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CASE STUDY

Economic nationalism and foreign acquisition completion

By Jianhong Zhang and Xinming He.

Economic nationalism – at its simplest, the influence of nationalism on economic activity through policy – is widely accepted to be a factor which should been taken into account by companies who aspire to cross-border mergers and acquisitions, especially against a background of increasing globalisation. In the body of literature dealing with such foreign direct investment, however, there has so far been no attempt to define and quantify its impacts.

Researchers Dr Jianhong Zhang of the Netherlands’ Nyenrode Business University and Dr Xinming He from Durham University Business School have set out to rectify this omission, at least in part. Believing that economic nationalism is dynamic and interactive, they set out to provide a quantitative measure of its impacts on foreign investment and to identify the extent to which those impacts vary.

Measuring the success of inward investment

Although economic nationalism has many facets, the researchers chose to focus upon three key elements – national security, foreign relations and national growth policy. From these they constructed a set of hypotheses relating to the likelihood of deals being completed under certain situations. They expected, for example, to find that deals are less likely to be completed if they involve security-related industries or state-owned operations, or that they are more likely to be completed if they involve a potential partner from a country with whom the host (in this case China) has good general relations, or if the inward investor will bring capital into the country.

A statistical approach requires data and the researchers were able to draw upon a substantial existing database of inward investment in China – a country selected both because of its recent and rapid economic growth and its sometimes reserved approach to foreign interests. The database covered a total of 7,275 cross-border deals over a period of 25 years from 1985 to 2010 and was evaluated through statistical methodology, identifying and evaluating several different subsets.

The impacts of economic nationalism

The analysis of the dataset provided clear evidence of the influence of economic nationalism in all three general areas considered. National security and state ownership were found to have a negative influence upon success with the chances of a successful acquisition reduced, while good foreign relations and key elements of economic policy (including whether the industry was hi-tech, levels of capital input and whether ownership was private) showed a significant positive correlation, indicating a greater likelihood of success.

The findings of the research make a threefold contribution to the existing body of work relating to foreign investment. As well as offering new insights into the process through an empirical method providing statistically significant results and examining the impacts of changes in economic nationalism, the Chinese experience can (with appropriate caution) be extended to other developing nations and as such provides potentially useful information for potential foreign investors. 

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