CROSS-BORDER MERGERS AND ACQUISITIONS

M&A AS A MODERN FORMS OF ENTREPRENEURSHIP AND INVESTMENT

CROSS-BORDER MERGERS AND ACQUISITIONS

ABSTRACT

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1. INTRODUCTION

The impact of globalization of markets, complexity of the business environment, volatility, and the need to expand the business multinational, need modern strategy for external growth. The importance of foreign direct investment (FDI) is manifested by acquiring the rights to manage and control, as well as the right of ownership over the company in which it invests.

The aim of this paper is to point primarily to the complexity of the problem of cross-border mergers and acquisitions. In the first part, I points to the role of M&A as a form of investment in the international market for corporate control. The second part focuses on the motives for the implementation of cross-border M&A, and the third part explains the strategy and tactics of their application in modern business conditions.

2. FOREIGN  DIRECT INVESTMENT AND INTERNATIONAL MARKET CORPORATE CONTROL

The emergence of global markets and directing business activities across national borders have caused the emergence of new sources of investment capital and a dispersion (change) in ownership structures. The most prevalent form of ownership in the company today is the separation of ownership from management. The high degree of differences in goals leads to a significant conflict of interest which is defined as an agency problem. The goal of the owners is to maximize capital investment of investment capital and a higher rate of return as expressed in the form of dividends. Enlightened stakeholder model arguing that “to maximize firm value, managers must not only satisfy, but enlist the support of, all corporate stakeholders”. Enlightened value maximization uses stakeholder theory to consider that a company cannot maximize value if any important stakeholder is ignored or mistreated. However, it maintains “as the criterion for making the requisite tradeoffs among its stakeholders” long-term value maximization, thereby solving the problems that arise from considering multiple objectives, as in traditional stakeholder theory.

Objective professional wheel-managers is to maximize the sake. One of the main areas of disagreement interests of owners of capital and management structure is the level of risk that is accepted when making business decisions. From the standpoint of the owners of capital diversification of investment capital they are able to reduce the risk of investment. In the decentralized solution, the organization determines the appropriate performance measure. Person or unit’s responsibility is to figure out what the performance drivers are, how they influence performance, and how to manage them. And managers at higher levels may help the person or unit to understand how to manage them.

When a company becomes a potential prey for takeover by other companies when does not create added value for shareholders. Companies that want to be in a short period of time to consolidate, protect and improve our competitive position (Petrović & Denčić-Mihajlov, 2010) as a mechanism of the market for corporate control using merger and acquisition (M&A) as a form of foreign direct investment.

Jensen & Ruback (1983) point to the need to consider responses to the following questions:

a)      What are the goals of Shareholders-acquirer and the target company?

b)      Should the firm have a single-valued objective?

c)      Does the defense strategy implemented by the target company may affect the reduction of shareholder wealth?

d)         Does company that acquires will create market power product?

e)           Does competition legislation imposes additional costs of a company takeover?

The debate over question: corporations should maximize value or act in the interests of their stakeholders, framed as stockholders versus stakeholders, or whether the firm should have a single-valued objective function or scorecard. Proposition: single-valued objective is a prerequisite for purposeful or rational behavior by any organization.Those in support of shareholder wealth maximization, argue that the most realistic for a firm is to have a single-valued prioritized objective, rather than myriads of them; Hitt et al. (2009) suggest that mergers and acquisitions reduce the transaction costs of entering new markets, yet there is still a high level of transaction costs relating to the process of adapting to the new market of location, cultural and regulatory aspects.

Thomas & Grosse (2001) indicate different groups of factors that affect the investment decision making:

a)      economic factors such as the characteristics of the market and the efficiency of investments;

b)      socio-political factors such as the impact of the macro environment on the company's operations (the degree of market orientation of the country, the existing infrastructure, protection of the environment, the characteristics of the legal system of the country);

c)      geographic distance. Country's investment location may be affected by the reduction of transport and communication costs.

Main motiv of foreign companies is profit. Ownership advantage can be inmaterial form (a competitive product, technology) or intangible form (patent, brand) and results in a utility in the expansion of production in the international market or licensing. For a country of investment investments in the form of m erdžera and acquisitions represent a change in ownership structure the undertaking which is the subject of investing. The positive side of this type of investment lies in improving the operations of the enterprise, the modern corporate management and technological competence in the international market. The significance is higher if the country is investing transition or a developing country, and the origin of investment capital from the developed countries. The corporate objective function that maximizes social welfare thus becomes “maximize current total firm market value.” It tells firms to expand output and investment to the point where the present market value of the firm is at a maximum.

3. MOTIVES OF INTERNATIONAL M&A

Numerous scholars have conducted empirical studijei developed a number of theories and hypotheses about the motives of international mergers and acquisitions. The set of theories and hypotheses investigated the reaction of the management structure the company to changes in the environment. Passive reaction manifests itself in response to changes in the environment, while active responses based on strategic planning. Goar (1969) proposes a theory of the disorder (disturbance theory) by which the differences in expectations of shareholder cause the action frequently changed owners. This suggests that when it comes to economic turbulence, the owners of the target company will be more pessimistic and the company that acquires more optimistic mood regarding the evaluation of the target company, which eventually results in the realization of the company takeover. Jensen believes the inherent conflict between the doctrine of shareholder value maximization and the objectives of stakeholder theory can be resolved by melding together “enlightened” versions of these two philosophies: “Enlightened value maximization recognizes that communication with and motivation of an organization’s managers, employees, and partners is extremely difficult.” In short, says that a firm cannot maximize value if it ignores or mistreats any important stakeholder group. By the same token, the enlightened stakeholder theory implies that firm value is the goal, but the processes and the audits suggested by the stakeholder theorists should form the basis of action towards motivating all the key stakeholders (Jensen, 2001:16). What we must do, however, is to set up our organizations so that managers and employees are clearly motivated to seek value.

Every firm has to develop its own growth strategy according to its own characteristics and environment. Internal growth strategy can take place either by expansion, diversification and modernisation. External growth is a process where two organisation comes together for the achievement of common goal. Foreign collaboration helps in removing financial, technological and managerial gap in the developing countries. It is recognised as an important supplement for development of the country and for securing scientific and technical know-how[1].

Theory macroeconomic shocks (Macroeconomic shocks theory) lists factors such as economic growth, interest rates or inflation (Wang, 2008). GDP growth and lower interest rates cheapen the a company takeover process and make the implementation of mergers and acquisitions more likely.

Companies which using the Theory of Monopoly (Monopoly theory) increase monopolistic market position create barriers to entry for other companies in the market, realizing external growth (Stigler, 1950). The theory wrong assessment of the market (Market (mis)-valuation hypothesis) is based on an inefficient capital market and indicates that due to asymmetric information about the target company its market price does not reflect its true value. Most empirical studies speak in favor decrease the value for shareholders for company that acquires (Wang, 2008), which explains the behavior of managers and decision-makers on the takeover of the target company on behalf of their own interests at the expense of shareholders. In this sense, the theory of "managerial Empire" (Empire-building hypothesis) argues that in situations with less able to control the work of managers by shareholders may be directing the company to grow above its optimal size. This further leads to the growth of cost asymmetries and increased use of personal benefits by managers. Theory managers pride (Hubris theory) is based on the view that individuals not always bring rational decisions under conditions of uncertainty. Managers depending on the situation suits them, they can to convince shareholders that the market does not show the real economic value of the target or integrated companies and that their assessment of the correct valuation (Wang & Moin, 2012).

With Enlightened value maximization Jensen (2001) proposes a new vision for both approaches, the Enlightened Value maximization and Enlightened Stakeholder theory. According to Jensen (2001), the enlightened value maximization would assume many of the characteristics of stakeholder theory, but also accept the maximization of total long-term firm market value as a criterion to make the necessary tradeoffs among its stakeholders. Jensen’s new approaches pointed out that the maximization of long-term firm market value seems to be a necessary condition to keep the corporate investment in relationships with stakeholders. As Jensen points out, the Balanced Scorecard likewise does not provide a single objective standard for guiding how to weigh financial, customer, internal business process, learning and growth and other dimensions that together make up the ―scorecard.. Balanced Scorecard theory is flawed because it presents managers with a scorecard which gives no score--that is, no single-valued measure of how they have performed. Thus managers evaluated with such a system […] have no way to make principled or purposeful decisions. The solution is to define a true measuring performance for the organization or division.

Defining motives realization of cross-border M&A is defined bythe degree of efficiency of the capital market or the rationality of decision makers. In one aspect, the M&A operationalization of strategic development for the company, and the other as a result of passive response to changes in the company's environment or irrational behavior of decision makers.

3.1. INCREASE COMPETITIVENESS

The global market and changes in the competitive environmentmake it possible for the formation of large multinational companies. Evenett (2004) states that the integration of national markets to developing countries and transition contributes to increase sustainability and reduce monopolistic behavior of companies. The strategy of these countries to attract foreign investment capital, and in order to provide access to new markets and technological developments, while the strategy of large companies that through cross-border merger and acquisition activity shorten the period of entry into the global market. For developing countries in transition is characteristic that the main contribution to shaping the competitive environment provides state structure through policy stimulus in the area of macroeconomic stabilization, price and trade liberalization, privatization and the establishment of institutional and legal framework as the basis for the development of a market economy. The geographical presence of the company in those markets where it has not had a share not rare to be a condition of survival, not one of the commercial alternatives. The dilemma: whether the target market to build new capacity or to buy existing ones. Purchase of existing capacity is financially profitable, the time aspect ROI quickly achievable.

The effects of economies of scale reduction of costs per unit Product opens space for the elimination of duplicate functions, reduces the risk of business operations and opens up new possibilities in the field of manufacturing, marketing, purchasing and sales, research and development.

The effect of the depth of the economy often appears as the main motive of international acquisitions in the financial sector. The effect contributes to competitive advantage because the companycan use one set of inputs in the production of a wide range of products and services (Denčić-Mihajlov, 2009). Incurred within one company (transaction costs) can be reduced vertical merger.

3.2. RESPONSE TO CHANGES IN THE ENVIRONMENT

The strategy of external growth in the form of M&A target companies the ability to overcome numerous constraints such asaccess to the necessary resources, financial resources, outdated technology, the saturation / insufficiency of the domestic marketand slow adaptation to changes in market conditions. These companies have an intense to development of techniques and technologies and access to new knowledge and skills in order to provide a competitive product. The legislation bars represent a significant determinant of the performance of post acquisition period, refers to the protection of shareholders, accounting standards and the taxability of acquisitions (Rossi & Volpin, 2004). When the taxable merger, the assets of the acquired firm is revalued as a result of the revaluation in the form of attribution of value or write-off is treated as taxable income or loss (Brealey & Myers, 2003). Multinational companies have the role of supplier of technology to developing countries and transition economies.

3.3. INEFFICIENT CAPITAL MARKET

The most important participants the capital market investors -the owners of capital. In the corporate business environment the main task is to contribute to increasing the value of the share capital. In contrast, the wide dispersion of ownership increases the room for maneuver managers. Companies that are included in an activity that is not related to the activity of the company, bidders can be initiated motives managers who are not of an economic nature. Realization takeover could have negative consequences if there is no profit, where the final outcome can be reducing the price of shares of company that acquires, inability to pay dividends, not rare and ruin the investment project. Serving managers that his assessment more valid than the market, over-confidence, arrogance, contributes to greater complexity of the agency problem. One reason for this behavior is the tendency of managers to preserve acquired high positions in the company.

Maximization of the total market value of the firm is the best objective function that will guide their managers to conduct appropriate tradeoff among its various stakeholders. Enlightened stakeholder model arguing that “to maximize firm value, managers must not only satisfy, but enlist the support of, all corporate stakeholders”. This is an advantage of Jensen‘s, furthermore, he explains, "top management plays a critical role in this function through its leadership and effectiveness in creating, projecting and sustaining the company’s strategic vision" (Jensen, 2010, p.33). The answers to the questions of how managers should define better vs. worse, and how managers in fact do define it, have important implications for social welfare. Asking manager to maximize profits, market share, future growth in profits and anything one pleases leave him/her without decision objective. The result would be confusion and fundamentally handicap the firm in its competition for survival (Jensen, Wruck and Barry, 1991). Managers must pay attention to all constituencies that can affect the value of the firm. Customers want low prices, high quality, and full service. Employees want high wages, high-quality working conditions, and fringe benefits, including vacations, medical benefits, and pensions. Suppliers of capital want low risk and high returns. objective function is at the core of any decision criterion—must specify how to make the tradeoffs between these demands. There is simply no principled way within the stakeholder construct that anyone could say that a manager has done a good or bad job. One of the most important jobs of managers, complementing objective measures of performance with managerial subjective evaluation of subtle interdependencies and other factors is exactly what most managers would like to avoid. Stakeholder theory giving managers more power to do whatever they want, imposed by forces outside the firm—financial markets, corporate control (takeovers), and, product markets. Given a dozen or two dozen measures and no sense of the tradeoffs between them, the typical manager will be unable to behave purposefully, and the result will be confusion. And without specifying what the tradeoffs are among these two dozen or so different measures, there is no “balance” in their scorecard.

4. MERGERS AND ACQUISITION STRATEGY AND TACTICS

Depending on the target that the company wants to achieve strategies merger / takeover could be focused on horizontal, vertical or conglomerate integration. Merger is a form of a negotiated merger of two companies, in which consent is required a minimum of half of the shareholders of both companies. Acquisitions are more common in practice, for company that acquires tactic means that companies carry out good assessment of investment, facilitate minimizing transaction costs and increase the positive outcome of the post- acquisition period.

Takeover tactics must be set to its realization contributes to increasing shareholder wealth without jeopardizing the interests of employees in the company nor the interests of its creditors, and in accordance with legal regulations. Some of the modern tactics of a company takeover are:

1.      Tactics purchasing shares on the open market;

2.      Takeover control over the company by fighting agent;

3.      Friendly takeover by negotiating the sale of shares and

4.      Realization of public takeover bid (Denčić-Mihajlov, 2009).

Tactic purchasing shares on the open market with an applied when acquirer does not want to disclose their intentions, striving d and as soon as possible buy a controlling stake before the managers of target companies have been informed that there has been a change of ownership and take adequate defense strategy. Shareholders who have a minority share in the ownership structure may delegate their right to vote on representatives,usually investment banks, lawyers or specialized brokerage firm.the role of MPs to representing the interests of one or more shareholders to influence business decisions in favor of their principals. Negotiations on the sale of shares representing friend takeover that are implemented by direct negotiation between company that acquires and target companies and usually involves a sale of the entire company. This tactic cost can be very popular. In case of cancellation of the agreed conditions or their disrespect can result in relatively high price. Takeover tactics is the most common form of acquisitions. In order to protect shareholders a large number of countries precisely defines the conditions in which this type of a company takeover can be implemented. European Parliament Directive (2004/25 / EC) regulation issues related to the trade of securities, shareholder protection and providing equal opportunities for all potential investors. Defining the price offered is a very important aspect, because it must be high enough to be attractive to shareholders, but not so high that the acquirer is in a position to prepaid the value of the redeemed shares, thus jeopardizing future profitability.

5. INTERNATIONAL EXPERIENCE AND EFFECTS OF IMPLEMENTATION OF M&A

M&A are present in the sector of production and services alike (a automotive industry, chemical, pharmaceutical, oil, financial and telecommunications services).

The economic history has been divided into Merger Waves based on the merger activities in the business world as:

Period	Name	Facet
1893–1904	First Wave	Horizontal mergers
1919–1929	Second Wave	Vertical mergers
1955–1970	Third Wave	Diversified conglomerate mergers
1974–1989	Fourth Wave	Co-generic mergers; Hostile takeovers; Corporate Raiding
1993–2000	Fifth Wave	Cross-border mergers, mega-mergers
2003–2008	Sixth Wave	Globalisation, Shareholder Activism, Private Equity, LBO
2014-	Seventh Wave

Source: http://www.kpmg.com/ZA/en/IssuesAndInsights/ArticlesPublications/Transactions-Restructuring/Pages/Seventh-Wave-of-MA.aspx (11.03.2016)

The first wave of M&A activities will start in 1893, and is characterized by the integration of predominantly horizontal type which caused the creation of a monopolistic market structure and the large monopolies: Du Pont, US Steel, Standard Oil, General Electric, Eastman Kodak, American Tobacco (Denčić-Mihajlov, 2009). Oligopolistic structures characteristic of the second wave, which began in 1910, when they arise giants like General Motors, IBM, John Dere and others. The third cycle began in the mid-twentieth century and led to a change in the way of funding acquisitions, a number of integration conglomerate diverification companies activity in various sectors of industry. The fourth wave is characterized by an increase in the number of hostile takeovers, resulting in the emergence of more subtle tactics, and an increase in speculative stock market activities as well as the collapse of the bond market low rating. The very end of the twentieth century was marked by the fifth wave of M&A activity,which is still ongoing, and characterized by a reduced number of hostile takeovers and increased participation of strategic approaches.

According to data from UNCTAD (2013), the share of M&A in the total foreign investment was growing until the outbreak of the economic and financial crisis of 2008, when it came to a sudden drop of investment activities in general. Over the 2003-2005 period, developed countries accounted for 85% of the USD 465 billion cross-border M&As, 47% and 23% of which respectively pertain EU15 and US firms either as acquirer or as target countries. According to the Baker & McKenzie (2013) in the financial services sector slowdown and increasing regulatory constraints that characterize the developed markets, as well as a better competitive conditions tend to result in an increase in cross-border transactions. The energy sector, natural resources and mining is characterized by an increase in demand at the global level, which is most pronounced in China, India and Russia. The largest number of M&A in developing countries were implemented in the energy sector. According to the report, Clifford Chance (2012) M&A activity in 2012 in the mining industry are intense on the Australian market, while telecommunications, media and technology in the first half was characterized by a decline in these activities in general. The increase is noticeable only in the field of technology, which initiated the diversification of products and the need for rapid growth. The health sector is characterized by intense M&A activity in China, where the government is a significant increase in interest from foreign companies that are trying to overcome regulatory barriers and establish a partnership with the local companies, even when it involves the transfer of control.

6. METHODOLOGY

2.1. Estimation strategy to model cross-border M&As

We follow Head and Ries (2005, 2007) to model the location decision of multinational firms through M&As[2]. the probability pij that a randomly drawn company from country i acquires a randomly drawn target in country j. Using the total stock of targets in country j (kj ) and the total number of potential acquiring company in country i (mi), the expected value of mergers and acquisitions (M&Aij ) between country i and j is:

E(M&Aij ) = mipijkj

Assume also that net profits from an acquiring company si in country (i) for an investment in country j are [πi−σtij+εsij ], where πi is the discounted value of the gross profits due to the profitability of the merger, tij denote transaction costs between markets i and j (note that tij can be a multidimensional vector) and εsij is random term of unobserved firm level characteristics, independently distributed with Type I Extreme value cumulative distribution (CDF(ε) = exp(− exp(−ε))). Using discrete choice theory (see Mac Fadden (1974)), one can show that under such assumptions:

pij = exp(πi − σtij ) l ml exp(πl − σtlj ) (2)

where the probability to win the bid for a firm in country i is positively related to the discounted value of its expected profits and negatively related to transaction costs; but it also depends on the position of all the potential competitors, Bj = l ml exp(πl − σtlj ), with respect to market j. Using the latter expression, we get:

E(M&Aij ) = mi exp(πi − σtij ) Bj kj (3)

where Bj is a measure of the “financial remoteness” of market j. The interpretation of this term is clearcut: (i) the higher the discounted value of the expected profits of all other potential buyers or (ii) the easier it is for all potential acquiring firms to buy a target firm in country j, the more difficult it is for a firm in country i to compete on such an asset. Given the analogy with the “multilateral resistance factor” developed in the trade literature (Anderson and Van Wincoop (2003)), Bj is alike the “market potential” (or “supplier access”). We can rewrite (3) as follows:

 E(M&Aij ) = exp (log(mi) + log(kj ) − log(Bj ) + πi − σtij ) (4)

where mi and kj are related to market sizes, πi is related to the profitability of investments in country i and tij is related to transaction costs between markets.

We can therefore use the gravity equations framework to estimate the impact of various determinants of cross-border M&A in a given sector s, which takes the following form

12 M&Aij,s,t = eαieαj eαt eαs (Gdpi,s,t Gdpj,s,t) βZθ ij,s,tηij,s,t (5)

where M&Aij,s,t denotes M&A between source country i (acquirer) and host country j (target) at time t in sector s, Gdpi,s,t (resp. Gdpj,s,t) stands for the market size of sector s in country i (resp. j), Zij,s,t is a set of control variables (linked to expected profitability of firms, transactions costs and other barriers) that might affect cross-border M&A and αi, αj , αt and αs are the source and host country fixed effects, a time-fixed effect and a sectoral fixed-effect respectively. ηij,s,t is an error term assumed to be statistically independent of the regressors.

The use of acquirer/target fixed-effects is necessary to control for unobservable countries characteristics in order to limit potential biases due to omitted variables in the estimation. In particular, it allows to control for the “financial remoteness” Bj of some host markets (assumed to be constant over time). We also control for time fixed-effects since cross-border M&As have been strongly increasing over time due to increasing financial integration across countries. As for Zij,s,t, we assume that they are function of geography, institutions and financial variables capturing expected profitability of firms. Variables are described in detail in the following subsections.

2.2 Description of the data on mergers and acquisitions

I using Thomson Financial (SDC Platinum) over the 1985-2004 period (10 manufacturing and 10 service sectors) described in the Appendix (section 7.2)

The most important acquiring manufacturing sectors in terms of size accounting for almost three quarters of global M&As in manufacturing are (i) chemicals, petroleum, coal, rubber and plastic products, (ii) machinery and equipment, and (iii) food, beverages and tobacco. We divide the twenty years sectoral observations in two main groups: 1) M&As occuring within the same sector (“within sectors”): acquirer and target firms belong to the same sector. 2) M&As occuring across sectors (“across sectors”): the acquirer firm is targeting a firm whose main activity does not belong to the sector of the acquirer (according to our level of disaggregation).

2.3 Description of the regressors

Following expression (5), we study M&As by assessing the roles of market size, transaction costs and firms’ expected profitability. The first key variable is sectoral GDP in the source and the host country at time t. We restrict the elasticity to be the same for country i and country j by using the log of the product of the two GDPs at date t (log(Gdpi,s,t Gdpj,s,t)), but none of the results depend on this restriction. two different dummies constructed as Emui,t Emuj,t is equal to one if both countries belong to EMU at time t and zero otherwise; nonEmui,t Emuj,t is equal to one when the host country j belongs to the euro zone but not the source country. We also control for the market value-GDP ratio of the target country j, as M&As might be more likely when foreign capital is more economical (Baker, Foley and Wurgler (2008))

The descriptive statistics concerning the sectoral indicators (across countries and across sectors).

7. DATA

7.1. Descriptive statistics

Sample: - Annual data over the period 1985-2004 - 21 source countries and 31 target countries - 10 manufacturing sectors and 10 service sectors.

Table 1. Inward and outward foreign direct investment flows, annual, 2008-2013

DIRECTION	Inward	MEASURE	US Dollars at current prices and current exchange rates in millions
YEAR	2008	2009	2010	2011	2012	2013
ECONOMY
Albania	974,3333	995,9299	1050,708	876,268	855,4405	1225,494
Austria	6858,315	9303,418	839,6851	10617,85	3939,385	11082,65
Belgium	193950,3	60963,29	77013,95	119021,9	-30261,1	-2405,87
Bosnia	1001,648	249,9485	406,0295	493,3402	366,3095	331,716
Croatia	5938,058	3346,352	489,9753	1516,802	1355,508	580,1199
Cyprus	1413,993	3472,128	765,5472	2384,112	1257,336	533,2833
Czech Republic	6451,003	2926,815	6140,583	2317,554	7984,109	4990,445
Estonia	1731,144	1839,952	1598,357	340,4763	1516,79	949,8089
Finland	-1144	717,6565	7358,833	2549,84	4152,672	-1064,85
France	64184,28	24215	33628,46	38547,03	25085,64	4875,465
Germany	8108,646	23788,52	65619,93	59317,03	13203,24	26720,79
Greece	4498,627	2436,365	330,0739	1143,135	1740,101	2566,523
Ireland	-16452,9	25715,33	42804,07	23544,7	38314,57	35519,72
Italy	-10835,3	20076,6	9178,261	34323,8	92,51003	16507,8
Latvia	1261,391	93,9373	379,5297	1465,747	1109,321	808,3462
Luxembourg	16853,28	19313,9	39730,84	18116,2	9526,574	30075,37
Malta	943,412	411,6802	924,2446	275,9173	4,125305	-2099,76
Montenegro	960,4233	1527,259	760,4408	558,0527	619,7529	447,3504
Netherlands	4549,31	38609,95	-7324,33	21046,63	9705,715	24388,87
Portugal	4664,862	2706,38	2645,813	11149,63	8994,983	3114,022
Serbia	3492,097	2358,11	1813,056	3256,788	659,4051	1377,417
Slovakia	4868,024	-6,0791	1769,761	3491,286	2825,923	590,9695
Slovenia	1947,486	-658,56	360,005	997,6576	-59,4377	-678,582
Spain	76992,51	10406,6	39872,51	28379,21	25696,45	39166,6

Table 2. Goods and Services (BPM6): Exports and imports of goods and services, annual, 2005-2014

MEASURE	USD in millions	SERIES	Total trade in goods	FLOW	Exports
YEAR	2010	2011	2012	2013	2014
ECONOMY
Individual economies	_	_	_	_	_
Albania	736,926	962,078	1124,33	1411,45	1231,96
Austria	145021,8	170050,9	160172,1	163510	164146,1
Belgium	271308,3	323428,6	303389,2	321893,5	325189
Bosnia and Herzegovina	3230,77	4109,86	3837,31	4363,28	4490,23
Bulgaria	20583,8	28248,2	26677,7	28159,13	27903,46
Croatia	10683,72	12181,47	11139,43	11853,38	13480,49
Cyprus	2281,94	2748,17	2590,62	3648,632	4199,111
Czech Republic	115008,2	137794,4	134056,9	137002	146635,3
Estonia	9909,078	14434,88	14266,72	15119,52	15127,81
Finland	66974,42	79036,36	73015,38	73825,04	76144,25
France	507441,3	586278	560095,5	580675,5	581452,8
Germany	1216272	1431995	1380059	1438654	1490934
Greece	22243,71	27413,45	27903,34	29543,56	31153,02
Hungary	87566,17	99806,08	90208,58	96090,07	99922,65
Ireland	116384,4	125571,4	117232,6	121813,4	142247
Italy	446870,5	522556,8	500742,7	503453,2	513931,4
Latvia	8816,693	11538,11	12393,77	13025,14	13419,91
Lithuania	19722,14	26999,05	28815,59	31862,59	31562,72
Luxembourg	19818,69	23737,93	22354,02	23975,02	24208,9
Malta	3346,68	3951,16	4105,261	3799,596	3442,209
Montenegro	449,069	653,931	498,566	525,273	479,325
Netherlands	477184,8	554309,1	544084,9	566035,9	570923,8
Norway	129119	164773	159825	153521	146231,6
Poland	159570,1	184242	181326,7	197662,6	208938,7
Portugal	48891,13	58797,12	56981,04	61848,83	62867,26
Romania	43462,31	55746,61	51207,38	58278,66	62106,51
Serbia	10198,56	11748,1	10792,8	14010,3	15285,59
Slovakia	64003,2	79215,9	80751,1	82742,8	83219,8
Slovenia	24675,35	29251,2	27309,73	28800,03	30674,07
Spain	254172,8	306139,9	293952,9	310748,7	317049,4
Sweden	167215,3	197103,8	184634,9	181128,7	178556,4
Switzerland	277166	345691	332472	373459	327570
Turkey	120992	142392	161948	161789	168935
Ukraine	47299	62383	64427	59106	50552
United Kingdom	418766,2	495394	482013	479725,6	486292,4
World	14901483	17965411	18147645	18545295	18688979
Developing economies	6326503	7823809	8194084	8425328	8467947
Transition economies	597222,1	797991,6	817099,8	800900,7	763124,8
Developed economies	7977757	9343611	9136461	9319067	9457906
Developed economies: Europe	5257362	6218464	5976504	6209525	6296878
High-income economies (IBRD)	10215947	12232717	12217999	12439771	12498747
CEFTA	18407,58	22561,96	20911,08	25374,54	26937,97
EFTA	410406,7	515315,9	496904,9	531572,7	478649,9
EU28 (European Union)	4845769	5701782	5478294	5676492	5816730
Euro area	3725339	4377453	4210216	4374975	4481892
Europe	5740249	6859746	6634851	6853821	6907867

8. RESULTS

Among developed economies, European MNEs are the most upbeat about global FDI prospects (see figure I.24), despite continuing concern about the EU regional economy. These expectations arise from factors such as the quantitative easing programme launched by the European Central Bank; the considerable cash holdings accumulated by major MNEs in the region; the attractiveness for foreign investors of firms, in particular SMEs, based in weaker EU economies;10 and MNEs’ consolidation strategies in industries such as pharmaceuticals and telecommunications. In contrast, executives from Latin America, North America and other developed economies (Australia, Japan, New Zealand, etc.) are less optimistic about global FDI prospects.

Significant momentum for cross-border M&As, decline in greenfield FDI projects.⁴

After two consecutive years of decline, M&A activity resumed growth in 2014 (figure I.10). In net terms,⁵ the value of cross-border M&As increased by 28 per cent over 2013, reaching almost $400 billion. MNEs have gradually regained the confidence to go back on the acquisition trail.

The value of cross-border M&As in developed economies increased by 16 per cent and those in developing and transition economies by 66 per cent. Investors’ appetite for new greenfield investment projects is less buoyant. After a first rebound in 2013, the total value of announced greenfield investment declined slightly by 2 per cent, remaining close to the $700 billion level of 2013. In particular, in 2014 the value of greenfield projects in developed and developing economies was substantially unchanged compared with 2013 (annual growth rates of −1 per cent in both groupings), while transition economies saw a considerable fall (−13 per cent).

Figure 1. Value of cross-border M&As and announced greenfield projects, 2003−2014 (Billions of dollars)

Source: UNCTAD, cross-border M&A database for M&As (www.unctad.org/fdistatistics); Financial Times Ltd, fDi Markets (www.fDimarkets.com) for greenfield projects.

FDI flows to Europe also fell by 11 per cent to $289 billion. Among European economies, inflows decreased in Ireland, Belgium, France and Spain while they increased in the United Kingdom, Switzerland and Finland.Germany became the largest investing country in Europe.

United States companies represented an attractive target, absorbing more than one third of the largest M&A acquisitions globally. European MNEs targeted the United States market, in particular pharmaceutical firms but also other industries. For example, Germany-based Bayer purchased the consumer care business of Merck for $14.2 billion, and Swiss Roche Holding acquired Intermune for $8.3 billion. In January 2014, Italian automaker Fiat completed its acquisition of Chrysler for $3.65 billion, gaining full ownership. Large M&A deals in Europe occurred predominantly in the telecommunications industry. Of the five largest acquisitions in Europe, three were in telecommunications, and all were led by other European MNEs. The largest deal was the acquisition of SFR SA (France) by Altice SA (Luxembourg) for $23 billion.

The value of sales of MNEs’ stakes in foreign entities (divestments,6 including sales to domestic firms or to other MNEs) reached a record high in 2014, at $511 billion, a 56 per cent increase over 2013 (figure I.11) and the highest value since 2008. This value was split almost equally in transactions between sales to other MNEs (52 per cent) and transfers from MNEs to domestic companies (48 per cent).

Among developed economies, European MNEs are the most upbeat about global FDI prospects (see figure I.24), despite continuing concern about the EU regional economy. These expectations arise from factors such as the quantitative easing programme launched by the European Central Bank; the considerable cash holdings accumulated by major MNEs in the region; the attractiveness for foreign investors of firms, in particular SMEs, based in weaker EU economies;¹⁰ and MNEs’ consolidation strategies in industries such as pharmaceuticals and telecommunications. In contrast, executives from Latin America, North America and other developed economies (Australia, Japan, New Zealand, etc.) are less optimistic about global FDI prospects.

Factors such as substantial investment in infrastructure (especially in information and communication technology (ICT)), a strong skills base, political stability and proximity to Europe make Morocco well placed to attract services FDI.

In South-East Europe, foreign investors mostly targeted manufacturing. In contrast to previous years, when the largest share of FDI flows was directed to the financial, construction and real estate industries, in 2014 foreign investors targeted manufacturing, buoyed on the back of competitive production costs and access to EU markets. Serbia and Albania, both EU accession candidates, remained the largest recipients of FDI flows in the subregion at $2 billion and $1 billion, respectively

Geopolitical risk and regional conflict weighed heavily on FDI flows to the transition economies of the CIS. FDI flows to Ukraine fell by 91 per cent to $410 million − the lowest level in 15 years − mainly due to the withdrawal of capital by Russian investors, and investors based in Cyprus (partly linked to roundtripping from the Russian Federation and Ukraine). The Russian Federation − the region’s largest host country − saw its flows fall by 70 per cent to $21 billion because of the country’s negative growth prospects as an well as an adjustment after the exceptional level reached in 2013 (due to the large-scale Rosneft−BP transaction (WIR14)).

Direct impact on FDI inflows. In the last 10 years, annual FDI inflows to the Russian Federation grew almost five-fold, from $15 billion in 2004 to $69 billion in 2013, before they fell dramatically in 2014. Driven by high expected rates of return, foreign MNEs increased their investments in energy and natural-resourcesrelated projects. Foreign investors have entered the Russian energy market mainly through two channels: asset swaps and technology provision deals. Oil and gas firms of the Russian Federation were allowed to enter downstream markets in developed countries in exchange for allowing MNEs from those countries to take minority participations in those firms’ domestic exploration and extraction projects. For example, Wintershall (Germany) acquired a stake in the YuzhnoRusskoye gas field in Siberia, and Eni (Italy) gained access to exploration and production facilities in the Russian Federation. In return, Gazprom (Russian Federation) acquired parts of those companies’ European assets in hydrocarbons transportation, storage and distribution. In some oil and gas projects that require high technology, such as the development of the Shtokman field, the involvement of developedcountry MNEs such as StatoilHydro (Norway) and Total (France) was necessary because of their expertise.

After a period of growth, FDI in natural-resourcesrelated industries has come to a standstill. Sanctions have had an impact on both channels. For example, in November 2014, BASF (Germany) and Gazprom (Russian Federation) agreed to scrap a $14.7 billion asset swap that would have given Gazprom full control of a jointly operated European gas trading and storage business, including the biggest underground gas storage facility in Europe. In return, BASF’s Wintershall affiliate was set to gain stakes in two west Siberian gas fields.²⁹ The oil industry was also affected by a ban on the exports of a wide range of goods, services and technology to Russian oil projects, in particular those in Arctic, deep-water and shale areas. The enormous Siberian oilfields developed in Soviet times are ageing, and without the development of new resources − from the Arctic to Siberia − Russian oil production could fall. Some foreign affiliates have already begun to hold back in some projects in the Arctic. For example, ExxonMobil (United States) had to freeze all 10 of its joint ventures with Rosneft in this region, including the Kara Sea project. Similarly, a Shell (United States) joint project with Gazprom Neft for the development of the Bazhenov field had to be suspended, as did the Total (France) project with Lukoil.

Europe was host to inflows worth $289 billion (down 11 per cent from 2013) accounting for 24 per cent of the world total in 2014. Inflows fell in 18 European economies, including major recipients in 2013 such as Belgium, France and Ireland. In contrast, some of the European countries that made the largest gains in 2014 were those that had received negative inflows in 2013, such as Finland and Switzerland. FDI to the United Kingdom jumped to $72 billion, leaving it in its position as the largest recipient country in Europe. Inflows to North America halved to $146 billion, mostly due to an exceptional M&A divestment. The share of North America in global FDI flows was reduced to 12 per cent (compared with 21 per cent in 2013). Inflows to the United States decreased to $92.4 billion, mainly due to one large divestment (VodafoneVerizon). However, the United States remained the largest host developed country. In Asia-Pacific, FDI flows to Australia and Japan contracted, while those to New Zealand rebounded.

Outflows from European countries were virtually unchanged at $316 billion, or 23 per cent of the global total. Reflecting the highly volatile trends at the level of individual economies, Germany almost trebled its outflows, becoming the largest direct investor country in Europe in 2014. France also increased its outflows sharply, to $43 billion. In contrast, FDI from other major investor countries in Europe plummeted; FDI from the Netherlands (the largest European investor country in 2013) lost 28 per cent, and flows from Luxembourg (the second largest in 2013) fell to a negative value. United Kingdom outflows fell to −$60 billion (largely owing to the mirror effect of the Vodafone-Verizon divestment). In North America, both Canada and the United States increased their outflows modestly. FDI from Japan declined by 16 per cent, ending a threeyear run of expansion.

In May 2015, the European Commission published a concept paper on “Investment in TTIP and beyond – the path for reform”, the German Federal Ministry for Economic Affairs and Energy published a suggestion for a model investment protection treaty for developed countries, and Norway put forward a new draft model BIT for public consultation.

The European Commission proposed new approaches to key IIA provisions related to the right to regulate and ISDS in its concept paper on “Investment in TTIP and beyond – the path for reform”, launched in May 2015 (European Commission, 2015). Four areas are identified for such further improvement: (i) the protection of the right to regulate, (ii) the establishment and functioning of arbitral tribunals, (iii) the review of ISDS decisions by an appellate body, and (iv) the relationship between domestic judicial systems and ISDS. (European Commission, 2015[3]).

CONCLUSION

Foreign direct investment in the form of M&A help companies to overcome many limitations, such as access to finance, outdated technology, the saturation / insufficiency of the domestic market, the slow adaptation to changes in market conditions. Company that acquires may be motivated by short-term goals to achieve profitability, and long-term strategic objectives compared to the target economy. Relatively stable business conditions affecting the long-term strategic orientation of the company in achieving the long-term profitability, a table with long sides can benefit both the acquirer and the target company and its national economy. Given that very often goals in country's with transitional economy, characterized by a number of macroeconomic problems that impede economic development and the chronic lack of capital that is necessary to compensate for attracting foreign investments make it considerably more complex.

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[1] http://www.yourarticlelibrary.com/business/business-strategies-internal-growth-and-external-growth-strategies/7518/ (11.03.2016)

[2] See also Guimaraes, Figueirdo and Woodward (2003).

[3] European Commission (2015). pp. 11–12. “Investment in TTIP and beyond – the path for reform”, Concept Paper, May. http://trade.ec.europa.eu/doclib/docs/2015/may/tradoc_153408.PDF (11.03.2016)

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 [FMZ1]the emergence of new sources of investment capital have caused separation of ownership structures from management. The goal of the owners is to maximize capital investment with higher rate of ROI. High degree of differences in goals leads to a significant conflict of interest which is defined as an agency problem.