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European Economic Review
journal homepage: www.elsevier.com/locate/eer

Cross-border mergers and strategic alliances
Larry D. Qiu Ã
School of Economics and Finance, The University of Hong Kong, Pokfulam Road, Hong Kong

a r t i c l e in fo
Article history: Received 5 February 2008Accepted 30 December 2009 JEL classi?cation: F12 F23 Keywords: Cross-border strategic alliances Cross-border mergers Export FDI Distribution costs

abstract
This paper develops a model with distribution costs to study ?rm cooperation in forming strategic alliances and mergers, under different types of foreign market entry modes, that is, export or foreign direct investment (FDI). Under bothexport and FDI, we ?nd that cross-border alliances (mergers) dominate domestic alliances (mergers); and cross-border alliances and mergers are preferred to independence if and only if distribution cost is high. Under export, cross-border alliances are chosen in equilibrium if distribution cost is high. Under FDI and with high distribution cost, cross-border alliances (mergers) are chosen inequilibrium if plant setup cost is low (high). & 2010 Elsevier B.V. All rights reserved.

1. Introduction In the past two decades we have witnessed the acceleration of globalization. Globalization takes various forms as it penetrates countries. Beyond the traditional forms, namely export and green-?eld foreign direct investment (FDI), it has become common nowadays for multinationals to use cross-bordermergers and acquisitions (M&As) or to form crossborder strategic alliances in order to extend their businesses internationally (OECD, 2001). The value of cross-border M&As grew from USD 153 billion in 1990 to USD 1 trillion in 2000, while the number of new cross-border strategic alliances increased from around 830 in 1989 to 4520 in 1999.1 The Daimler–Chrysler merger, the Ford-Mazda alliance, andthe Renault–Nissan alliance are just a few examples of this new trend of globalization occurring in the automobile industry. As pointed out in the OECD (2001), cross-border M&As and strategic alliances are two distinctive features of the recent industrial globalization. Why do ?rms form cross-border strategic alliances or engage in cross-border mergers? What economic factors affect their incentivesto form such alliances and mergers? To answer these questions, we build a two-country, multi-?rm economic model, in which ?rms decide on the type of cooperation, namely, cross-border strategic alliances or mergers, given that they have made their individual choice in foreign market entry modes, that is, export or FDI.

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E-mail address:[email protected] URL: http://www.sef.hku.hk/~larryqiu See the OECD (2001) which is based on Thomson Financial’s database and on the Japan External Trade Organisation (JETRO).

0014-2921/$ – see front matter & 2010 Elsevier B.V. All rights reserved. doi:10.1016/j.euroecorev.2009.12.009

Please cite this article as: Qiu, L.D., Cross-border mergers and strategic alliances. European Economic Review(2010), doi:10.1016/j.euroecorev.2009.12.009

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Firms form strategic alliances in order to cooperate in some aspects of their business. They are often competitors in the product markets. This type of partial cooperation is in fact a common feature among most strategic alliances.2 Speci?cally, we assume that within the samealliance, the ?rms share their distribution networks; thus it is basically a distribution alliance. The Haier–Sampo strategic alliance is just a good example.3 Based on such a model, our analysis yields a number of important and empirically testable results. We ?nd that cross-border alliances (mergers) dominate domestic alliance (mergers). A ?rm has a larger incentive to form a cross-border…