Conflicting relationships between the home country and the host country have a strong, negative effect on policy risk

Conflicting relationships between the home country and the host country have a strong, negative effect on policy risk

Conflicting relationships between the home country and the host country have a strong, negative effect on policy risk

Policy risk negatively affects the completion of acquisitions, but the strength of the effect depends on home-host relations, according to new research published in Global Strategy Journal. The relationship between policy risk and cross-border acquisition completion is negative and strong in conflicting relationships, weaker in collaborative relationships, and weakest in ambivalent relationships, the study authors found.

“Over the past decade, we have seen major shifts in the geopolitical environment and increasingly dynamic relationships between countries that are likely to continue to influence cross-border investment, making our research topical and relevant,” said lead researcher Tsvetomira V. Bilgili, an assistant professor at Kansas. State University.

The team used longitudinal event data on intercountry interactions to infer cooperative, conflicting, and ambivalent relationships. Each event in the sample was assigned a score between -10 and +10 to indicate how positive or negative the event is. For example, the signing of a formal agreement received an 8, while the imposition of an embargo, boycott or sanctions received a -8.

To test the effect of home-host relationships on the relationship between policy risk and cross-border acquisition completion, the research team used logistic regression on a sample of 26,124 cross-border acquisitions by 14,568 unique buyers.

The researchers found that for every unit that increases policy risk, the probability of closing a deal decreases by 2.2%, but that home-host relations can alter the effect. When the relationship between countries is conflicting, the policy risk poses an even greater challenge to completing the deal, as host governments may be more motivated to intervene in the deal.

Cooperative intercountry relations can provide a buffer, but the effect of policy risks is not fully mitigated; ambivalent intercountry relations, however, mitigate the effect of policy risks to the greatest extent — possibly, the team hypothesized, because host governments may want to maintain home relations by avoiding arbitrary and unfavorable actions against acquirers.

“For example, China and India have long had disputes over border security, but they are also cooperating on the economic front,” Bilgili said. “We argue that the state of international relations may be indicative of the intentions and motivations of the host government to make arbitrary or opportunistic policy changes that could prevent the completion of cross-border takeovers.”

For executives, this underlines the importance of monitoring international relations in order to better assess the likelihood of policy changes that could have a negative effect on foreign acquisitions. Depending on the state of intercountry relations, some organizations may be better placed to successfully pursue investment opportunities in high policy risk countries.

“Our findings suggest that in an increasingly complex global environment, understanding intercountry relationships is critical to companies’ ability to make cross-border acquisitions in countries where policy risk is high,” Bilgili said.

New report sheds light on cross-border displacement

More information:
Tsvetomira V. Bilgili et al, Friends, enemies or “frenemies”: intercountry relations and cross-border acquisitions, Global Strategy Journal (2022). DOI: 10.1002/gsj.1460

Provided by Strategic Management Society

Quote: Conflicting home-host relationships have a strong, negative effect on policy risk (2022, September 2), retrieved September 2, 2022 at -country-strong -negative.html

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