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Cross-Border Acquisitons and Target Firms' Performance: Evidence from Japanese Firm-Level Data

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Kyoji Fukao
Keiko Ito
Hyeg Ug Kwon
Miho Takizawa

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Paper provided by Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University in its series CEI Working Paper Series with number 2006-18.

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Date of creation: Feb 2007
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Handle: RePEc:hit:hitcei:2006-18

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Keywords: FDI TFP Acquisition Selection bias Propensity score matching Average treatment effect abstract: Using Japanese firm-level data for the period from 1994-2002 this paper examines whether a firm is chosen as an acquisition target based on its productivity level profitability and other characteristics and whether the performance of Japanese firms that were acquired by foreign firms improves after the acquisition. In our previous study for the Japanese manufacturing sector we found that M&As by foreigners brought a larger and quicker improvement in total factor productivity (TFP) and profit rates than M&As by domestic firms. However it may be argued that firms acquired by foreign firms showed better performance simply because foreign investors acquired more promising Japanese firms than Japanese investors did. In order to address this potential problem of selection bias problem in this study we combine a difference-in-differences approach with propensity score matching. The basic idea of matching is that we look for firms that were not acquired by foreign firms but had similar characteristics to firms that were acquired by foreigners. Using these firms as control subjects and comparing the acquired firms and the control subjects we examine whether firms acquired by foreigners show a greater improvement in performance than firms not acquired by foreigners. Both results from unmatched samples and matched samples show that foreign acquisitions improved target firms’ productivity and profitability significantly more and quicker than acquisitions by domestic firms. Moreover we find that there is no positive impact on target firms’ profitability in the case of both within-group in-in acquisitions and in-in acquisitions by domestic outsiders. In fact in the manufacturing sector the return on assets even deteriorated one year and two years after within-group in-in acquisition while the TFP growth rate was higher after within-group in-in acquisitions than after in-in acquisitions by outsiders. Our results imply that in the case of within-group in-in acquisitions parent firms may be trying to quickly restructure acquired firms even at the cost of deteriorating profitability.

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Find related papers by JEL classification:
C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods
D24 - Microeconomics - - Production and Organizations - - - Production; Capital and Total Factor Productivity; Capacity
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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  1. Ralph Paprzycki & Kyoji Fukao, 2005. "The Extent and History of Foreign Direct Investment in Japan," Hi-Stat Discussion Paper Series d05-84, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
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  3. Fukao, Kyoji & Ito, Keiko & Kwon, Hyeog Ug, 2005. "Do out-in M&As bring higher TFP to Japan? An empirical analysis based on micro-data on Japanese manufacturing firms," Journal of the Japanese and International Economies, Elsevier, vol. 19(2), pages 272-301, June. [Downloadable!] (restricted)
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  4. James Heckman & Hidehiko Ichimura & Jeffrey Smith & Petra Todd, 1998. "Characterizing Selection Bias Using Experimental Data," Econometrica, Econometric Society, vol. 66(5), pages 1017-1098, September.
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  5. Kyoji Fukao, 2004. "Do Foreign Firms Bring Greater Total Factor Productivity to Japan?," Discussion papers 04014, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
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  6. Rachel Griffith & Helen Simpson, 2001. "Characteristics of foreign-owned firms in British manufacturing," IFS Working Papers W01/10, Institute for Fiscal Studies. [Downloadable!]
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  7. Fukunari Kimura & Kozo Kiyota, 2007. "Foreign-owned versus Domestically-owned Firms: Economic Performance in Japan," Review of Development Economics, Blackwell Publishing, vol. 11(1), pages 31-48, 02. [Downloadable!] (restricted)
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  9. Heckman, James J & Ichimura, Hidehiko & Todd, Petra E, 1997. "Matching as an Econometric Evaluation Estimator: Evidence from Evaluating a Job Training Programme," Review of Economic Studies, Blackwell Publishing, vol. 64(4), pages 605-54, October. [Downloadable!] (restricted)
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  12. Arnold, Jens & Smarzynska Javorcik, Beata, 2005. "Gifted Kids or Pushy Parents? Foreign Acquisitions and Plant Performance in Indonesia," CEPR Discussion Papers 5065, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  13. Sourafel Girma & David Greenaway & Richard Kneller, 2004. "Does Exporting Increase Productivity? A Microeconometric Analysis of Matched Firms," Review of International Economics, Blackwell Publishing, vol. 12(5), pages 855-866, November. [Downloadable!] (restricted)
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