University Finance Report: International Financial Management Analysis

This report presents an analysis of international financial management, specifically focusing on the factors that influence Foreign Direct Investment (FDI) acquisition. The study employs a systematic approach, utilizing regression analysis and a multinomial Logit model to examine the relationships b...Read More

Running head: INTERNATIONAL FINANCIAL MABAGEMENT
International Financial Management
Name of the Student
Name of the University
Author note

1INTERNATIONAL FINANCIAL MANAGEMENT
Analysis
Analysis is done following a systematic approach. The objective is to analyze factors
influencing FDI acquisition. Regression explains the cause and effect relations between
dependent and independent variables. The best way of analyzing the relation between FDI
acquisition and factors like institutional distance, uncertainty avoidance distance and industrial
relatedness is to conduct a regression analysis. Given the trichotomous nature of the dependent
variable that is ownership choice, a multinomial Logit model is formed. However, before
framing final model several things are considered.
First task is to observe the summary statistics of all the variables.
Variable Obs Mean Std. Dev. Min Max
UAD 1009 -2.16056 19.52557 -30 16
ID 1009 3.902991 0.56352 2.986649 4.618378
Ind_relate~s 1009 0.342914 0.474918 0 1
GDP 1009 1.20E+13 1.99E+12 7.59E+12 1.58E+13
GDP Growth 1009 -6.43295 3.633294 -12.4528 0.761495
Enterprise~e 1009 234.0319 2233.029 0 65380.65
Transactio~e 1009 45.04399 220.3831 0 3712.861
FD 1009 7.346978 3.913787 0.560856 15.58575
Sector 1009 0.282458 0.450418 0 1
Table 1: Summary Statistics of the chosen variable
The above table shows some centre measures of central tendency and dispersion. This
gives idea about distribution of the variables. For the regression model the chosen independent
variables are Institutional distance (ID), Uncertainty Avoidance Distance (UAD) and Industry
relatedness. All the variables that are GDP, GDP growth rate, Enterprise value, Transaction
value, Formal Distance (FD) and sectors are control variables. From the summary statistics mean

2INTERNATIONAL FINANCIAL MANAGEMENT
value of all the variables are positive except that is for UAD and GDP growth rate. Negative
GDP growth rate has adverse impact on the economic decision and hence on Ownership choice.
This is one factor behind keeping growth variable in the analysis as a control variable. From the
standard deviation measure, it is observed that Enterprise value and transaction value are highly
variable.
The next step in the research analysis is to examine the correlation among the choice variables.
For this purpose a correlation matrix is formed.
UAD ID
Ind_re~
s GDP
GDPGro~
h
Enterp~
e
Transa~
e FD Sector
UAD 1
ID 0.8992 1
Ind_relate~
s 0.0064 0.0132 1
GDP
-
0.5698 -0.727 -0.0227 1
GDPGrowt
h
-
0.7417
-
0.7517 -0.0497 0.5617 1
Enterprise~
e 0.0243 0.0008 -0.0423 -0.0005 -0.0125 1
Transactio
~e
-
0.0208
-
0.0214 0.005 -0.0262 0.0626 0.319 1
FD
-
0.2073
-
0.4438 -0.0238 0.6526 0.0601 0.0577 -0.0162 1
Sector 0.0261
-
0.0132 0.0801 0.0466 0.0556 -0.0357 -0.0489
-
0.0158 1
Table 2: Correlation matrix of all the independent and control variables

3INTERNATIONAL FINANCIAL MANAGEMENT
The next issue to be addressed is whether collinearity is present or not. Correlation matrix
shows degree of association among the variables. Here, one gests pair wise correlation. In a
multivariate regression analysis, presence of multicollinearity can create a major problem and
even falsification of the result obtained. The problem of multicolinearity is said to exit when one
or more independent variables are related. For a statistically acceptable result the independent
variables should be independent of each other. The presence of any kind of relation between
them gives a biased result where the coefficients are either over estimated or under estimated
based on the nature of the relation. Therefore, test for multicollinearity should be done before
estimating the regression model. There are different testing methods for multicollinearity. These
include computation of Variance Inflation factor (VIF), estimation of Condition Index (CI) or
such others. In the paper variance inflation factor (VIF) is used for this purpose. A value of VIF
less than 10 implies multicollinearity is zero or negligible. If the estimated value of VIF is
greater than or equal to 10 then multiocollinearity can be a severe problem and in that case
dropping the correlated with other variables should be dropped.
Source SS df MS
Number of obs
= 1009
F( 8, 1000) 746.08
Model 329151.33 8 41143.917 Prob > F 0.000

4INTERNATIONAL FINANCIAL MANAGEMENT
Residual 55146.656 1000 55.146656 R-squared 0.8565
Adj R-squared 0.8554
Total 384297.99 1008 381.24801 Root MSE 7.4261
Coef. Std. Err T P > t [95% Conf. Interval]
ID 34.74279 .8098321 42.9 0.000 33.15362 36.33195
Ind_relatedness -0.1983576 0.4965931 -0.4 0.690 -1.172842 0.7761265
GDP 1.51E-13 2.2E-13 0.68 0.495 -2.82E-13 5.83E-13
GDPGrowth -7.03E-02 1.20E-01 -0.59 0.558 -3.06E-01 1.65E-01
EnterpriseValue 0.0000883 0.000111 0.79 0.427 -0.0001296 0.0003061
TransactionValue 0.0003974 0.0011283 0.35 0.725 -0.0018168 0.0026116
FD 1.140175 0.0966761 11.79 0.000 0.9504636 1.329886
Sector 1.906563 0.5241122 3.64 0.000 0.8780773 2.935049
_cons -148.9093 4.286158 -34.74 0.000 -157.3202 -140.4984
Table 3: Regression for independent variables
Variable VIF 1/VIF
ID 3.81 0.262694
GDP 3.51 0.285198
GDPGrowth 3.47 0.288159
FD 2.62 0.382143
Transactio~e 1.13 0.884738
Enterprise~e 1.12 0.890147
Sector 1.02 0.981699
Ind_relate~s 1.02 0.983602

5INTERNATIONAL FINANCIAL MANAGEMENT
Mean VIF 2.21
Table 4: Variance inflation Factor
VIF for all the variables are less than 10 making the mean VIF 10. This indicates that the
chosen variables behave independently and hence can be used for the regression model.
Once the choice of variables is made then the regression analysis can be done. The list of
dependent and independent variables taken for analysis is given below
Variables Definition source
Dependent Variable
Ownership Full acquisition is coded by 1, when the acquirers buy 100% equity
of the target firms; Majority acquisition is coded by 2, when the
bidders buy 50%-99% shares of targets; minority acquisition is
coded by 3, when the acquirers buy less than 50% of the targets.
Thomson
One
Banker
Independent Variables
Uncertainty Avoidance
Distance
The differences in one of cultural dimension index(Uncertainty
Avoidance Distance) among the home (acquirer) and host (acquired)
country
The
website of
Hofstede
Institutional Distance The institutional differences between countries of acquirer and
acquires through calculating the six dimensions from Kaufmann et
al. (2009)
World
Bank
Industry Relatedness The similarity of industry among the home and host country, which
is regarded as if the SIC code of industry in countries matched.
Code 1 means the industry is related, Code 0 is means unrelated.
Thomson
One
Banker
Control Variables
GDP difference The difference in gross domestic product between home and host World

6INTERNATIONAL FINANCIAL MANAGEMENT
country Bank
GDP Growth difference The difference in growth rate of gross domestic product between
home and host country
World
Bank
Enterprise Value The value of the companies acquired Thomson
One
Banker
Transaction Value The value of a specific transaction Thomson
One
Banker
Financial Distance The difference in financial development among host and home
country
Cross-
National
Distance
Database
Sector
(Manufacturing/Service)
To test if the deal is implemented in manufacturing or service sector.
Code 1 is represented the transaction of manufactures, otherwise 0.
Thomson
One
Banker
Main analysis of the present paper is based on the result of multinomial logistic model.
A typical logit model is used to make regression analysis when the dependent variable contains
binary outcome. Multinomial logit model is an extension of simple form of logit. It helps to
examine the relation for variables that have outcome in three or more level. Here there are 3
choices coded as 1,2 and 3 representing full acquisition, majority acquisition with share between
50 to 99% and minority acquisition with share less than 50% respectively. A choice has to made
about the base or reference outcome. The regression result shows two sets of relation with the
independent variables in relation with the base or reference outcome. Base outcome is the one
that appear with the highest frequency. A frequency table is constructed to choose the base.

7INTERNATIONAL FINANCIAL MANAGEMENT
Ownership Choice Freq. Percent Cum.
1 543 53.82 53.82
2 135 13.38 67.2
3 331 32.8 100
Total 1,009 100
Table 5: Frequency of different ownership choice
From the frequency table it is seen that the frequency for fully acquisition is 543, for
majority acquisition the corresponding frequency is 135 and that for minority acquisition is 331.
It is very clear that ownership choice of full acquisition appears maximum number of times.
Hence, it is chosen as the base outcome.
Multinomial logistic regression
Number of obs
= 1009
LR chi2(14) = 218.39
Prob > chi2 = 0.000
Log likelihood = -867.72559 Pseudo R2 = 0.1118
Ownership
Choice Coef
Std.
Err Exp (b) Z P > |z|
[95% Confidence
Interval]
1 Base Outcome
2
UAD
.014384
7 0.01315 1.014489 1.09 0.274 -.0113945 0.040164
ID -.638667 .552063 0.527996 -1.16 0.247 -1.72069 0.443357
Ind_relatedness -.459455 .206027 0.631628 -2.23 0.026 -0.86326 -0.05565
GDP 5.33e-14 9.16e-14 1 0.58 0.561 -1.26E-13 2.33E-13
GDPGrowth -.015965 .050176 0.984162 -0.32 0.750 -0.11431 0.082379

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EnterpriseValue
.000673
8 .000523 1.000674 1.29 0.197 -0.00035 0.001699
TransactionValue
-2.22e-
06 .000578 0.999998 -0.00 0.997 -0.00113 0.00113
FD -.012467 .04256 0.987611 -0.29 0.770 -0.09588 0.07095
Sector -.208419 .216713 0.811867 -0.96 0.336 -0.63317 0.21633
_cons
.688393
4 2.58104 1.990515 0.27 0.790 -4.37036 5.747143
3
UAD .0479622 .010975 1.049131 4.37 0.000 0.026452 0.069473
ID -1.27451 .467394 0.279567 2.73 0.006 -2.19059 -0.35844
Ind_relatedness -.992010 .174949 0.370831 5.67 0.000 -1.3349 -0.64912
GDP 1.60e-14 7.36e-14 1 0.22 0.828 -1.28E-13 1.60E-13
GDPGrowth .0682524 .039657 1.070635 1.72 0.085 -0.00947 0.145979
EnterpriseValue .0041456 .000798 1.004154 5.20 0.000 0.002582 0.005709
TransactionValue -.012377 .00272 0.987700 4.55 0.000 -0.01771 -0.00705
FD .0237726 .034846 1.024057 0.68 0.495 -0.04452 0.092069
Sector -.757366 .182056 .468899 -4.16 0.000 -1.11420 -.400543
_cons 5.072575 2.17158 159.585 2.34 0.019 .8163657 9.328785
Log-Lik Intercept Only: -976.922 Log-Lik Full Model: -867.726
D(982): 1735.451 LR(14): 218.392
Prob > LR: 0.000
McFadden's R2: 0.112 McFadden's Adj R2: 0.081
Maximum Likelihood R2: 0.195 Cragg & Uhler's R2: 0.227
Count R2: 0.538 Adj Count R2: 0.000
AIC: 1.779 AIC*n: 1795.451
BIC: -5036.013 BIC': -107.725
Cox and Snell: Maximum Likelihood R2: 0.195
Nagelkerke : Cragg & Uhler's R2: 0.227
Table 5: Result of Multinomial Logit Regression

9INTERNATIONAL FINANCIAL MANAGEMENT
Before entering into the detail, analysis of the model the overall significant of the model
needs to be tested first. The null hypothesis here is that the model is not a good model. Hence,
lower the probability of accepting the null hypothesis greater is the overall significance of the
model. The statistics used for this test is chi square. Lower the P value for the statistics higher is
the chance for rejecting the null hypothesis and obtains a significant model. For the chosen
model it is observed Prob>chi -=0.000. This implies a overall significant model. Correlation
coefficient gives idea about part of the dependent variable explained by the independent
variables. However, for a logistic regression standard R square used for linear regression model
cannot be used. Nagelkerke R square is a more appropriate measure here. The output of
multinomial logit regression gives nagelkerke R square value as 0.227. This has the implication
for indicating how much proportion of the dependent variable is explained by the independent
and control variables together. It can be said that the independent variables and control variables
able to explain 22.7% variation of the dependent variable.The above table shows the relation of
majority acquisition with independent and control variables over the full acquisition and the
same for minority acquisition. Sign of the co efficient indicates the direction of the relationship.
The co efficient should be statically significant to make any prediction about the relationship.
The null hypothesis used for testing significance of the coefficient assumes the co efficient equal
to zero. Corresponding alternative hypothesis is co efficient is different from zero. Rejection of
the null hypothesis indicates the significance of the estimated co efficient. The simplest way to
take the decision is to observe the p value for each estimate, which is the probability of accepting
the null hypothesis. Greater the p value lower is chance for rejecting the null hypothesis. When p
value is less than 0.05 than the probability of accepting the null hypothesis is very low and hence
can be rejected making the coefficient significant.

10INTERNATIONAL FINANCIAL MANAGEMENT
Looking at the control variable for majority acquisition, all the variables are statistically
significant as P values are greater than 0.05. Coming to minority acquisition slightly different
result is obtained as some of the control variables are statistically significant. The significant
variables are enterprise value, transaction value and sectors. P values of all these three variables
are 0.00. This implies a complete rejection of null hypothesis of having the coefficient zeros.
Therefore, enterprise value, transaction value and sectors have significant impact on ownership
choice. Enterprise value represents the value of the acquired firm. The coefficient is positive and
significant and therefore has the implication high enterprise value benefit the acquire. The
transaction value captures the value of a certain transaction. The co efficient is negative and
hence implies and adverse effect on the ownership choice. Sector is a binary variable assuming
the value 0 and 1. 1 stand for manufacturing sector and 0 stand for service sector. The significant
of this variable indicates that when acquisition is made in a manufacturing industry then it has an
effect on the dependent variable.
Constant term is also significant for minority acquisition is significant unlike for minority
acquisition case where all the control variables including as well as the constant term appears as
non-significant.
The variable Uncertainty avoidance distance is positively related with majority
acquisition. Value of the concerned co efficient is 0.014. When uncertainty avoidance distance
increases by one unit then majority acquisition can be increased by 1% over the full acquisition
given significance of the variable. The value for UAD is 0.274 making acceptance of null
hypothesis in favor of non-significance. Hence, the relation remains in determinant. The
Corresponding co efficient of UAD in case of minority acquisition is also positive. The value
here is 0.048. This indicates UAD has a positive influence for minority acquisition over full

11INTERNATIONAL FINANCIAL MANAGEMENT
acquisition. Unit change in uncertainty avoidance causes a nearly 5% increase in ownership
choice to wards minority acquisition. For minority acquisition, the variable UAD is statistically
significant with a p value = 0.00. The result supports the hypothesis that higher value of
uncertainty avoidance is associated with higher ownership choice for minority acquisition in
contrast to full or majority acquisition. Uncertainty avoidance distance measures the associated
risk on part of the acquirer in doing investment in doing business or investment in the emerging
market. Therefore, greater uncertainty avoidance increases the likely hood of minority
acquisition. This statement is supported by the collected data. A statistically significant and
positive co efficient for this variable indicates that uncertainty avoidance, and minority
acquisition moves in the same direction significantly. With higher uncertainty avoidance,
acquirer retains a minority share reducing the possibility of majority and full acquisition.
For institutional distance, there seems a negative relation between ID and majority
acquisition. This means increase in institutional distance has an adverse impact on majority
acquisition. Value of the estimated co efficient is -0.638. Therefore, on account of unit increase
for this variable there might be a 63% increase in majority acquisition. This means institutional
distance is likely to have a much greater impact on ownership choice than uncertainty avoidance
distance. However, this conclusion can only be drawn if the variable turns out to be statistically
significant. Too test the significance p value is considered. The noted p value is 0.247 which is
greater than the significance level 0.05. This makes the variable statistically insignificant. As the
co efficient turns out to be statistically insignificant its effect on majority acquisition should not
be considered. For another ownership category “minority acquisition” institutional distance has
similar kind of inverse relation. Corresponding co efficient value here is -1.27. The p value is
0.006 that is within the significance. The p value suggests significance of the co efficient and

12INTERNATIONAL FINANCIAL MANAGEMENT
hence the associated variable. With a lower value of institutional distance index there is a greater
minority acquisition in the emerging markets. In fact, the change in minority ownership choice
the change in minority acquisition is greater than 1. The insignificant nature of the variable for
majority acquisition helps actually supports the real word phenomenon and maintains in
ambiguity the proposed hypothesis. The result just obtained supports the proposition that a
smaller the extent of institutional distance between the target company and the acquirer of
company, higher is the preference for minority acquisition. A related implication is for having
greater full or majority acquisition, institutional distance should be higher. If the institution co
efficient in the model for majority acquisition turns out to be significant then this would
contradict this hypothesis. Because a lower value of one factor cannot increase both the majority
and minority acquisition. Then the result would be ambiguous and no relevant conclusion can be
drawn.
The third variable affecting ownership choice is industrial relatedness. Acquirer always
prefers to acquire more shares in the related industry than any other unrelated industries. In
unrelated industries sectoral distance is likely to be higher. Therefore the variable should have a
positive and significant relation with full acquisition and majority acquisition while that of a
negative relation with minority acquisition. For minority acquisition the estimated coefficient is -
0.99. The recorded p value is 0.000. This suggests presence of a significant and negative effect of
industrial relatedness with minority acquisition decision. A negative value of industrial
relatedness can result in much higher preference for minority acquisition on the part of the
acquirer. For majority ownership industrial relatedness plays an inverse role. Lower relatedness
is associated with a higher majority acquisition. Value of the co efficient is –0.459 and the p
value as obtained from the logistic analysis is 0.026. This implies that the test statistics lies in the

13INTERNATIONAL FINANCIAL MANAGEMENT
critical region and thus indicates rejection of the null hypothesis. The implication here is that
higher level of industrial relatedness leads to a lower preference for majority acquisition over the
full acquisition. The inverse relation of related factors for minority and majority acquisition gives
support to the fact that with increase industrial related minority and majority acquisition
decreases leading to increasing preference for full acquisition. Hence, industrial relatedness is a
crucial factor for increasing full acquisition in the emerging markets.
Discussion
The study discusses various factors affecting the share of acquisition in emerging
countries. Many research works have already been on the international acquisition. In most of
these papers, extreme case of acquisition such as situation of full acquisition and otherwise case
is formed where acquisition decision is taken as dichotomous in nature (Contractor et al., 2014).
There are few papers where partial acquisition receives central priority. In order to expand
business multinational considers acquisition in the targeted industry. With acquisition, the capital
or resource base of the the participating international business house strengthens by integration
of the resource base. In a business, friendly environment the strong resource base helps in
successfully operating in a foreign country. However, the success and level of integration
depends on the extent of acquisition. With a partial acquisition, the acquirer is partially
successful in achieving its objective. Partial acquisition reflects flexibility in the ownership
decision. Here, the acquirer are not fully liable for the resources and thus is not fully committed
to their responsibilities. With a full acquisition the acquirer has complete liability of any decision
related to the acquired business (Hoskisson et al., 2013). In partial acquisition a portion of
company’s share is retained by its former owners. The former owners in the paper refer to those
wholly previously owned the entire of the company. As the paper concentrates on acquisition of

14INTERNATIONAL FINANCIAL MANAGEMENT
multinational company in emerging markets presence of former owners become more relevant.
In these markets company equity shares generally hold by managers present in director boards.
The present paper has taken an attempt to find out the motivation and pre determined
factors affecting partial acquisition decision. Partial acquisitions are further taken in two groups
– majority acquisition where the acquirer has a share in a range between 50 to 99 percent and
other is minority acquisition where the acquirer retains share less than 50%. Hence, the
ownership choice is modeled with three types of decision – full acquisition, majority acquisition
and minority acquisition.
Full acquisition bears high cost of capital and itself increases the risk of the multinational.
Full acquisition needs maximum resource commitment and hence involves greater cost of capital
(Okafor, Piesse & Webster, 2015). In full acquisition, the multinationals operate in an
environment where there are less support from the local environment and has least knowledge
about regarding the market and culture of the host country. The location specific disadvantage
can be overcome with high profit prospects. Full acquisition means all the accounting and
managerial decision is the responsibility of the acquire firm. Therefore, acquirer enjoys the entire
profit. Any acquisition less than full acquisition means there are shared profit and risk between
the target and acquirer company (Park & Choi, 2014). Here, all the benefits from a successful
acquisition and operation is not enjoyed by the acquirer firm. Profits are shared between the
target and acquirer firm depending on the extent of share each has. Any managerial decision
needs concern from both the shareholders and thus conflicts may arise because of cultural and
institutional distance. One advantage of partial acquisition is that the financial burden is divided
between the two participating members. Higher the share left with former directors or owner
smaller is the share of the multinationals and greater is the reduction from the profit. The former

15INTERNATIONAL FINANCIAL MANAGEMENT
owner and managers allow partial acquisition by making cost benefit analysis (Lebedev et al.,
2015). If lose in company’s earned profit help the host company to expand its business with the
assistance received from foreign participants then it is good deal. It is not always the case that the
company’s former owner owns the remaining shares. In most of the cases, shares are distributed
among the small equity shareholders of the respective companies. Therefore, making ownership
decision multinationals need complete evaluation of the trade off involved in partial and full
acquisition. Different contexts to be considered here diversity related to institutional framework
and cultural dimension, different aspect of the industries like relation with the acquirer company.
Present paper examines the distance between the host and home country in three broad
spectrums. The distance between the target and acquirer company is measured considering three
aspects- formal institutional distance, relatedness between different industries and cultural
difference leading to incomplete information about the host country and other related factors. All
the factors are important for ownership choice (Goldar, 2016). While taking entry in a foreign
country, the business firm has to confront and adjust with the institutional base of the host nation.
The success of business operation and surveillance in the foreign market greatly depends on the
institutional framework. Direct rules and regulations are part of formal institution. Informal
institution on the other hand is social or cultural norms having implicit values. Institution in its
simplest form include legal framework, rules, laws in the given country or society (Buckley,
2014). Institutional factor vary greatly when considered for cross border nations. The regulatory
environment differs significantly among nations. Restrictive environment prevails in countries
where domestic business needs protection. Relaxed regulatory framework is the feature of
countries encouraging openness (Bartels, Napolitano & Tissi, 2014). Formal institutional
distance measures the variation in major institutional factors between the host nation and home

16INTERNATIONAL FINANCIAL MANAGEMENT
country of the multinationals. Higher institutional distance between the home country of the
acquiring firm and the host nation indicates high investment risk. The risk generated from low
accessibility to the information related to the institution and targeted establishment. The risk
plays a major role for multinational business houses in making their ownership share and
projection of their survival. The institutional distance captures how smoothly the resources can
be transferred from the acquiring nation to the host nation (Meyer, 2015). The institutional based
decision depends on a set of factors like resource allocation, routine management and practices
related to business. Hence, high distance of institution considers an obstacle to carry out business
in the foreign nation. In contrast, low institutional distance reduces these challenges (Tingley et
al., 2015). Before expanding business in foreign nation proper information is required about
existing rules, regulation and political framework. A hypothesis is then proposed regarding the
relation of institutional distance and ownership choice. According to the hypothesis, lower
institutional distance means higher minority acquisition. Conversely, high institutional distance
reflects preference for majority and full acquisition. The regression result gives a significant
negative relation between the institutional factors and minority ownership choice. Here emerging
markets for three host countries are considered. They are India, China and Brazil. The decision
of US based multinational are analyzed. Institutional factors depend on setting specific country
settings. Partial acquisition especially minority acquisition is preferred by US multinational
when institutional distance is lower between US and the host country. More the acquire nation is
institutionally distant from targeted host country lower is the institutional distance. Minority
acquisition takes place instead of full acquisition here. However, for majority acquisition that
also counts under partial acquisition no conclusion can be made. The variable though shows
negative but insignificant relation with the majority acquisition over the full acquisition.

17INTERNATIONAL FINANCIAL MANAGEMENT
Greater institutional distance raises complications in respect to operation of management
practice, procedural decisions, technique of production or operation and in field of other
decisions (Usman, et al, 2015). High value of this index indicates high extent of difference
between host economies and home economies mainly resulted from factors related to rules and
regulation of distinct economies. International company that has highly distant institutional
factors leading to high divergence between the home and host economies face unfamiliar
operational environment. Therefore, prefers partial acquisition and keep the acquisition share
less than 50 percent. On the other hand, higher institutional distance between home environment
and that of the emerging market for targeted host nation greater is the choice towards increasing
their ownership. In this situation, they prefer a greater control to the assets of targeted company.
This is because higher institutional distance reduces the risk generated from uncertain factors of
nation’s institution. High share of ownership gives right to the foreign acquirer to make
necessary changes in the organization. Greater acquisition encourages the acquirer to have a
greater and efficient integration even after the complete acquisition. They take it s their own
interest to make necessary institutional change and attain their targeted economic goals.
Opposite is the situation with lower institutional distance (Gorynia, et al., 2015). A great extent
of trade off can be realized in decisions related to the capital investment, management control
and risk. Therefore, reduces the choice for full or majority acquisition.
The next variable whose effect is to be discussed is uncertainty avoidance distance. This
is actually associated with the fact that when there are higher cultural difference between two
nations then the acquirer may exposed to a risk of having uncertain business environment.
Cultural differences restrict the multinational firm to successfully establish its business and
maintain a stable relationship between formers or local management and other shareholders.

18INTERNATIONAL FINANCIAL MANAGEMENT
Among different factors measuring cultural distance, the factor for present analysis is
Uncertainty Avoidance Distance because of its significant impact on the choice variable (Lee,
2016). Consideration of uncertainty avoidance measures seems to be the most important factors
because of foreign direct investment is an act that assumes great risk. The sit5uation further
become complicated with the presence of uncertainty. It captures uncertainty of the acquirers for
doing business or increasing investment in emerging markets like India, China and Brazil. The
uncertainties related to unexpected outcomes imposing unforeseen cost on the acquirer. With
full acquisition, the external and internal costs are to be borne by the foreign acquirer (Contractor
et al., 2014). In such a situation, choosing full acquisition means involving in an irreversible
business practice. Higher uncertainty avoidance index thus induces the acquirer to go for a least
acquisition (Gammeltoft & Fasshauer, 2017). With fewer responsibilities and less control
minority acquisition turns out to be a right ownership choice. In minority acquisition there are
less risk as well as les profit share. However, with a uncertain environment, profit prospects is
offset by the associated and unprecedented events in the future. Here comes the hypothesis that
higher uncertainty avoidance distance leads to a high chance of minority ownership choice. The
regression analysis supports the hypothesis in light of obtained statistics and its significance test.
From the multinomial logit model, it seems that Uncertainty avoidance distance has a positive
association with the majority and minority acquisition over full acquisition. For minority
acquisition, the relation is significant. In case of majority acquisition, the positive relation is not
supported by statistical rule of significance. Therefore, uncertainty avoidance distance is
positively associated with minority acquisition over full or majority acquisition. Insignificant co
efficient gives the claim partial success as no conclusion can be drawn for majority acquisition.
As mentioned earlier, Uncertainty avoidance distance is an indicator of cultural differences. With

19INTERNATIONAL FINANCIAL MANAGEMENT
a significant co efficient for UAD, it reflects the importance Uncertainty avoidance above
individual factor consideration. High uncertainty points to ambiguities about the related to fund
transferability in the acquisition decision (Pinto et al., 2017).
The last independent variable obtained from the analysis is the extent of industrial
relationship between the firm making acquiring decision and the target company. Industrial
relatedness is a measure of sectoral difference. The similarities or differences are captured in
terms of acquired knowledge, extent of competitiveness in the industry, business practices of the
targeted industry and other routine norms. Greater the similarities between the targeted and
acquirer company easier is the process of transition. It also helps the multinational corporation to
adjust in a foreign country. When acquisition is made in a related industry, the acquirer can
efficiently compete with its local competitors and can enjoy a comparative advantage. In case of
unrelated industry, the firm cannot realize such advantages. It is unlikely for the company to earn
benefit from an unrelated industry (Buckley, Elia & Kafouros, 2014). Acquirer coming from a
distinct industry cannot utilize their existing experience and face difficulty in understanding the
stricture of the industry and needs much time to successfully operate in the industry. With less
knowledge about the industry, there are more uncertainties for the operation (Chittoor, Aulakh &
Ray, 2015). If the firm selects a related industry for making acquisition then these problems are
eliminated. It can use its experience gathered from investment in home country and can adapt the
same strategy if suitable for the environment in the host nation (Arslan, Tarba & Larimo, 2015).
Same argument hold for acquisition considered for cross border nation. Industrial relatedness
helps the acquiring firm to operate efficiently in a foreign country. This posits a very clear
hypothesis that greater the indusial relatedness found between the target and acquirer firm lower
is the minority acquisition. In other words, this increases the possibility of full acquisition.

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Logistic regression analysis shows negatively significant statistics for minority and majority
acquisition. Therefore, a low industrial relation indicates either greater minority or majority
acquisition. In other words, when industries are highly related then full acquisition is a more
preferable decision choice.
The discussion summarizes the effect of three most influencing variables on ownership
choice. They are distance between two country’s institutional frameworks, differences in social
and cultural dimension and similarities and differences between the acquired and target industry
measured by examining relatedness of the industry. The effect of most of control variables is not
important in case of majority acquisition, as all of them turn out insignificant. For minority
acquisition only three variables- enterprise value, transaction value and sectors seem as
significant and thus have impact on acquisition decision.
The empirical analysis and discussion has implication for managerial and investment
decision. The study helps acquirer who is planning for investing in an emerging market. The
managers should consider trade off related to utilization of resources and associated risk and
uncertainty while making cross border investment decision. Moving from minority acquisition to
majority acquisition and finally for full acquisition there are increasing risk for invested capital.
Therefore, before going for a full acquisition several factors related to a safe business
environment. When the acquirer has a full acquisition then it does not receive any assistance
from the former owner (Bany-Ariffin, Hisham & McGowan, 2016). However, the assistance
from the owner of origin often requires assistance from the host country and the target company.
Results obtained from the analysis shows that there are factors that have significant contribution
on the acquisition variable. The acquire company needs to consider three indicators related to
institution, cultural and sectoral difference and finally interrelation among industries. If the

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institutional distance indicates a lower value then they should go for minority acquisition.
Different factors matter for institutional distance. Both the formal and informal institutional
factors included for consideration of institutional distance. In the front of cultural and sectoral
factors uncertainty avoidance distance matters the most. The managers of the acquirer firm if
face a high uncertainty avoidance distance then chooses minority ownership.
The most important factor for ownership choice is the relatedness with the target
industry. Investors should target related industry for making full acquisition. In case of unrelated
industries they better choice is to go for minority acquisition and if not majority acquisition.
Conclusion
The study aims at revealing the factors affecting ownership choice for Foreign Direct
Investment. With increasing global integration, cross border investment becomes very important.
Countries always welcome foreign direct investment realizing the positive effect from such
investment. Foreign investors with a better and improved production technology enhance the
productivity of the host nation. Related consequences are better skill management, establish
international network. A steady flow of international find leads to an overall economic progress.
However, the multinational firms before making investment needs to consider a set of factors.
Specially, in case of emerging market the decision is taken with an even more concentration. The
factors related to ownership choice in the emerging markets are considered for analytical
purpose. The multinational firms in USA are taken here. Extent of FDI acquisition depends on
the distance between the home and host of acquisition. With a change in the growth rate and
institutional factors capital investment change. Foreign acquirer considers benefits and risk
associated with the each ownership choice. The risk and benefits depend on the distance between

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the hoe and host country. The terms distance here does not refer to the physical distance. In the
present paper, distances in three aspects are considered. The first aspect is the institutional
distance. Institution plays an important role in economic decision. It is important for not only
foreign business but also affects choices in the domestic economy. In a restrictive environment
with high regulation, foreign investors are unlikely to do business in the region. Higher
institutional distance means greater benefits for the acquirers. Lower institutional distance on the
other hand, increases the risk for foreign acquisition. Another indicator measuring distance
between host and home country is the uncertainty avoidance distance. It indicates the extent of
unpredictability related with the ownership choice. When there are high chances of unpredictable
events then it automatically raises the risk of capital. Industrial relatedness is another crucial
factor to be considered. In a related industry, acquirer enjoys a greater benefit as there are greater
scope for utilizing their work experience and strategy. In case of unrelated industry, there are
significant time lag between the investment made and return obtained. In this case, the new
owner need time to understand the structure of the industry. Lack of knowledge also increases
the investment risk. In this case, chance of full acquisition is less. Then the investors prefer to
choose less than full acquisition.
The ownership choices are of two types’ full acquisition and less than full acquisition that
is partial acquisition. In the partial acquisition, there are again two choices majority acquisition
and minority acquisition. In majority acquisition, the acquirer’s share lies between 50%-90%.
For minority acquisition the acquirer’s share is less than 50%. The full acquisition is coded with
1, majority acquisition is coded with 2 and minority acquisition is coded with 3. Analysis is
made to find a meaning relation between the ownership choice and factors influencing the
decision. Given the qualitative nature of the outcome multinomial logit model is formed. In the

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regression analysis, ownership choice is taken as a dependent variable and explanatory variables
are institutional distance, uncertainty avoidance distance and industrial relatedness. In the
regression analysis, some variables are taken as control variables. These variables are GDP,
growth rate in GDP, enterprise value, transaction value, sectors that is also coded with 0 and 1.
For multinomial regression model, a base outcome needs to be chosen. The present analysis is
made full acquisition is a base outcome. Two regressions output is obtained. One shows the
relation of majority acquisition with the independent variables over the full acquisition. The
other set of regression output accounts same type of relation for minority acquisition. The
regression output gives some significant and some insignificant variables. For statistically
significant variables, a firm conclusion can be made. For insignificant variables, the relation can
be explained intuitively only. First proposed hypothesis is that lower institutional distance is
associated with a greater choice towards minority acquisition. In other way, the hypothesis
suggests that there are grater preferences for full acquisition for high value of institutional
distance. The regression output supports this hypothesis and shows a negative significant relation
with minority acquisition. The next hypothesis is drawn regarding the influence of uncertainty
avoidance distance. Uncertainty avoidance distance represents unforeseen future risk associated
with acquisition decision and hence on the ownership choice. No firms want to fully acquire the
target firm if there is greater associated risk. Hence, the hypothesis is proposed as- a high index
value of uncertainty avoidance leads to a greater chance of minority acquisition. The logit
regression gives a positive significant UAD co efficient when evaluating relation with minority
acquisition. For majority acquisition, the relation remains undetermined, as there the concerned
co efficient is insignificant. Therefore, conclusion can be drawn only for minority acquisition.
Higher the value of uncertainty avoidance greater is the minority acquisition over majority or full

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acquisition. Another hypothesis is proposed on the relation between industrial relatedness and
ownership choice. In case of making acquisition in a related industry, the acquirer company
enjoys some direct and indirect benefits apart from the profit share. The benefits can be in terms
better resource management in the acquired industry, proper utilization of labor’s skill and can
use output of the newly acquired industry for flourishing their own business. Therefore strong
industrial relatedness increases preference for full acquisition over partial acquisition. This
indicates a negative relation must exist between minority acquisition choice and industrial
relatedness. The regression outcome points to a negative significant relation between industrial
relatedness and minority acquisition. Therefore, the study sticks with the proposed hypothesis
and conclusion is drawn in favor of the research proposition.
The present study has an implication for accounting and managerial decision for foreign
acquirers. While taking acquisition decision they should consider the influences of the significant
factors. In case of higher institutional distance, acquirer should choose minority acquisition. For
higher cultural or sector distance the uncertainty increases and hence chance of full acquisition
reduces. Multinational should go for full acquisition in the related industry. The right choice of
acquisition share benefits the acquirer and the host nation as well.

25INTERNATIONAL FINANCIAL MANAGEMENT
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