Learning through international acquisitions: the process of knowledge acquisition in China.
* Research on the process of knowledge learning and absorption in acquisition context has emerged recently. Yet relatively less attention has been paid to the process of knowledge transfer and learning and its impact on successful acquisitions.
* This paper adopts a process perspective' to investigate this issue. Based on four international acquisitions in China, it generates new theoretical propositions as well as practical managerial implications.
* Results reveal the types of knowledge acquired and how it is transferred and learnt to contribute to the success of international acquisitions. The knowledge acquisition and learning process in international context involve three stages: knowledge assessment, knowledge sharing and knowledge assimilation.
* Foreign acquirers tend to acquire complementary knowledge from local targets, adopt dual management structure and facilitate communications with local personnel in order to achieve the success of acquisitions and future operations.
Knowledge Acquisition * Learning Process * International Acquisitions * Network Capacity * Case Study Research * China
The growing importance and popularity of cross-border mergers and acquisitions (M&As) and a number of failures in such M&As have led to an increased interest in this topic. Post-acquisition issues such as integration processes, post-acquisition performance of the combined firm, the knowledge transfer and organizational learning have been investigated in recent years. Research on the knowledge transfer has revealed some critical factors, such as; articulability of knowledge, communication, retention of key talents, size and timing of the acquisition, the success/failure of knowledge transfer and the overall performance. Yet relatively less attention has been paid to the impact of knowledge transfer and learning on the acquisition success. International acquisitions, as a distinct and easily identifiable phenomenon, provide us a suitable context to study how the variation in the amount and type of knowledge transfer among merging firms affects the outcome of acquisitions.
In light of the growing prevalence of international acquisition and the rather high rate of foreign entry failure, academics and managers have become extremely interested in understanding the factors that explain how to make international acquisitions work and succeed. Earlier work has suggested that the integration process is highly critical for the success of most acquisitions, both domestic and international (Child/Faulkner/Pitkethly 2001). The degree of cultural differences was found to negatively affect shareholder value (Chatterjee et al. 1992, Weber/Shenkar 1996), However, later work showed that crossborder M&As with greater cultural and institutional differences may facilitate the learning and cooperation and provide enhanced opportunities for acquiring firms to obtain new information and capabilities from acquired firms (Bresman/Birkinshaw/Nobel 1999, Harrison et al. 1991, 2001, Morosini/Shane/Singh 1998, Vermeulen/Barkema 2001). These studies are greatly influenced by the research in the knowledge transfer process across alliances and joint ventures which highlights that the ability to learn is the key to success (Anh et al. 2006, Doz 1996, Inkpen/Crossan 1996, Uhlenbruck/Meyer/Hitt 2003). Yet researchers have suggested that we need to understand further how firms learn and apply knowledge in an effective manner to make acquisitions successful (Finkelstein/ Haleblian 2002, Shimizu et al. 2004). These concerns raise important research questions:
How do firms acquire and learn knowledge through international acquisitions? What are the types of knowledge acquired and applied in international acquisitions, and do these processes achieve the objectives of acquiring firms' international acquisition strategies? This paper adopts a process perspective to address these unanswered questions.
Previous strategy research acknowledges that firms are to a large extent devoted to exploiting available knowledge and exploring new knowledge to develop sustainable competitive advantages in dynamic business environments (Grant 1996a, Kogut 2000, Kogut/Zander 1992, Presutti/Boari/Fratocchi 2007). Knowledge is viewed as strategically the most important resource of the firm that form a competitive advantage. Particularly, tacit knowledge, which covers know-how and know-what (Kogut/Zander 1992), and is the key resource of the firm because it is extremely difficult to imitate by competitors (Grant 1996b). International acquisitions can expand a newly combined firm's knowledge base in fast changing business environment (Bresman/Birkinshaw/Nobel 1999, Coff 1999). In particular, they provide firms access to business-related or local market related knowledge (Inkpen/Beamish 1997, Lord/Ranft 2000), facilitate learning among acquisition parties (Vermeulen/Barkema 2001) and make firms more embedded in the local market (Forsgren 2002, Hadjikhani 1997, Johanson/Vahlne 1977). Knowledge acquisitions therefore involve the process of articulating, assimilation, learning and deploying know-how and know-what from a local firm to develop a foreign firm's acquisition and management skills. Hence, we suggest that tacit knowledge acquisitions and learning acts as an important mechanism through which a foreign acquirer is able to achieve its strategic objectives (Persson 2006).
Based on four international acquisitions in China, we generate theoretical propositions. There are two main reasons, one practical and the other theoretical, why China is in research focus. First, with China's accession to the WTO and the removal of restrictions on FDI through acquisitions, international acquisitions began to be the main investment mechanism for foreign investments entering China (Cooke 2006). Despite the fact that transactions are greatly restricted due to the regulatory loopholes and the lack of transparency in policies, foreign firms do consider acquiring firms in China to get the opportunity to expand and protect their brands and to consolidate their international competitive position (Yang/Ghauri/Sonmez 2005). Managers become more interested in understanding how they can be successful in their acquisition deals in this emerging market. Second, the process of international acquisitions in China has increased dramatically, and has become an important but under-explored topic for both practitioners and academia. Although research has addressed international joint ventures in China (Child/Faulkner 1998, Child/ Yan 1999, 2003, Li 1995, Li/Lam/Qian 2000, Luo 2001, Vanhonacker/Pan 1997), there has been little emphasis on acquisition strategies, process and management. This may be due to the sensitivity and confidentiality of information in M&As (Walter 1985) and the difficulties in gaining access to such information (Berggren 2003, Salama/Holland/Vinten 2003). Another reason may be the short history of international acquisitions in China, as well as the distinguished nature and process of industrial restructuring and privatisation compared with other emerging markets (Meyer/Estrin 1999, Uhlenbruck/Meyer/Hitt 2003). To open up the 'black box' in this new emerging phenomenon, we take the first step to discuss issues related to international acquisitions in China by focusing on the process of how acquiring firms' obtain knowledge and how it influences the success/failure of international acquisitions.
Knowledge Acquisition and Learning in International Acquisitions
Academic research that investigates how firms benefit from the transfer of knowledge through acquisitions is fairly recent. Some earlier work suggested knowledge transfer is particularly critical for cross-border inter-firm cooperation (Hamel 1991, Inkpen/Crossan 1996). Research on international acquisitions (Hayward 2002, Hitt et al. 1998) also pinpointed the important role of knowledge transfer. It assumes that the ability to acquire knowledge about best practices and local market influences multinationals' international performance. However, these studies mainly direct the attention towards factors that enhance or impede knowledge transfer, without examining the learning process and its link to firm performance (Lord/Ranft 2000, Ranft/Lord 2002).
Building on a learning perspective, researchers emphasize that experienced acquirer need to know which targets to select and understand complexities of the integration process (Lubatkin 1983). However, since the implementation of complex acquisition strategies requires diverse experience (Hayward 2002), firms have to be cautious not to apply prior successful experience to dissimilar new events (Finkelstein/Haleblian 2002). On the other hand, highly similar knowledge gained in acquisitions may hamper the firms to learn new knowledge for use in future acquisitions. Therefore, acquirers need to learn to complete the complex tasks of acquisition implementation from diverse pool of experiences (Beckman/Haunschild 2002, Reus 2004). One solution is to learn from acquisition partners. But some important questions are: what are the knowledge and capabilities they are to acquire from local firms and how they learn and apply that knowledge in an effective manner?
External knowledge is always distinct from the existing knowledge base an acquiring firm already possesses due to the cultural and institutional embeddedness (Chatterjee et al. 1992) and language barriers (Cooke 2006). On the other hand, when external knowledge is complementary to the existing knowledge, the external knowledge can be both comprehensible and useful. As a result, the availability of complementary knowledge can facilitate and enhance knowledge pool. This is consistent with the complementary resource perspective (Harrison et al. 1991, 2001). When foreign firms enter the Chinese market, they are targeting local capabilities to complement their own in pursuit of a combined useful knowledge base. Firms in China are generally described as having a low level of technology and a high level of bureaucracy as compared to multinationals. However, these firms can be quite competitive in the local market due to the specific environments, monopolistic sectors, close networks of local partners and familiarity with local customers. Foreign investors can benefit from acquisition of complementary knowledge base from local firms, which can contribute to high-performing acquisitions. The extent to which the acquiring firm acquires and learns such knowledge influences the acquisition success.
We see the process of knowledge acquisition and learning in international acquisition context that is directed toward helping a foreign acquirer evaluate, learn, accumulate and leverage complementary knowledge and skills from local targets. We base our study on prior research on dynamic capabilities (Ghauri/Hadjikhani/Johanson 2005, Teece/Pisano/ Shuen 1997) and the knowledge-based view of the firm (Grant 1996b, Nonaka/Takeuchi 1995) to suggest that this process involves deliberate efforts to assess, share, and assimilate complementary knowledge in combined organizations. This process show similar characteristics with those in alliance and partner learning processes (Doz 1996, Grant/ Baden-Fuller 2004, Hamel 1991). Nevertheless, acquiring firms need to replace or maintain key managers from the acquired firm with the supposedly more knowledgeable managers from the acquiring firm (Walsh 1988, 1989) to enhance the knowledge base. The specific nature of acquisition and combination of knowledge bases between acquiring and acquired firms, posit a complex process in which the new external knowledge is learnt and absorbed.
Assessment of Complementary Knowledge
Tacit knowledge which is closely associated with production tasks is deeply rooted in individual action and involvement within organizations (Nonaka 1994). Such knowledge can be rather difficult to imitate outside organizations, but may perhaps be obtained by having talented managers or employees stay on their positions after the acquisitions (Hitt et al. 2001, Lepak 1999). But not all employees possess knowledge and skills that are of strategic importance, the task of assessing individually held knowledge is rather complex. The assessment can be conducted in many different ways, such as through communication in pre-acquisition phase, the use of "third-party"--consultants and the observation of articulated knowledge.
In the context of managing acquisitions in China, assessment of acquired firms' complementary knowledge can be extremely beneficial. First, it helps acquiring firms to get a record of target's knowledge base so that they can figure out a set of appropriate complementary knowledge required for their acquisitions and future operations. For example, a foreign acquirer that lacks in local market experiences and knowledge will highlight the importance of such knowledge. Second, the assessment process itself can facilitate communication between managers from different divisions and organizations. Since business in China relied heavily on personal relationship--guanxi (Park/Luo 2001), this particularly helps acquiring firms better understand the relationship through an 'internal-external' or 'internal-agency-external' communication system. Consequently, managers from an acquiring firm can potentially identify problems and challenges that exist in the target firm and prepare for better management practices. Assessment activities, through meetings, observations, reports and consulting lead to more effective management of acquisition implementation, and thereby to acquisition success.
Sharing Complementary Knowledge
International acquisitions form a newly combined "social community" in which two organizations with different culture and institutional contexts integrate and provide opportunities to share knowledge. Knowledge sharing plays an important role in the development of organizational skills from the perspective of a knowledge-based view of the firm.
While opportunity cannot directly transform itself into capability, firms need to be motivated to facilitate communication and cooperation through regular and systematic mechanisms. Another reason why the motivation is so important is because geographical and cultural and language barriers may discourage managers to engage in communication activities. A presumption lying in acquisition is that synergy can be achieved by incorporating best practices and skills from both sides into the combined firm. Yet this may lead to a problem that managers of acquiring firms are overconfident and ignore potential knowledge and skills in acquired firms, which can lead to poor implementation and performance. Western managers may take it for granted that they perform much better than their counterparts in China, which can destroy the relationship established with local partners and drive the firm stuck in the market mud. In this sense, motivation to share knowledge and learn from local targets is rather critical to the success of acquisitions.
Acquiring firms also need certain ability to share knowledge which they are able to understand and receive from acquired firms. Firms can develop such ability through prior acquisition practices (Hayward 2002, Hitt et al. 1998). Empirical studies in acquisition literature also suggest that strategic and organizational fit facilitates the acquirer's ability to understand the capabilities of the acquired firm (Datta 1991, Rondinelli/Black 2000). This is consistent with international knowledge transfer literature which acknowledges the role of organizational similarity as determinant of the ability to transfer knowledge (Lane/Lubatkin 1998).
Assimilation of Complementary Knowledge
Similar to knowledge transfer in alliances (Doz 1996, Powell/Koput/Smith-Doerr 1996), acquisitions provide the combining firms with the possibility to develop capabilities and expertise by acquiring new knowledge from their acquisition partners. The final step, the most decisive one, is to absorb external knowledge from acquired firms and combine newly acquired knowledge with existing internal knowledge of the acquiring firms. Assimilation of knowledge involves absorbing and internalizing individually and organizationally held complementary knowledge possessed by acquired firms and applying the knowledge into new situations and tasks. This process emphasizes the importance of 'learning how' wherein a foreign acquirer focuses on acquiring the way how an acquired firm performs, operates and manages its business. By assimilating acquisition partners' knowledge and best practices, acquiring firms can enlarge their knowledge base. In other words, a foreign firm can adapt itself to the local market and effectively utilize its knowledge base. By assimilating and absorbing knowledge, absorptive capacity of acquiring firms can be enhanced that may help the acquiring firms to manage subsequent acquisitions more effectively.
To sum up, we suggest the process of knowledge acquisition and learning plays an important role in explaining the success of international acquisitions. The process enables foreign acquirers to have better knowledge bases as they learn, accumulate and leverage complementary knowledge and experiences from local target firms. In this process, acquiring firms are devoted to assessing, sharing and assimilating know-how. Each of these aspects differs in terms of the manner in which it facilitates knowledge acquisition and learning. Sharing helps in exchanging and learning management know-how through the combination of two finns, while assimilation helps acquiring firms absorb or retain the knowledge derived from external acquisition targets.
As it is an explorative study, a case study approach was adopted, with a view of developing theoretical propositions based on a priori assumptions derived from earlier literature and our field observations (Ghauri/Gronhaug 2005, Yin 1994). We aim to find empirical evidence in order to support or reject the findings from previous research and thereby generate a series of theoretical propositions for further large sample tests.
Since manufacturing sector has generated nearly 60 percent of acquisition inflows by 2006 (Thomson One Banker 2007), we focused on this industry using a theoretical sampling frame (Glaser/Strauss 1967). Guided by the emerging theory, we allowed significant heterogeneity among different types of acquisitions in China, i.e., origin of host country, types of target firms and relevance of business markets between foreign firms and local targets. In other words, we were inspired by earlier (Pettigrew 1990) advice to go for 'polar types'. The study includes four international acquisitions: the first is an acquisition of a number of state-owned conglomerates by a Malaysian public firm; the second is an acquisition of a private firm by a USA-based firm; the third is an acquisition by a large multinational based in Europe; and the fourth is an acquisition by a UK-based multinational. Table 1 contains a list of cases included in the study.
Semi-structured interviews were conducted in this study, where respondents were free to talk and give their opinions as they understood the process. We chose a single respondent approach in our research. There are two criteria to identify appropriate respondents: a) they must be knowledgeable about the firm and its competitive environment (Campbell 1955), and, b) they must be familiar with the acquisition strategy and the knowledge acquisition and learning process (Ghauri 2004). Hence, top directors responsible for the acquisition process are considered the most appropriate respondents. Table 2 provides the list of managers interviewed for this study. Each interview lasted from one to two hours and was recorded allowing us to pay more attention to the respondent and to ask subquestions arising out of their stories/answers. In order to achieve a triangulation, we further sought data and information from annual reports and specific literature on organization's underlying philosophy and working practices.
All the interviews were analyzed by building categories, reflecting common patterns in the answers of the interview respondents and among companies (Eisenhardt 1989, Ghauri 2004). We compared and contrasted cases in order to draw conclusions as suggested by (Miles/Huberman 1994). If common features or patterns in knowledge acquisition process emerge, then our findings would be more trustworthy (Ghauri/Gronhaug 2005).
Case 1--Firm A
"I would maintain that the takeover of state-owned conglomerates in general was a successful deal ... This acquisition expanded our business to China by integrating with various local manufacturing activities such as canned food, flour milling printing and trading. To date, we can say that our position in China has been improved, brands highly recognized and our position in corporate finance has improved a lot." (Chief Representative of CEO in China)
Acquisitions of production know-how and market knowledge were perceived as contributing to the acquisition success. Decision makers at firm A planned the knowledge acquisition and learning process carefully. As one of the management committee members states: "We had deliberate considerations and steps to seek appropriate knowledge within the local partner and replace our people in some positions to spearhead changes that should be carried out at the company."
Knowledge Acquisition and Learning Process
The knowledge acquisition and learning process was undertaken together with other strategic implementation after acquisitions. This process aimed to uncover valuable organizational knowledge and transfer the relevant know-how for overall acquisition integration and operations.
"Our first talk was with local authority that was looking for an investor at that time. We then had an initial idea what the problems and challenges would be if we were to take over the conglomerates. But what impressed us most was the huge potential to manage these firms !f we could make best use of their local market knowledge and experiences to manufacture and market more products. In addition, we could also learn how to establish and maintain close relationship with local political and business partners."
Assessment: The manager admitted that they were quite clear in their mind about what types of knowledge bases, possessed by local firms, would be useful to them. Top management of Firm A felt that lack of local market knowledge was the most important challenge for them to implement their acquisition strategies which emphasized on restructuring of local firms and providing more products and services to local market. The assessment also revealed the importance of networking in local market, especially with political partners. The nature of target indicated that the government looked after their operations and performances through frequent meetings, reports and communications between top management and local officials to ensure implementation of government guidance and planning. One of the key issues was redundancies and downsizing when the deal was negotiated between two parties. Firm A realized that the management team had to take care of this particular issue in order to satisfy local authorities.
Sharing: The manager explained that they did not establish a particular integration team after the acquisition. Alternatively, it was the top management in headquarter who was in charge of making the necessary decisions relating to integration strategies. Although some placement of Malaysians with the management expertise and skills was done to improve the productivity and efficiency; they also highlighted the importance of acquiring specific knowledge from local managers. For example, the interview respondent took the responsibility for establishing and maintaining networks with local authorities. He was initially connected with local officials through local mangers' personal ties, which was often a shortcut for foreign firms to build up political network in China. The manager appreciated the similarity of culture and language shared with local partner that contributed to better communication and understanding.
Assimilation: Since top management designated a specific person as representative for China's operation (the respondent), the assimilation process was undertaken according to the individual manager's planning based on top management decision. No specific strategies were planned. However, the manager paid attention to what the local senior mangers talked about so that he and the top management could be aware of the specific challenges and pitfalls that they would encounter during the acquisition process. The manager also listened to local operation and marketing managers reports once a month to ensure that best practices were followed. Reflecting the usefulness of such communication practice, the interviewed manager said:
"At first I thought that vast differences in managerial philosophy existed between local managers and us in spite of the use of Mandarin as our business language. But once I've talked with them, I found that we shared common value which was to improve the performance of the firm. Therefore, they were quite helpful in explaining the situation of the firm and the market to me at my first days in China. They were quite experienced in marketing strategies because they knew local market and customers better than I did."
Case 2--Firm B
"The deal was successful in diversifying our business to the latest technological market. We achieved our objectives by acquiring technological know-how from local firm and leveraging our financial and management know-how in the organization." (Vice President)
This second case study focuses on explaining how a USA-based firm acquired and learned knowledge when it diversified into biotechnology industry. When the deal took place in 2002, there was a favourable market environment. The biotechnology industry was in early growth period and was fully supported by the government. Given the rapid social and economic development, demographic changes, increased standard of living and greater affordability for biotech, Firm B was very optimistic in the market growth and future potential.
Knowledge Acquisition and Learning Process
Assessment: Firm B had previous operations in China, which helped them gain knowledge how to do business in China, such as response to industrial policies and network building. In addition, "as a public company, we have more advantages in managerial and financial aspects than local counterparts." During the assessment period, Firm B had frequent talks with top management in the local private firm in order to be familiar with the operations and performance. In addition, professional accounting firms were hired to provide a comprehensive financial performances and valuation reports. These practices assured Firm B that it was important to acquire technological and production know-how from local target.
"We observed a number of knowledge bases useful for us when we decided to acquire the local target. First, as known to all, to have GNP certificate is the essential requirement to enter the market. Our acquisition partner had the certificate, which provided us legitimacy. Second, the local firm possessed the mature technology to commercialize and mass produce products. Third, the management team in this private firm was better evaluated than those in state-owned enterprises. Top management were determined, innovative and were very cooperative."
Sharing: After acquisition, several senior managers left the organization due to the restructuring and integration. Yet key personnel in R&D and product processing were kept in their own positions with specific rewarding schemes. In order to achieve expected synergies, Firm B injected a great amount of capital in updating facilities and production lines and R&D activities. Employees from two companies contributed respectively in the new organization. "It was efficient to integrate employees with different expertise and experience within the organization. The mature technological development acquired from our target firm accelerated our product commercialization and helped us in achieving an advantageous market position."
Assimilation: Technological know-how, as the main type of knowledge, was acquired from local firm. In addition, previous patents were transferred to Firm B and further developed. For example, the firm purchased a number of US-made machinery and imported seeds in order to industrialize the embryo transplant products. In addition, Firm B learned how to manage planting process from local experienced managers. The original scientific planting system developed by the local firm was continuously adopted. During the communication process, top management in Firm B found that their counterparts shared same value and strategic vision for growth.
Case 3--Firm C
"We had not been in China--such a large market, especially compared to Finland That's why acquisition was considered and conducted We were aware of not having enough local market experience and knowledge; however, we had overcome a lot of obstacles thanks to the cooperation between our Finnish managers and Chinese partners." (Vice President, Strategic Development)
The success of integrating Firm C and local plant was done in a deliberate effort of providing specific schemes for knowledge learning and absorption. An integration team was created in order to face the challenges of acquiring the local target due to cultural and business language barriers. The integration team was led by a senior line manager reporting to the chief executive officer.
Knowledge Acquisition and Learning Process
Assessment: "It was necessary to uncover the best practices inside the local plant. For example, the existing management experience was considered quite useful in helping Firm C to enhance its market reputation and access to local distribution channels." However, the team assessed the possible synergies and emphasized the importance of modernizing production facilities and introducing latest technology in the local plant. They listened to external advisors' report regarding the performance of local firm, i.e., the number of production lines, the level of productivity and financial expenditures on production and R&D. The team decided to take a number of actions including sending Finnish senior managers to China, modernizing production lines and introducing new technologies.
Sharing: In spite of inefficient technological and production know-how, firm C decided to provide a friendly environment for communication and cooperation. No radical restructuring actions were undertaken. A dual-management system was created in order to encourage local managers to socialize and mix with their counterparts from the Finland. Local managers were encouraged to express their opinions regarding the operation management, marketing practices and logistic planning while Finnish managers made efforts to deliver modern technology and production philosophy.
Assimilation: Up to 10 Finnish senior managers were expatriated to China. They were mainly responsible for management, production process, marketing and R&D. Other than offering clear boundaries and guidelines about expected performance, they were observing how local managers manage relationship within and outside the organization. For instance, the expansion of market distribution was one of the main tasks for the combined organization in order to distribute paper products beyond local area. While Finnish managers had worldwide network, they learned from local managers how to promote their products in the Chinese market and build up network with local authority. These practices ensured cooperation with Chinese managers and were important determinant to the success of the acquisition.
Case 4--Firm D
"The sugar market in China has a great potential and we needed to strengthen our position. We acquired the local refinery in 1997, expecting to enhance the production capacity to meet the market demand and we did that." (Director of Finance)
The acquisition was focusing on entering the market and enhancing the production capacity, mainly aimed to maximize profit and market share in the local market. The firm enhanced the productivity and efficiency by increasing its sugar cane production over 200,000 tonnes sugar cane in 2001. Profits were also made despite the fact that most sugar refineries in China reported deficit.
Knowledge Acquisition and Learning Process
Assessment: The small sugar plant in China was originally a joint venture created between Firm D and local partners. By purchasing the majority share in the joint venture helped the firm overcome the restrictions on foreign investment in the industry. Previous experience through joint ventures convinced the management team that local market experience was critical to the firm. These experiences include the networking expertise in establishing relationships with the local actors and authorities, the operation process in the crushing capabilities and marketing capabilities to adapt to the local environment. Since the firm focused on domestic market, the firm emphasized the importance of developing strong supply partnership with second-tier manufacturers and retailers, which were usually built up through local managers' personal relationships.
Sharing: Firm D implemented a retention programme for the "key managers" from local target in order to avoid any loss of managers with years of local market and networking experiences. Several senior managers were asked to stay in the local firm and provided additional rewards and autonomy. Firm D adopted a rather flexible management system which allowed local managers to be in charge of daily business operations and routines. Local mangers were required to report the operations and management in monthly meetings. On the other hand, Firm D provided technical support programs to local employees when new production facilities were brought from the UK to China. A modern operation management system was also introduced.
"By acquiring the local sugar refineries, which have long history of comprehensive networks with second-tier manufacturers and retailer, we could possess this local marketing and logistic expertise to integrate with our modern production processing and management."
Assimilation: Regular meetings were held in order to assure the operations and management in local targets. "We were able to manage the operation by ourselves other than with joint venture partners. We implemented this management expertise in another two acquisition activities after 2000." The particular networking expertise acquired from local firms by the retention of key personnel, enabled Firm D to build up long-term partnership with various players. "The relationship with local operator and supplier helps us make best use of the facilities to launch our products quickly in the market." The firm also understood the principle of building up networks with local authorities. Only relying on individual relationship was definitely not enough. The firm made deliberate efforts to establish a proactive investor image to the local market, which was highly appreciated by the local government.
"We recognized that what the local government wanted from us was to improve the local production capability and contribute to the economic growth. So we invested a lot in the renovation of local refineries, introducing advanced technology, injecting financial capital and adopting new marketing tactics. These practices guaranteed support from local authorities. In turn, we could have our legitimacy in operating in sugar industry and potential acquisition activities. "
By comparing and contrasting the four cases, we can observe common features and practices associated with acquisition success in China. The common issues are linked to the types of knowledge and the ways the four acquirers used to access knowledge and integrate their different entities, through learning and assimilation process.
The study illustrates that foreign acquisitions were largely driven by the need to acquire local knowledge, which was due to the lack of market presence and vast differences between the home market and China. This has been particularly found in Firm A, B and C cases. Firm A invested in the local SOE conglomerates without prior experience and knowledge. Firm B had never been involved in the biochemical industry, which at the same time was a rather new market in China. The lack of expertise in biochemical products and services was considered to be a major problem for firm B. Hence, firm highlighted the importance of acquiring local knowledge.
The main knowledge that was acquired from the local targets was how to deal with the local environment, which was the ultimate goal. Foreign firms made an effort to understand the features of the local business environment, the political behaviour, including the processes involved in gaining approval and legitimacy, licensing, patents, land use, the techniques to communicate with local suppliers, distributors, customers and other business actors and certain social responsibilities towards the local community (Child/Rodrigues 2005, Child/Yan 1999). Therefore, the skills of relationship-building were regarded as vital to the acquisition of local knowledge. For the firms which entered unrelated business areas, technical skills and other specialist knowledge in products and services were crucial. In all the cases, production know-how represented one of the main attractions of local managers. Table 3 provides a summary of the learning process in the four cases.
In addition, the acquisition of networking capacity was highlighted in the four cases. Foreign firms agreed that local mangers with experiences and skills in building and maintaining long-term relationship with various partners was beneficial in getting access to the local network. It was realized that close network with local authorities was essential for foreign investors while relationship with value chain partners assured the successful operations in the local market.
A common practice in the four case studies was communications between managers from the acquiring and the acquired firms. Foreign firms acknowledged the lack of consent between parties may hamper learning, interpretation and transfer of local knowledge (Williamson 1991). Strong commitment from the two acquisition parties and cooperative environment for exchanging ideas and learning from each other seem vital to minimize the information asymmetry and uncertainties associated with acquisitions
During the assessment process, other than communications between managers from two parties, the use of third-party, such as consultants, can offer detailed information regarding the management, marketing and financial performance of target firms in China where the business routines and accounting and legal systems are different from other markets. A fundamental question in knowledge assessment process is "What know-how can help achieve synergy?" (Harrison et al. 2001). In spite of various knowledge bases, all foreign acquirers realized that barriers to communication existed due to either cultural or language differences. Prior experiences, such as multinational experience, acquisition experience and alliance experience were helpful in the learning process.
As previous studies on learning have pointed out (Bresman/Birkinshaw/Nobel 1999, Kiessling/Richey 2005), it is difficult to transfer local knowledge among individuals. Hence, the role of the key individuals who possess special experiences and know-how is critical as a fundamental base of organizational learning (Salama/Holland/Vinten 2003). All the four foreign firms reckoned that relying on and developing the individual relationships which local managers had been the main source for their learning. The retention of local key individuals was observed in all four cases, indicating its crucial role in the knowledge acquisition and learning process. Through this means, foreign firms could gain access to the unique social and business environment of the local market.
The cases illustrate that the process of knowledge assimilation depends on the cooperation between the two parties after the merger. The mix of foreign and local managers in different divisions enables the application of expertise and knowledge in new situations. Local managers were mainly responsible for production, R&D and marketing while foreign expatriates decided financial and corporate strategies. Communication through meetings, reports and observations enables foreign acquirers to learn the way how local managers manage the firm and build up networks with different partners. As a result, trust, one of the major challenges in acquisitions (Salama/Holland/Vinten 2003), could be established.
Our study reveals that international acquisitions can facilitate the learning and cooperation between acquiring and acquired firms (Bresman/Birkinshaw/Nobel 1999, Vermeulen/Barkema 2001), given the degree of cultural and institutional differences. Moreover, we observed the process of knowledge learning and acquisitions not just allowed foreign acquirers to obtain tacit knowledge and capabilities from acquired firms, but also helped them build up cooperative relationship with local managers, employees and other local actors. In this meaning, the knowledge learning process plays an important role in the success of acquisitions.
As noted earlier, this study intends to provide a foundation for theory development. Based on the four case findings, we now approach the formulation of preliminary key findings that lead to a set of tentative theoretical propositions. They are tentative because further research involving large-sample testing is required in this area.
The above discussion has demonstrated that acquisition of knowledge contributes to the success of international acquisitions. Through knowledge assessment, the acquirer and the target could plan what kind of individual knowledge bases were possessed by individual employees. For example, a foreign firm can expect to leverage their financial advantages in further R&D investment to introduce new products to local customers. The complementarity in the knowledge-based resources enables the newly combined firms to develop accumulative capabilities during acquisition implementation, through a cooperative environment that promotes knowledge sharing and encourages knowledge transfer (Lord/Ranft 2000, Ranft/Lord 2002).
Proposition 1a. Foreign acquirers are more likely to acquire complementary knowledge-based resources in local targets. These knowledge-based resources include local market knowledge, networking skills and specific R&D capabilities.
Proposition lb. Knowledge complementarity between the acquiring and the acquired firm has a positive effect on the knowledge learning and combination within the newly combined organization.
This study also provided an insight into the process through which newly acquired knowledge-based resources become part of the bundle of knowledge-based resources of the acquirer (Coff 1999). Through knowledge sharing, the acquirer and target can exploit the complementary knowledge bases effectively. In the context of international acquisitions, knowledge transfer and learning can not occur if knowledge repositories leave during acquisitions implementation. In other words, the retention of key employees during acquisition implementation makes knowledge learning possible (Bresman/Birkinshaw/ Nobel 1999). The case studies illustrated that senior managers were invited to stay in the newly combined organization and given autonomy in daily operations and management. Moreover, the development of communication mechanisms is necessary for knowledge sharing and absorption (Gupta/Govindarajan 2000, Inkpen/Dinur 1998).
Proposition 2. The retention of key local employees is important in the process of knowledge acquisition and learning in international acquisitions.
Proposition 3a. A dual management structure and a significant degree of decision autonomy delegated to the local partner in the newly combined organization can foster communication and cooperation within the organization.
Proposition 3b. The communication mechanisms established by foreign acquirers facilitate cooperation with local managers.
A key motivation for international acquisition is the access of new or partly new tacit knowledge from local targets. Foreign firms are able to exploit new or partly new knowledge, i.e., R&D, production, marketing and networking and thereby achieve better acquisition performance. These acquired skills and knowledge lie in organizational routines or practices to better manage implementations of acquisition strategies. In this manner, knowledge acquisition and learning process can provide access to new ideas and achievement of their acquisition strategies. For instance, a foreign firm without previous experiences can establish strong market position once it acquires specific know-how possessed by the local target. The assimilation and internalization process also enables foreign acquirers to apply this newly acquired knowledge into future operations. For instance, a multinational can transfer tacit knowledge, i.e., local market knowledge, technical know-how or networking skills, that resides in a local target to other subsidiaries of the firm (Lord/Ranft 2000).
Proposition 4. The assimilation and internalization of tacit knowledge from and to the acquired firms contributes to the performance of a firm's international acquisitions.
Proposition 5. The assimilation and internalization of tacit knowledge enables the application of relevant experiences and skills in future operations.
Foreign managers ought to be aware of acquisition strategy and learning, particularly in terms of what kinds of local knowledge are desirable based on their own primary objective of acquisition. In general, greater emphasis should be put on the potential and actual transfer and use of complementary knowledge-based resources rather than on being over-optimistic (Meyer/Lieb-Doczy 2003). The existing management expertise within the foreign acquirers can be considered an advantage over its local partners. Yet equally important is the fact that the existing knowledge bases can be adapted to the local context and combined successfully, which is mostly achieved through the retention of key managers.
In most cases, it is evident that foreign capital complements production know-how, since foreign firms are dedicated to using the existing production facilities and improving the efficiency of production. It is also the case that further investment often focuses on the local R&D function. Another critical question for foreign firms is what kinds of knowledge-based resources they should seek from local firms. Knowledge about competitors in the local market, about low cost of raw materials, building up a good relationship with local distributors and customers, as well as government can complement their financial, managerial and technological advantages. For those companies that also target the global market, it may be more critical to integrate the production skills and technological know-how acquired from local targets into the parent firm's global network.
The acquired local firms have valuable experience embedded in their organisational norms and routines that are useful for foreign firms to learn. Nevertheless, the local knowledge derived from the specific social cultural contexts may be hard to acquire. Therefore, they require foreign managers to maintain contact with local managers in order to understand the history, cultural and business environment of the local market. In addition, the risk and uncertainty in local markets force foreign managers to rely on the relationship with the local authorities, particularly when they are concerned about legitimacy issues. In general, it is through key individuals in the target firm (Park/Luo 2001) that foreign firms get to know and become familiar with the government officers in the related departments.
To answer the key question 'How do foreign firms acquire and learn knowledge through international acquisitions?', we systematically investigated the knowledge acquisition and learning process and its effect on the performance of international acquisitions. The success of international acquisitions is determined by the extent how foreign firms can acquire local knowledge effectively and quickly. In particular, we find that foreign firms that did not know much about the local market and network of local actors were devoted to acquiring these knowledge-based resources and transferring them to their local and global operations. Foreign firms may be aware of the benefits of acquiring know-how from their local targets, not only for gaining information of the market, but also for acquiring explicit and implicit knowledge. The emphasis on double-layer partnership, both with political agencies and business partners, was considered to be helpful in obtaining legitimacy and contributing to sustainable competitive advantage in China where the economy is undergoing a transition from central planning to market economy. Dual-management system is frequently adopted in acquisition learning process as shown in the cases, which facilitates communication and cooperation between local and foreign managers in China.
The limitations of this research include the lack of generalizability of the case studies, as well as the lack of depth in the information due to delicate circumstances. It may be of greater interest to test our theoretical model empirically. Insufficient research so far has focused on the acquisition and restructuring of firms during the Chinese economic transition.
Manuscript received October 2006, revised August 2007, final revision received September 2007.
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Huan Zou ([mail])
Lecturer in Strategic Management, Business School, Loughborough University, Loughborough, United Kingdom.
Professor Pervez N. Ghauri ([mail])
Professor of International Business, Manchester Business School, Manchester, United Kingdom.
Table 1. Description of Cases Studied Case Industry Country History in Acquisition of Origin China (years) Completed A A number of manu- Malaysia 0 1995 facturing sectors B Sugar UK 1 1997 C Biotechnology us 1 1998 D Paper Finland 0 2000 Case Industry Target Transaction Choice Value (million RMB) A A number of manu- SOE 165.3 facturing sectors B Sugar JV 50 C Biotechnology Private 745.03 D Paper JV 4346 Table 2. Description of Interview Schedule Interview Case Respondent Position Dates Interview Locations A Chief Representative 17/01/2004 China Telephone Interview of CEO in China 20/07/2004 China Face-to-face Interview B Vice President, Chief 05/02/2004 China Telephone Interview Financial Executive 28/07/2004 China Face-to-face Interview C Ex Vice President, 09/01/2004 UK Telephone Interview Strategic Development 13/06/2004 UK Telephone Interview (resigned in 2004) D Director of Finance 08/01/2004 UK Telephone Interview 15/06/2004 UK Telephone Interview Table 3. Types of Local Knowledge and Learning Process in the Four Cases Case Prior local Types of Acquired Local Knowledge Knowledge Knowledge Assessment A None * How to deal with local * Meetings with authorities, the local top man- routines of agement political behaviour * Meeting with * Country and business local authorities environments * How to communicate with local partners B Not in same * The political routine * Meeting with market in terms of the local top man- request, approval agement process and decision * Use of profes- for licensing, sional account- patents etc. ing advisor * How to communicate with local partners * Technical skills and specific knowledge in products and services C None * How to deal with * Meeting with local authorities local top man- * How to communicate agement with local partners * Use of profes- sional advisors D Yes, in same * I low to deal with * Internal talks market local authorities with joint ven- ture partners * Country and business environments Case Prior local Knowledge Knowledge Learning Knowledge Sharing Assimilation Platform A None * Networking * Reports of local * Retention expertise operation and of local marketing prac- manage- tices ment team * Implementation * Monthly- of best practices based among the con- meetings glomerates B Not in same * R&D know- * Patents trans- * Retention market how ferred and deve- of local * Production loped R&D team know-how * Learned how to * Frequent * Networking manage plan- meetings expertise zing process C None * New orking * Respective * Retention expertise responsibility of local * Market held by local manage- knowledge managers and ment team expatriates * Dual * Frequent nice- management tings system D Yes, in same * Production * Respective * Retention market know-how responsibility of local * Networking held by local manage- expertise managers and ment team * Market expatriates * Dual knowledge * Frequent mee- management tings system Case Prior local Comments on Learning Knowledge Practices A None Due to the lack of previous knowledge, Firm A is quite dedi- cated to acquiring the local knowledge by working with the local management team and transferring the implicit knowl- edge to their own team B Not in same Due to the lack of expertise in market the specific areas, Firm B works with local management and R&D team to understand the business and markets. Firm B arranges a large amount of in- vestment in the target in terms of production and technology development to acquire related technical expertise C None Difficult to understand the local market due to great disparities in language, culture, legal system and business routines. High- level commitment to the acquisi- tion requires a quick method of accumulating related local knowledge D Yes, in same Difficult to understand the local market market due to great disparities in language, culture, legal system and business routines. Therefore, Firm D relies on the local management team to learn how to adapt to the local market
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|Author:||Zou, Huan; Ghauri, Pervez N.|
|Publication:||Management International Review|
|Date:||Apr 1, 2008|
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