The Political Economy of Inward FDI: Opposition to Chinese Mergers and Acquisitions

Abstract

A great deal of political economy scholarship has focused on how countries can attract foreign direct investment (FDI), and the effects of FDI on growth and political stability. A related topic that has received almost no attention, however, is that of divergent political reactions to inflows of FDI in the countries receiving investments. This is an oversight, because inward FDI flows are not equally welcomed by the host country and, in fact, often encounter strong political opposition. We study this phenomenon by examining political opposition to attempts by Chinese companies at mergers and acquisitions (M&As) with US firms. This is especially important given rapidly expanding Chinese M&A activity. We hypothesise that although most legal barriers to foreign M&As are based on national security considerations, objections on these grounds are often vehicles through which to channel other grievances, and that economic distress and reciprocity are also key drivers of political opposition. To test this theory, we constructed an original dataset of 569 transactions that occurred between 1999 and 2014 involving Chinese acquirers and American targets. We find that there is more likely to be opposition to Chinese M&A attempts in security sensitive industries, economically distressed industries, and sectors in which US companies faced restrictions in China's M&A markets.

Navigating the New Normal: Political Affinity and Multinationals’ Post‐Acquisition Performance

“…The political affinity between two countries influences a government’s actions not only in the political domain but also in the economic realm. For instance, when Lenovo attempted to acquire IBM, there were growing concerns from the U.S. government with regards to Chinese companies’ investments in the U.S.A. (Tingley et al, ). Government agents are less likely to feel concerned about international acquisitions if economic transactions involve foreign firms from countries with similar national interests.…”

The Rise of Foreign Direct Investment Regulation in Investment‐recipient Countries

“…Investment protectionism is not a new phenomenon as scholars have traced it to the events that occurred in the 20th century, including resource nationalism in Latin America and targeted protectionism against Arab and Japanese FDI in the advanced industrialized countries (Reich, ; Tanzi and Coelho, ). In the 21st century, we can observe a similar wave of investment protectionism against SOEs from emerging economies, such as China (Cuervo‐Cazzura, ; Enderwick, ; Tingley et al, ). This new wave is unique given that regulations of host‐states are evolving to respond to new perceived threats, including the rise of investment from SOEs (Shima, ; Wehrlé and Pohl, ).…”

“…This new wave is unique given that regulations of host‐states are evolving to respond to new perceived threats, including the rise of investment from SOEs (Shima, ; Wehrlé and Pohl, ). Scholars analyzing these regulatory changes have noted the specific role played by Chinese SOEs in these changes in Australia (Drysdale, ; Wilson, ), Canada (Ufimtseva, ), the United States (Tingley et al, ), and the European Union among others (Meunier et al, ).…”

“…One of the several explanations for investment restrictions, offered by scholars, rests on the idea of national security, an elusive concept that encompasses military and non‐military threats that can negatively impact a given nation (Romm, ). Existing studies looking at FDI restrictions suggest that investment protectionism occurs when the national security of investment‐recipient countries becomes threatened (Rosen and Hanemann, ; Tingley et al, ; Enderwick, ). However, national security is increasingly becoming a ‘catch‐all’ concept that captures the insecurities of specific host countries and hides other factors that drive protectionism (Tingley et al, ).…”

“…Established theories, advanced by scholars such as Sauvant (), Rosen and Hanemann (), and Nicholls (), indicate that national security concerns motivate countries to engage in FDI protectionism. The existing conceptualization of national security, is however problematic, given that it has become a catch‐all concept that masks other factors motivating host countries to adopt regulatory restrictions on FDI (Tingley et al, ). Therefore, the existing theory is too broad to account for why certain businesses, which are considered important from the national security perspective, are sometimes not protected by host governments.…”