1.1 The Questions
Corporate mergers and acquisitions, or M&A, and corporate consolidation have, for nearly half a century, been one of the areas of greatest concern to economists and policy-makers. At the beginning, scholars of industrial economics made their fundamental explorations on the issues. George Joseph Stigler and Oliver Williamson have been leading scholars exploring the effects of M&A from the aspects of corporate consolidation performance and public welfares. But as the welfare effects of M&A are complicated in theory and non-convergent in conclusion, many empirical studies have been conducted on the effects of M&A performances. And these explorations mostly resort to event studies and accounting information. As for the social effects of M&A, discussions are mostly carried out following diverse M&A models (Barros 1998; Yoshio Kamijo and Yasuhiko Nakamura 2009), M&A types (Julia et al. 1996), and the impacts of M&A policies (Khemani and Shapiro 1993, with remarkable research results achieved. In response to the waves of M&A in China, studies on M&A theory and empirical studies on M&A have flourished, making the field a thriving branch of research. Many scholars, focusing on the aspect of enterprises, study the mechanism and micro effects of corporate consolidation using event studies and accounting information. And from the aspects of M&A and industrial market structure, helpful explorations have been made by Gao Feng et al. (2001), Fan Conglai and Yuan Jing (2002), Liu Yu (2008), and Wen Haitao (2010).
As a mode of stock resources allocation, corporate M&A is internally driven by an institutional environment. In economic transitions, the conducts of governments, particularly government competitions, are key factors affecting M&A and corporate consolidation. Li Shanmin (2006), in the light of local government intervention, has carried out studies on value issues like restructuring through M&A and diversified M&A. Pan Hongbo (2008) has made empirical and normative studies on the âtunnelingâ and supporting effects of restructuring through M&A. Feng Xingyuan (2001) and Zhou Yeâan and Zhao Xiaonan (2002), with the paradigm of government competition, have explored the rise and progress of local government competitions in China and their positive and negative effects upon economic growth and regional economic development.
On the whole, previous studies on M&A and corporate consolidation are mostly based on a mainstream economic theoretical framework, following the perfect market hypothesis. In empirical studies, the explorations on the effects of M&A are in many cases limited to the micro level. Discussions on the basis of industrial market structures mostly take industries and market structures as exogenous variables and conduct analyses of their impacts upon the conduct and timing of M&A. This book will reexamine the industrial nature of M&A from the perspective of intra-governmental competition and endeavor to build a corporate consolidation model and framework for analysis of the issue. It will further explore the issues concerning M&A in the process of economic transition. The results are expected to enrich and improve the relevant literature on M&A and will be of great significance to more empirical studies on intra-governmental competition and the effects of industrial economy and the performances of regional economy.
Since the 1990s, corporate M&A has been an issue of great academic interest in China, socially and economically, with the countryâs economy transforming from âthe incremental reformâ to âthe stock reform.â Since 2009, ten programs for industrial revitalization and adjustments of key industries have been intensively introduced by Chinaâs State Council and the regional governments of China, exposing the significant role M&A can play as a means for corporate consolidation and the market structure optimization in the aspects of policy-making and economic performance. âIndustrial concentrationâ driven by governments has become a striking feature of a new round of corporate M&A in China. But a definite fact concerning the issue is the rise of local protectionism, market segmentation (Zhou Yeâan 2003; Bai Chongâen et al. 2004a, b) brought by intra-governmental competition in the period of economic transition, and the regional industrial âhomogenizationâ and industrial âdecentralizationâ in corporate M&A (Jiao Guohua 2009; Wang Fengrong, Ren Meng, Zhang Fusen 2011). Then, against the backdrop of economic transition, what has been the motivation and mechanism of government actions, especially government competition, involved in M&A? and what has been the working mechanism and effects of government competition in seeking ways for corporate consolidation and in reshaping market structure and industrial structure? How can the allocation of resources be rationalized and optimized? Empirical studies on these issues will be of practical significance for a better understanding of the mechanism and effects of the interaction between government and market in resource allocation and the rectification of local government competitions. They can clarify the direction for industrial growth under the existing systems and provide empirical references for the transformation of economic growth pattern.
1.2 Definitions of Key Concepts
- 1.Government and Local Governments
In economics, the term âgovernmentâ derives from homo economicus. Scholars, with Adam Smith at the head, have interpreted man as homo economicus pursuing the maximization of their self-interests. Though the hypothesis basically manifests the principles of human activities, it has its own grave defects. On this basis, new institutionalism has revised the assumption about economic agents and changed the hypothesis of the agentsâ complete rational behaviors into bounded rational behaviors, making the premise of behaviors for economic agents more reasonable. Later on, scholars of public choice theory use the revised reasonable person hypothesis to explain government conducts and believe that the government, as the agent of public interests, also meets the behavior hypothesis of maximizing the self-interests in itself and the individual officials. Among them, Niskanen (1971), through its probes into the behavior motives and the external environment of government officials, has established a theory of monopoly and bureaucracy economy, concluding with the proposition that the government will pursue budget maximization. It believes that the government, in its social process, also plays the role of homo economicus, although the government is not representing a single person, but a behavioral agent embodying various interest subjects. From this, the results of governmentâs âpublic choices,â like those choices of enterprises, are the results of gaming among all interest subjects. Unlike the public choice theory, the classical economics likens the government to a âblack box,â holding that the government is the ânight watchmanâ of the market economy, âthe almighty charity organizationâ addressing market failure at zero cost, the general representative of all people and social interests without its own independent benefit target, and a kind of âparadise model.â The institutional economists, employing the theory of public choice, take the government as a reasonable person seeking the maximization of its own interests, and, by bringing the government down to earth from paradise, stress that the goal of government actions is to maximize its own benefits.
In this book, the concept of government is defined in the light of institutional economics. The government, as an economic organization, has as its own goal to maximize its own interests. But unlike economic organizations in the common sense, its objective function is multifaceted. The local governments, as essential components in government systems, have their own interests as well, which involve the public interests in the jurisdiction, the interests of the local government departments, and the individual interests of the local government officials. In short, the government represents not only public interests, but public interests at various levels and of diversified value orientations. Meanwhile, with the changing restraint conditions and incentives for government conducts, the objective functions of local government conducts will have to make corresponding adjustments.
- 2.Government Competition
Government competition can be traced to the assumption of âfoot votingâ in Tiebout (1956). Albert Breton (1998) has put forth the concept of competitive government, and Wallace E. Oates (1999) has gone further and presented the Leviathan model of government. He Mengbi (2001), establishing âan analysis model for competitive government,â has generalized three conditional frameworks for making analysis of government competition, that is, the initial structure condition, political mechanism and culture, and foreign trade relations, pointing out that government competition may be divided into horizontal competition and vertical competition, or in other words, there exist competitions between local governments and governments at a higher level in respect to resources and control power, and also competitions between government organizations on the same level.
Following the analysis model of competitive government by He, Feng Xingyuan (2001) has stated that government competitions are to a large extent institutional competitions, there being a contention for tangible and intangible resources among different government organizations. Wolfgang Kasper and Manfred E. Streit have carried out studies on transnational government competitions from the perspective of institution, believing that the concept of institutional competition highlights the internal rules system and the external rules system of a nation and has a significant impact upon the cost level and international competitiveness of a nation. Thomas Apolte (1999) has also raised the point of government competition being a competition of institutions. It holds that there are many problems existing in political vote competition. Supplementary mechanisms are expected to be added to the vote competition through institutional competition so that the citizens in a certain jurisdiction can effectively exercise supervision over the administrators. So the drive for institutional competition derives on the one hand from the supervisory pressure of citizens in the jurisdiction and on the other from the competition with other jurisdictions.
Yang Hutao (2006) explores the influence of institutional changes on government competition and puts government competition into three kinds. One, government competition is for grabbing scarce productive resources. Two, government competitions are the local governmentsâ attitudes toward capitals and services beyond their own jurisdictions and their regulatory measures for strengthening their own advantages under âthe federal system.â As it is hard to measure the market admittance policy and the effective tax burden, this kind of government competition is also referred to as âcovert government competition.â Three, government competition is the general appraisal on the performance of local governments based on the policy information of other administrative regions by citizens of a certain administrative division. The process has impacts on the migration of citizens and can drive the politicians for better work. Government competition of this kind is the government competition brought up by Albert Breton.
The above discussion sums up the intension of government competition from various viewpoints. The concept of government competition we are adopting in this book refers to the transnational or transregional competitions staged among governments in different countries or among the regional governments in a country for attracting productive factors like capital, technology, talents, and for providing public goods or public services in the fields of investment environment, government performance, and institutional innovation. Under Chinaâs framework for transitional economy, the competitions between local governments have been interregional competition driven by incentives, fiscal and political, brought by the central government with the institutional supply mode, generally unfolding around the resources. And their specific performances are of two kinds: one is to attract the inflow of essential factors of production, and the other is to prevent the outflow of local productive factors.
As government competition is an interactive concept, we will use in some chapters of the book concepts with a broader sense like âgovernment interventionâ or âgovernment conductsâ on the ground of changing views and the limitation of empirical data. For the definition of âgovernment intervention,â the interpretation in the past studies is diversified. The Chinese version of The New Palgrave Dictionary of Economics (æ°ćžć°æ Œé·ć€«ç»æ”ćŠć€§èŸć
ž) has interpreted the English term âregulationâ as â知ć¶â (meaning âmanagement and controlâ), and its antonym âderegulationâ as âæŸæŸè§ç« éć¶ææŸæŸçźĄć¶â (meaning âloosen regulatory restrictions or loosen controlâ). In some classic dictionaries of economics, government regulations refer to all acts of government policy decisions for exercising restraints over the pricing, marketing, and production of enterprises, including, for example, the control over the pricing level and the setting of sta...