets concentration ratio (at 4- digit industry level, NACE classification). We employ seven explanatory variables. The variable of primary interest for this study is the dummy variable MODE, which indicates the chosen entry mode. The acquisition dummy variable takes the value of one if entry is in the form of a cross-border acquisition and zero if entry is in the form of a new plant. The six other explanatory variables control for additional observable factors that might affect the characteristics of a leading affiliate. They are: experience (TIME), market seeking (MOTIVE), ownership (OWNER), nationality (NATIO) and two industry-specific variables (GROWTH and IMPORT). First, we control for experience using the variable TIME. Growing experience helps to accumulate competence on the market and contributes both to overcome initial competitive disadvantages and to develop new country specific knowledge and capability. Thus, experience is an important factor influencing the competitiveness of a firm. It also stands for a better chance of survival of a foreign unit (Li and Guisinger, 1991; Woodcock et al, 1994; Shaver et. al., 1997; McClougan and Stone, 1998; Pan and Chi, 1999; Delios and Beamish, 2001), and for success in the foreign market in the post-entry stage. Thus, we hypothesize that host country experience improves the likelihood of creating a subsidiary with a strong 5 As we could not collect information from the enterprises about common PDIFF indicators (such as advertising expenditure as a percentage of sales etc.), we used the dummy variable as the second best solution.

14 14 position. TIME is a continuous variable. It is calculated as the difference between the year of observation (2003) and the year of establishment. Second, we control for market-seeking motives (MOTIVE). TNCs seeking new markets abroad are likely to pay particular attention to the conditions of the local market, such as the competitive situation, supply networks, supporting activities etc. (e. g. Pan and Chi, 1999). In turn, TNCs with an explicit focus on exports are likely to pay less attention to the operating conditions on the local market, but concentrate on factor endowments, trade barriers etc. Consequently, they will be less deeply involved in the local business scene and may not be well prepared to respond to changes of the economic and political conditions in this market. Thus, we expect that foreign subsidiaries with market-seeking motives will attain a leading market position more easily than affiliates operating on resource-seeking or efficiency-seeking motives (Dunning, 2000). MOTIVE is a dummy variable which takes the value one for market-seeking motives and zero for others. Third, we control for ownership (OWNER). Equity (ownership) is a frequently used measure of control, commitment and involvement. The larger the share of equity the more efficient does the control mechanism of the TNC work. In turn, minority joint ventures have been recognized as being inherently instable, because of lack of control by the principal (e. g. Dhanaraj and Beamish, 2004). One consequence is that minority joint ventures facilitate opportunistic behaviour on behalf of the foreign partner. Because of this weakness, minority joint ventures are often used as a transitory form of international involvement that will be transformed into a majority joint venture, as soon as penetration of the foreign market is believed to have been a successful venture (Pennings et al, 1994; Pan and Chi, 1999; Reuer, 2000; Mata and Portugal, 2000; Dhanaraj and Beamish, 2004). We hypothesize that foreign affiliates in a majority ownership of a TNC have a greater chance to become a leader in a host country.

15 15 Fourth, we control for EU-nationality. European TNCs tend to have an information advantage over non-eu multinationals. This advantage may also apply to economic activities which are carried out in Greece. For one thing, there are Greek particularities within European Union which may be better recognized and understood by EU-multinationals. Another more subtle aspect derives from the EU-process of convergence of financial and statutory policies, an integral part of which is Greece. That is, national standards, restrictions and regulatory policies are getting increasingly harmonized under the homogenizing framework of the Maastricht Treaty and the ongoing integration process (Amsterdam, Lisboa). 6 Since EU- TNCs are directly involved in this process of statutory convergence, their perceived investment risk declines and market commitment increases (e. g. Hadjikhani and Ghauri, 2001). They are, therefore, in an advantaged position relative to outsiders concerning the efficient use of the knowledge that is generated by intimate participation. As a consequence, subsidiaries of EU-TNCs operating in Greece are probably more familiar with the role that this country plays in this process and this constitutes good preconditions for becoming leaders on the Greek market. NATIO is a dummy variable that takes the value one if the parent company is located in a EU- country and zero if it is not. A fifth factor that potentially influences the entry mode choice and, later on, the performance of a subsidiary on the local market is the so-called industrial environment (e.g., Elango and Sambharya, 2004). We use two industry-specific characteristics in order to control for the influence of this environment. These are the rate of growth of the Greek industry (GROWTH), measured by industry specific production indices (1980 = 100), and the import penetration ratio (IMPORT), 7 measured by the share of imports in domestic consumption. 6 The implementation of the Euro and of international accounting standards and the introduction of a European legal framework of mergers and takeovers are examples. 7 The NACE classification was used at a 2-digit industry level and 3-digit level, wherever information was available.

16 16 4. Empirical Findings 4.1. Descriptive statistics Table 2 reports descriptive statistics such as mean and standard deviation of the dependent and independent variables for the total sample during the period Some remarkable differences between the two FDI modes can be observed in at least seven out of thirteen variables. In particular, subsidiaries created by acquisition are, on average, four times larger (SIZE) than subsidiaries created by Greenfield FDI and they are three times larger in capital intensity (CAP). Their market share (MSHARE) is twice as large as that of Greenfield ventures, and they are operating in product markets with a high degree of concentration (CONCET). The mean values of the dummy variable PDIFF are significantly higher in the case of cross-border acquisitions. Last, acquisitions more accurately express the new generation of FDI (TIME), and they can be found mostly in sectors with a relatively low import competition (IMPORT). Put Table 2 about here 4.2. Logit and OLS models In this section the most important econometric findings will be presented (Tables 3, 4, 5, 6 and 7). For each of the regression models, variance inflation factors (VIF) were examined to determine the existence of multicollinearity. The largest VIF factor in our models was 2.05 (see the last column in the Tables 3,4 & 5), which is much lower than the multicollinearity threshold of 10 (Neter et. al., 1996). Thus, multicollinearity has not been found. As regards the regression analysis of the total sample (Table 3), the goodness of fit and power criteria of the logit model are very satisfactory. For instance, model 1 has a high

17 17 overall explanatory power, with a chi-square of (p< 0.001). In addition, 76.9% of all observations are correctly classified, which indicates a very good performance. The Nagelkerke R-square measure confirms that the model has a good explanatory power (0.327). The overall interpretative ability of the OLS models 3 and 4 is quite satisfactory, too (adjusted R 2 : and respectively), while the corresponding interpretative ability of models 2, 5 and 6 is relatively weak. In the five OLS models, there seems to be no problem of autocorrelation in the residuals. The Durbin-Watson coefficient is about two (2.146 in model 2, in model 3, in model 4, in model 5 and in model 6). It is worth mentioning that, initially, in models 2 and 6, this coefficient was and respectively, which indicated autocorrelation of the residuals. We verified this by the ARCH procedure and resolved the problem using the Cochrane-Orcutt iterative procedure (Asteriou, 2006). The final results were ρˆ =0.481 for model 2 and ρˆ =0.588 for model 6. Put Table 3 about here In the secondary models, the statistically significant variables are the following. Model 1: MODE (***), ΤΙΜΕ (***), MOTIVE (**) and GROWTH (**). Model 2: MODE (***). Model 3: MODE (***), ΤΙΜΕ (***), MOTIVE (**) and OWNER (*). Model 4: MODE (***) and IMPORT (**). Model 5: MODE (*), OWNER (**) and ΝΑΤΙΟ (**). Model 6:MODE (**), TIME (***), OWNER (**), and GROWTH (*). To sum up, our explanatory variable (MODE) is statistically significant at the 1% level in four out of six models. This means that in the observation period , takeovers clearly exhibited a higher degree of product differentiation, and larger market share. They also had a bigger size and a higher capital intensity as compared to Greenfields. Also, these units operated in more concentrated product markets. Differences in profitability were rather of minor importance (statistically significant

18 18 at the 10% level). 8 We thus find full support for the hypotheses 1, 2, 4 and 5, but also for hypothesis 6, though to a lesser extend. Yet, we find weak support for hypothesis 3. As far as the control variables are concerned, it is worthy noting that three firmspecific variables are found to be statistically significant, that is, TIME, MOTIVE and OWNER. 9 As regards TIME (experience), this variable is important for product differentiation, size and market concentration (significance at 1% level). Moreover, MOTIVE (market-seeking), too, is significant for product differentiation and size (5% level), while the variable OWNER (foreign capital participation) is positively associated with profitability (5% level), operation in oligopolistic industries (5% level), and business size (10% level). Contrary to our hypothesis concerning NATIO (nationality), non-eu origin does not seem to have a negative effect on foreign subsidiaries on the Greek market. In fact, the opposite seems to be true in the case of profitability (5% level). 10 Last, the industry-specific variables GROWTH and IMPORT were statistically significant to a limited extend. Subsequently, we split our sample into two time periods, i.e. the period and the period (Tables 4 & 5 correspondingly) in order to test whether foreign units established (or acquired) during different periods of time show different performance. This is not the case. Specifically, the explanatory variable (MODE) was found to be statistically significant at the 1% level in three out of six models (PDIFF, MSHARE, SIZE). In the fourth model (CAP) its explanatory power was less (10% and 5% level respectively). 8 Several scholars such as Slangen and Hennart (2008) and Demirbag et al (2007) have expressed scepticism concerning the use of profitability as appropriate performance measure. 9 Most of these findings are in line with the literature on these topics. See for example Pennings et al, 1994; Pan and Chi, 1999; Reuer, 2000; Mata and Portugal, 2000; Dhanaraj and Beamish, 2004; Li and Guisinger, 1991; Woodcock et al, 1994; Shaver et. al., 1997; Delios and Beamish, In fact, many non-european TNCs, mainly those from the USA, have been operating in the European markets for many years and had already gained rich institutional and political experience on these markets for quite some time. Also, many of them had been active in Greece before via non-equity investments such as licensing or exports. Consequently, when entering the Greek market they will probably have acted as quasi-european firms rather than foreigners.

19 19 The control variables were much less important statistically than the FDI mode. For example, in the sub-sample , the most significant firm-specific variables were MOTIVE and NATIO (but with a negative sign) for both product differentiation and profitability (different levels of significance). Furthermore, in the two sub-samples, the importance of the control variables has somewhat increased as compared to the total sample (compare Tables 4 and 5 with Table 3). Put Table 4 about here Put Table 5 about here So far, the analysis has not provided an answer to how and when the foreign affiliates have attained their leading market position. These questions can be tackled by comparing the state of the acquired units and the Greenfields in the observation period with their respective state at the time of acquisition or establishment (that is, during the first two postentry years). Employing a T-test, we compare the mean values of three variables (MSHARE, CAP, PROF) in three different samples, the total sample, the sub-sample and the sub-sample (Table 6). The empirical analysis reveals statistically significant differences in performance between the two types of affiliates in MSHARE and CAP (1% level). The differences are existent during both the establishment and the observation period [see Table 6, in the three samples the models (1) and (2)]. Unfortunately it is not possible to give an exact quantitative statement on the relative performance, but our analysis suggests that the cross-border acquisitions at least stabilized there leading role during the postacquisition period [Table 6, total sample, model (3)]. Stabilizing a leading position in a

20 20 growing national market certainly means that these acquisitions had a particularly strong performance. To sum up, we present our main findings in Table 7. High support has been found for the hypotheses 1, 2, 4 and 5. Hypotheses 3 and 6 only found weak support, except for the T- test for hypothesis 3, which is rejected.. Put Table 6 about here Put Table 7 about here 5. Discussion This paper has compared acquisitions and Greenfield FDI in terms of their economic performance in the small open Greek economy. A lot of the literature on this topic focuses on the impact of these entry modes on the survival chances of affiliates. But pure survival of an affiliate does not necessarily mean that it holds a leading position on the local market and, by extension, that it shows an excellent performance. We take up this weakness and suggest that the reverse side of the coin, i.e. the exact extend of the economic success needs to be further explored. In doing this, we depart from the common survival literature. Until today only Slangen and Hennart (2008) have systematically examined the performance consequences of the entry mode choice directly. However, these authors only compare the ex ante expectations of the managers with the subsidiaries ex post performance during the first two post-entry years. This means that their investigation is limited to this short period of time. The authors recognize this limitation and point out that it is important to also capture the long-run benefits.

21 21 In the current paper we argue that FDI is a productive investment that needs time until all adjustments have been made and the benefits can be reaped. In the case of acquisitions, value creation via synergies or value destruction through cultural conflicts use to take quite some time. In turn, in Greenfields, the adaptation of the new entity to the host-country environment is a most challenging task. Hence, the establishment mode choice is a typical long-term management decision. This study takes care about these aspects and presents long term performance estimates. In particular, we propose that the establishment mode choice has a long term impact on the post-entry performance of affiliates. In order to test this proposition, we have interviewed 179 subsidiaries located in Greece, which have been operated for a longer period of time in the host country (observation period ). Our econometric results provide a satisfactory explanation of the superior performance of international acquisitions relative to Greenfield FDI for the case of Greece. More precisely, we detect that, after a sufficiently long operation period, foreign subsidiaries created by acquisitions exhibited larger market shares, a bigger firm size, higher capital intensity of production, and more differentiated products as compared to the Greenfield units. These results highly support four out of our six research hypotheses. We could qualify and confirm these results after splitting up our sample into two different time periods. One important reason for the excellent performance of the cross-border acquisitions is that these investments have been concentrated on domestic firms, which had a strong position on the local market even at the time when the takeover took place. Consequently, the new foreign entity could start running its operations out of a particularly good initial position. But this is not the whole story. A good starting point may be helpful, but it is not a sufficient condition for ongoing success. The core argument in favor of sustained superiority of crossborder acquisition derives from the industrial organization literature. It holds that, via acquisition, a TNC combines its own FSAs with the advantages of the acquired enterprise. In

22 22 the positive case, this merging of FSAs will eventually lead to a new powerful augmentation of core abilities. In this scenario, over the years, the buyer might be able to establish an advanced competitive position on the foreign market that becomes unchallengeable for quite along time. This position might be further stabilized, if the new firm is able to erect new entry barriers on this market, which are appropriate to keep potential rivals out and enhance the scope of monopolistic power as suggested by other scholars (e.g., Caves and Mehra, 1986; Buckley and Casson, 1998 Goerg, 2000). Apparently, market entrance barriers are so high in some cases that even attractive profit margins do not persuade foreign competitors to enter. Our empirical findings confirm the above scenario. In particular, using three variables of performance, we compare the performance of subsidiaries during the first two post-entry years of operation (establishment period) with the corresponding performance in the observation period. We find that, in fact, acquired affiliates improved or at least maintained their leading position concerning market shares and capital intensity as compared to Greenfields. As regards market share, a compelling explanation for the strategic positioning on the local market is the fact that sales and distribution systems do not function sufficiently well across borders, and that they are time-consuming to build-up out of a Greenfield position. Hence, foreign TNCs source, exploit and further develop these networks locally via takeovers rather than by establishing new plants and distribution systems (e.g., Anand and Delios, 2002; Chen and Zeng, 2004). In our study, these merits were long-lasting (more than a decade as a matter of rule) and have not been threatened by any adjustment process following after the takeover. This runs counter to the argument that acquisitions incur high resource deficiency costs in terms of redundancies and duplications (Woodcock et al, 1994), show a weak managerial performance (Woodcock et al, 1994; Li, 1995; McCloughan and Stone (1998), and face high post-

23 23 acquisition costs in general (McCloughan and Stone, 1998). We did not discern such effects in the case of the Greece economy. Generally speaking, the main explanation for the economic success of takeovers in Greece rests on two components. One is that they are focused on particularly attractive target firms, which are operating in well developed oligopolistic industries (e.g., foods and beverages). This provides these subsidiaries with an excellent starting position. The second draws on a dynamic process that is difficult to catch. Apparently, the TNCs engage in assisting and promoting their subsidiaries to merge their own FSAs with the specific strength of the acquired local firm. Our data coincide with the thesis that both effects have taken place in Greece during most of the EC (EU) era. 11 In our view, the most significant contribution of this paper is that it identifies cross-border acquisition as an attractive TNC strategy to enter a foreign market, and to stay there as a strong competitor in the long run. Takeovers appear to have an advantage over Greenfield FDI in overcoming the obstacle of the liability of foreignness and in achieving the objective of becoming a leader and defending this position. Moreover, our findings explain why, in the global division of labor, international acquisitions prevail as a means of entry to a local market (UNCTAD, 2000). Finally, some limitations of this approach should be considered. First, the subsidiaries created by Greenfield investment should be subject to further and more thorough examination. The fact that they fall short of acquisitions does not necessarily mean that all of them can be categorized as lemons. Vice versa, not all acquisitions are necessarily cherries. The econometric models, in fact, indicate statistically significant differences within the two groups of subsidiaries, but they do not necessarily apply to any single subsidiary. Certainly, the issue of gains of competitive advantages resulting out of experience requires further investigation, 11 The basic reason for this development was that trade barriers in Greece dropped considerably after the country had joined the EC (EU) in As a result, much of the tariff hopping Greenfield FDI of former times became obsolete. Under the new conditions, the relative attractiveness of cross-border acquisitions increased, because import competition on the Greek market intensified and speed has become an important new parameter in the investment calculus of TNCs.

24 24 since many Greenfields have been operating for quite a long time in the domestic market. Moreover, in order to extend these results to more general applications (e.g. to a wider range of economic settings), further studies will have to be carried out in other open economies. This is deemed particularly necessary, because this research issue has been investigated systematically for the first time in this paper, and Greece might be a special case. Finally, we have controlled for the subsidiary- and for the industry-level in the host country, but, due to lack of relevant information, we failed to control for the FSAs of the parent companies. Most certainly the strength of these inherited FSAs may also influence the performance of foreign subsidiaries. Hence, it is left to future research to broaden our knowledge on the relative importance of these effects.

25 25 Appendix: Questionnaire items used Name of person I..Name of person II. Position in the subsidiary. Position in the subsidiary. 1. Characteristics of the subsidiary Industry (NACE Classification)... Year of establishment (Greenfield/ acquisition)..:. Type of investment (Greenfield/ acquisition): Motive of investment (market-seeking, resource-seeking FDI etc.):.. Nationality of foreign investor. Foreign participation (in %) in the share capital of subsidiary. 2. Subsidiary performance Period of establishment/ acquis. Observation period (average for the first two years) (average for the period ) Market share. Capital intensity.. ROE... Product differentiation. Size.. Definitions: Market share: the market share of the foreign subsidiary on the local industry Capital intensity: the ratio of fixed assets per employee (thousands of Euro) ROE: the return before taxes on equity capital Product differentiation: yes, if the majority of the products are brand names/ no, if otherwise Size: sales (millions of Euro) 3. General assessment of performance of the subsidiary In the case of Greenfield investment: How the foreign subsidiary has been developed up to now? Are you satisfied? In the case of acquisition: How the acquired subsidiary has been developed up to now? Are you satisfied?

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