Investigating the linkages between industrial policies and M&A dynamics: Evidence from China
Introduction
Mergers and acquisitions (M&As hereafter) have been widely studied in the economic literature. Many scholars have focused on firm-level advantages or disadvantages originating from M&As (Burt & Limmack, 2003; Schweiger & Very, 2003; Fortune, 2005; Angwin, 2007; Kwon, Lee, & D. H., 2018; Harrison, Hitt, Hoskisson, & Ireland, 1991, and so on), and other researchers have focused on the role of managers and other stakeholders in promoting or hampering biddings (Baumol, 1959; Anderson, Havila, & Nilsson, 2013; and many more).
The role of M&As in transforming the structure of a sector, however, has been less explored. In particular, there is little empirical evidence on the linkages between industrial policies and M&A waves. Nevertheless, the topic is relevant in particular in the context of emerging countries with strong industrial policy apparatuses, since the possibility of driving M&As can become a powerful means to promoting structural change.
We aim to fill this gap by studying the case of China. Since the introduction of the open door policy in 1979, China has used selective industrial policies to promote the development of specific sectors, territories and technologies (Biggeri, 2017; Di Tommaso, Rubini, & Barbieri, 2013; Jiang & Li, 2010; Xiang & Zhang, 2013). Selective policies targeting sectors in particular have nurtured the growth of specific productions, technologies, national champions, etc. (Barbieri, Di Tommaso, Tassinari, & Marozzi, 2019; Chu, 2011; Nolan, 2001; among others), and their importance is currently acknowledged outside China (Andreoni, 2017).
More generally, Chinese policymakers have been pushing a structural change of their economy, identifying specific sectors within the Five Year Plans (FYPs hereafter), China's main policy documents. Chinese policymakers themselves recognize the role of M&As in transforming the features of firms and markets, up to the point that merger waves are explicitly encouraged in FYPs for particularly relevant sectors.
Our paper explores whether the identification of sectors that are particularly relevant in the FYP works as an incentive for economic actors to engage in M&As. To do so, we empirically explore the linkage between Chinese sectoral selective policies in the FYP and M&A waves at the industry level, with particular reference to emerging sectors. Using an original database compiled from several sources, we discriminate among the various forms of mergers (vertical/horizontal/conglomerate) and ownership of the acquirer (SOEs/private) to understand whether sectoral identification is able to influence M&A trends. Our main intuition is as follows: the selection of specific sectors in the FYP has already been shown to produce effects on economic performance (Wu, Zhu, & Groenewold, 2019). This happens because, after selective identification in the FYP, a whole range of encouraging policies follows (Kenderdine, 2017; Sun, Wu, & Liu, 2014; Zhao, Li, Zhao, & Ma, 2019). In the case of emerging sectors, policymakers use this scheme to promote a systemic shift of the economy towards frontier-technology productions (Chen, 2015; Prud'homme, 2016; Yang, 2015). In our view, therefore, the selective identification in the FYP acts as a signal that in the forthcoming years, these sectors will be at the core of the structural transformation of the economy. Although single actors do not know, since the beginning, what specific measures will be taken to promote these sectors, the sole identification of emerging sectors may, henceforth, be able to spread positive expectations in relation to those sectors and produce a reorganization in the markets via M&As.
To the best of our knowledge, ours is one of the first papers shedding light on the potential signaling effects of policies towards M&As and the sectoral structural change they trigger. In this regard, our contribution is explorative and wishes to open future lines of research. We try to address the causal link between being identified as an emerging sector and the number of M&As that are realized during the FYP period via a three-step instrumental variable approach (Adams, Almeida, & Ferreira, 2009; Wooldridge, 2010), using as an instrument a proxy for the technology level of the sectors in OECD countries.
The paper is structured as follows: the next section reviews the relevant literature on M&As. Section 3 focuses on Chinese selective policies in the FYPs and the distinction between pillar and emerging sectors, concluding with three empirical questions. The data and methodology description (section 4) and the empirical investigation (5) follow. Section 6 concludes with further discussion on the results and policy-oriented final remarks.
Section snippets
Mergers and acquisitions: Types and determinants
Largely, the literature has studied M&As from the microeconomic or firm-level perspective, with fewer contributions using a meso-macroeconomic (country or industry) focus. For our purposes, we are mainly interested in the latter, although some implications on microdeterminants are useful to understand the phenomenon and to build our empirical investigation.
At the industry level, M&As have an important role in modifying the structure of the market and its governance mechanisms (Holmstrom &
China's selective industrial policy and the five-year plans
With the launch of the Open Door Policy, China's economic structure has gradually shifted away from a centrally planned economy. In this respect, rather than going towards an open market economy, the national system has moved towards capitalism with Chinese characteristics or a socialist market system, in which Chinese governments have been active in designing and driving the structural changes of their economy. The selectivity of policies is a constitutive part of this framework (Di Tommaso et
Data, variables and baseline model
Our analysis is based on an originally compiled dataset coming from the merging of different sources5
A description of Chinese M&A
The majority of the 1995 M&As in our database are vertical: 919, corresponding to 46.1%. Conglomerate M&A are 508 (25.5% of the sample), and Horizontal are 481 (24.4%).14 The entire M&A phenomenon has remained substantially stagnant up to the mid-2000s (corresponding to the 9th and 10th FYPs), with only 3.4 M&A on average each year. During the 11th Five-Year plan period (2006–2010), the number of M&As, in particular
Discussion and conclusion
This article empirically investigates the relation between selective policies and M&A waves at the industry level, focusing on the Chinese case and sectoral identification in the FYPs. The empirical analysis we have performed provides some answers to the explorative research questions we have formulated, also in terms of policy implications. First, it seems that the identification of sectors emerging in the FYPs can positively affect M&A events, influencing a restructuring of the markets
Acknowledgments
The research is supported by the following grants: “Emilia-Romagna International School of Policy” Project (CUP: E45J19000150004) implemented by the Department of Economics and Management of the University of Ferrara (Italy) with Emilia-Romagna Region funds (Regional Council Resolution n.1358 on August 05, 2019); Key Project of Philosophy and Social Science of the Ministry of Education of China (Grant n.15JZD020); Guangdong Science Foundation (Grant n. 2018A030313517); Youth Fund Project for
References (110)
- et al.
Understanding the relationship between founder–CEOs and firm performance
Journal of Empirical Finance
(2009) - et al.
Political ties and VC exits: Evidence from China
China Economic Review
(2017) - et al.
Investigating the economic role of mergers
Journal of Corporate Finance
(2004) - et al.
The political economy of industrial policy: Structural interdependencies, policy alignment and conflict management
Structural Change and Economic Dynamics
(2019) - et al.
Association between accounting performance measures and stock prices: A test of the life cycle hypothesis
Journal of Accounting and Economics
(1992) - et al.
Measuring market concentration in China: The problem with using censored data and its rectification
China Economic Review
(2014) - et al.
Getting the specialization right. Industrialization in southern China in a sustainable development perspective
World Development
(2020) - et al.
Diversification’s effect on firm value
Journal of Financial Economics
(1995) - et al.
Challenges of working with the Chinese NBS firm-level data
China Economic Review
(2014) - et al.
Intimidating competitors—Endogenous vertical integration and downstream investment in successive oligopoly
International Journal of Industrial Organization
(2008)