Tingley 2015
Tingley 2015
Tingley 2015
doi: 10.1093/cjip/pou049
Article
Article
Abstract
A great deal of political economy scholarship has focused on how countries can
attract foreign direct investment (FDI), and the effects of FDI on growth and political
stability. A related topic that has received almost no attention, however, is that of di-
vergent political reactions to inflows of FDI in the countries receiving investments.
This is an oversight, because inward FDI flows are not equally welcomed by the host
country and, in fact, often encounter strong political opposition. We study this phe-
nomenon by examining political opposition to attempts by Chinese companies at
mergers and acquisitions (M&As) with US firms. This is especially important given
rapidly expanding Chinese M&A activity. We hypothesise that although most legal
barriers to foreign M&As are based on national security considerations, objections
on these grounds are often vehicles through which to channel other grievances, and
that economic distress and reciprocity are also key drivers of political opposition.
To test this theory, we constructed an original dataset of 569 transactions that
occurred between 1999 and 2014 involving Chinese acquirers and American targets.
We find that there is more likely to be opposition to Chinese M&A attempts in secur-
ity sensitive industries, economically distressed industries, and sectors in which US
companies faced restrictions in China’s M&A markets.
C The Author 2015. Published by Oxford University Press on behalf of The Institute of Modern International Relations,
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2 The Chinese Journal of International Politics, 2015, Vol. 0, No. 0
Introduction
In 2005, a series of attempts by Chinese firms to acquire American companies made na-
tional headlines. In May of 2005, Chinese software giant Lenovo Group Ltd successfully
acquired the personal computing division of IBM Corporation for $1.75 billion. Although
the sale was a voluntary market transaction that did not appear to violate any US laws, the
purchase nevertheless triggered a backlash from Congress and the Pentagon over the trans-
action’s national security implications.1 At the time this acquisition was completed, the
House of Representatives had already begun scrutinizing a concurrent $18.47 billion bid
by the government-run China National Offshore Oil Corporation to purchase Unocal
factors are also likely to cause political opposition to such deals. We specifically hypoth-
esize that when the target of a foreign M&A is in an economically distressed industry,
or when the target firm is in an industry in which US companies face restrictions from the
acquiring firm’s government, American officials are likely to voice opposition to the trans-
action regardless of the national security implications.
We empirically test this theory by examining the factors that have produced political
opposition to Chinese firms’ attempts at M&As of US firms. In the last 15 years, there has
been a dramatic increase in Chinese M&A activity in the United States. In the year 2000 it
had an annual value of less than $1 million,5 but in 2013 stood at $14 billion. This signifi-
cant increase in investment activity is a clear manifestation of China’s expanding economic
5 These data are from the China Investment Monitor (available at http://rhg.com/interactive/
china-investment-monitor) and Dexter Roberts, ‘Chinese Investment in U.S. Doubles to $14
Billion in 2013’, Bloomberg Businessweek, January 8, 2014, http://www.businessweek.com/
articles/2014-01-08/chinese-investment-into-u-dot-s-dot-doubles-to-14-billion-in-2013.
6 Part 3 provides a discussion of the legal framework that regulates foreign acquisitions of
American companies.
4 The Chinese Journal of International Politics, 2015, Vol. 0, No. 0
by other factors.7 Our project provides empirical evidence to support this claim by demon-
strating that, even when controlling for national security sensitivity, proposed acquisitions
of American firms are likely to generate political opposition when the target firm is either
in an economically depressed industry or one in which the capital-exporting state has
blocked investment by American firms. This suggests that domestic politics may affect the
international relations between China and the United States, and also highlights reciprocity
in international politics. Tit-for-tat relations have long been studied in the field, and often
claimed as a source of stability and cooperation.8 Finally, the political economy literature
has almost entirely overlooked the reactions in developed countries to investment flows
from developing countries. Our project demonstrates that there are valuable insights to be
7 Paul Connell and Tian Huang, ‘An Empirical Analysis of CFIUS: Examining Foreign Investment
Regulation in the United States’, Yale Journal of International Law, Vol. 39, No. 1 (2013), pp.
131–63.
8 Robert M. Axelrod, The Evolution of Cooperation (New York: Basic Books, 1984); Deborah
Welch Larson, ‘The Psychology of Reciprocity in International Relations’, Negotiation
Journal, Vol. 4, No. 3 (1988), pp. 281–301; Robert O. Keohane, ‘Reciprocity in International
Relations’, International Organization, Vol. 40, No. 1 (1986), pp. 1–27; David M. Kreps, Paul
Milgrom, John Roberts and Robert Wilson, ‘Rational Cooperation in the Finitely Repeated
Prisoners’ Dilemma’, Journal of Economic Theory, Vol. 27, No. 2 (1982), pp. 245–52.
9 F. Henrique Cardoso and Enzo Faletto, Dependency and Development in Latin America
(Berkeley: University of California Press, 1979); Robert R. Kaufman, Harry I. Chernotsky and
Daniel S. Geller, ‘A Preliminary Test of the Theory of Dependency’, Comparative Politics, Vol.
7, No. 3 (1975), pp. 303–30; Theodore H. Moran, ‘Multinational Corporations and Dependency:
A Dialogue for Dependentistas and Non-Dependentistas’, International Organization, Vol. 32,
No. 1 (1978), pp. 79–100; Tony Smith, ‘The Underdevelopment of Development Literature: The
Case of Dependency Theory’, World Politics, Vol. 31, No. 2 (1979), pp. 247–88; James A.
The Chinese Journal of International Politics, 2015, Vol. 0, No. 0 5
promotes development or just greater dependency on rich countries and their firms.10
Another strand of the literature has focused on other important economic questions like
what factors enable countries to receive FDI,11 the effects of FDI on growth and stability,12
and economic and distributional consequences of FDI.13 Within this literature, political sci-
entists have often focused on the role of political institutions, such as a country’s degree of
democratization, in FDI flows.14 For example, one recent paper that closely tracks our em-
pirical interest is by Pandya.15 In a cross-national analysis of FDI restrictions, Pandya finds
that democracies have fewer restrictions on FDI flows and that labour organizations see
their political fortunes increase with less restrictive inward FDI flows.16 Yet, as the ex-
amples in our introduction demonstrate, we know that democracies like the United States
do not always welcome inward FDI, and so our article helps to understand variations
in support for inward FDI, here in the form of M&A attempts. Furthermore, less research
has looked at the reactions of relatively rich countries to foreign investments by firms from
developing ones.17
Rather than focusing on the influence that broad institutions have on inward FDI flows
14 Quan Li and Adam Resnick, ‘Reversal of Fortunes: Democratic Institutions and Foreign
Direct Investment to Developing Countries’, International Organization, Vol. 57, No. 1 (2003),
pp. 175–211.
15 It should be noted that Pandya’s analysis does not include the United States.
16 Sonal S. Pandya, ‘Democratization and FDI Liberalization, 1970-2000’, International Studies
Quarterly, Vol. 58, No. 3 (2014), pp. 475–88; Stephen S. Golub, ‘Measures of Restrictions on
Inward Foreign Direct Investment for OECD Countries’, OECD Economic Studies, Vol. 36, No.
1 (2003), pp. 85–116.
17 One exception is recent research by Meunier, Burgoon and Jacoby on political fears in
Europe caused by the recent surge of investments from China. See Sophie Meunier, Brian
Burgoon and Wade Jacoby, ‘The Politics of Hosting Chinese Direct Investment in Europe’,
Asia-Europe Journal, Vol. 12, No. 1 (2014), pp. 109–26.
18 Pandya, ‘Democratization and FDI Liberalization, 1970-2000’.
19 C. S. Eliot Kang, ‘U.S. Politics and Greater Regulation of Inward Foreign Direct Investment’,
International Organization, Vol. 51, No. 2 (1997), pp. 301–33.
20 Zaring, ‘CFIUS as a Congressional Notification Service’.
21 A notable example of M&A protests in the United States that did not involve Chinese com-
panies is the Dubai Port World attempted purchase of six ports in the United States in 2006.
The Chinese Journal of International Politics, 2015, Vol. 0, No. 0 7
Chinese acquisitions focuses largely on the motives and behaviour of Chinese firms, includ-
ing investments to gain strategic assets and competitive advantages,22 brand recognition,
and technology diffusion.23 These supply side forces are important, but in this article we
focus on determinants of demand. In focusing on the demand side, we try to explain what
M&As are protested, and which are not. We explore three factors that have the potential
to produce opposition to M&A attempts by foreign firms: national security sensitivity,
economic distress, and reciprocity.
22 Huaichuan Rui and George S. Yip, ‘Foreign Acquisitions by Chinese Firms: A Strategic Intent
Perspective’, Journal of World Business, Vol. 43, No. 2 (2008), pp. 213–26.
23 Margot Schüller and Anke Turner, ‘Global Ambitions: Chinese Companies Spread their
Wings’, Journal of Current Chinese Affairs, Vol. 34, No. 4 (2005), pp. 3–14.
24 Zaring, ‘CFIUS as a Congressional Notification Service’.
25 Prabhakar, ‘Deal-Breaker’; Mark E. Plotkin and David N. Fagan, ‘The Revised National
Security Review Process for FDI in the US’, Columbia FDI Perspectives No. 2, Vale Columbia
Center on Sustainable International Investment, January 7, 2009, http://hdl.handle.net/10022/
AC:P:8776.
26 The current legal framework regulating foreign investments in the United States will be dis-
cussed in Part 3. See James K. Jackson, ‘The Committee on Foreign Investment in the
United States’, CRS Report, No. RL33388, Congressional Research Service, February 4, 2010,
p. 18.
27
Connell and Huang, ‘An Empirical Analysis of CFIUS’.
8 The Chinese Journal of International Politics, 2015, Vol. 0, No. 0
Economic Distress
Another clear motivation for political leaders’ likely opposition to foreign M&As is the
desire to protect local economic interests that M&A activity might hurt. Crystal
advanced this view in stating that, ‘to the extent foreign companies are able to exploit
their firm-specific advantages within the host country—domestic capital specific to these
affected sectors should react in a similar (negative) way to IFDI and favour more restrictive
or discriminatory policies’.28 Firms in distressed industries—such as those that have experi-
enced recent downturns or that are doing substantially worse than the rest of the econ-
omy29—may try to block foreign acquisitions in their industry through either lobbying
congressmen or having industry associations pressure the Federal Government.30
Reciprocity
Poor reciprocal access to foreign markets is also a potential factor that influences govern-
ment officials’ decisions to oppose foreign acquisitions of US firms. Although executive
branch officials have denied that reciprocity would influence policy-makers’ treatment of
FDI inflows from China,34 Crystal nevertheless emphasizes reciprocity as a major issue
when assessing inward investment, arguing that ‘the extent to which producers have an in-
centive to use domestic barriers as a bargaining tool to improve foreign market access’ is
paramount.35 In fact, during the 1980s there was an effort in Congress to ban foreign
investments in the United States unless American citizens were granted reciprocal access
to the foreign investors’ domestic market.36 Although the Reagan administration blocked
this proposal out of concerns that it would spark reprisals from other countries, it nonethe-
less demonstrates that public officials have indeed been concerned about whether or not
American investors receive equal treatment.
Moreover, China has raised objections to American efforts to screen foreign invest-
ments,37 having in 2011 created a ‘National Security Review’ (NSR) process that mirrors
Other Factors
Aside from these three political economy factors—security, economic distress, and reci-
procity—two others that make US politicians more likely to oppose foreign entities’ M&A
attempts will be important to control for in our multivariate analyses. First, politicians
are more likely to express opposition to state-owned enterprises attempting to acquire
American companies. State ownership of the foreign firm—epically by the Chinese govern-
ment—is likely to increase fears that acquisition of an American target will create risks to
both national security and economic competiveness,43 and the transaction is thus likely to
receive greater scrutiny. Second, US politicians tend to express greater opposition to foreign
acquisitions when the target firm has high brand recognition. Transactions that involve
well-known firms are more likely to draw widespread public attention, and thus increase
the likelihood that political leaders will feel compelled to express populist sentiments
that the firm should be under the control of Americans.
43 Paul R. Krugman, ‘Competitiveness: A Dangerous Obsession’, Foreign Affairs, Vol. 73, No. 2
(1994), pp. 28–44.
44 Kang, ‘U.S. Politics and Greater Regulation of Inward Foreign Direct Investment’.
45 Zaring, ‘CFIUS as a Congressional Notification Service’.
46 Housing Committee on Banking, and Urban Affairs, ‘A Review of the CFIUS Process for
Implementing the Exon-Florio Amendment’, October 20, 2005, p. 140.
47 Curtis J. Milhaupt, ‘Is the US Ready for FDI from China? Lessons from Japan’s Experience in
the 1980s’, in Karl P. Sauvant, ed., Investing in the United States: Is the US Ready for FDI
from China? (Cheltenham: Edward Elgar, 2009), pp. 185–208.
The Chinese Journal of International Politics, 2015, Vol. 0, No. 0 11
Under the existing legal framework that this series of executive orders and congressional
actions created, foreign entities hoping to acquire American firms are required to submit
their proposed transactions to the CFIUS for evaluation. This evaluation lasts a maximum
of 30 days, and if the CFIUS chooses to do so, it can launch a 45-day investigation during
this window. After an investigation, the CFIUS must make a recommendation to the presi-
dent to either block the transaction or permit it to go forward. The CFIUS is also required
to report regularly to Congress, whose members often voice opposition to proposed trans-
actions. Although the legal basis for opposition must be that the transaction threatens na-
tional security, commentators have noted that both executive branch officials and members
of Congress are likely to claim that transactions threaten national security when they are
62 United Nations Conference on Trade and Development, ‘Inward and Outward Foreign Direct
investment Flows, Annual, 1970-2012,’ Foreign Direct Investment Database, http://unctad.
org/en/pages/Statistics.aspx.
63 Roberts, ‘Chinese Investment in U.S. Doubles to $14 Billion in 2013’. For additional details,
see Thilo Hanemann, ‘Chinese FDI in the United States: Q1 2014 Update’, RhG Research
Note, Rhodium Group, May 8, 2014, http://rhg.com/notes/chinese-fdi-in-the-united-states-
q1-2014-update.
64 Daniel H. Rosen and Thilo Hanemann, ‘China’s Changing Outbound Foreign Direct
Investment Profile: Drivers and Policy Implications’, IIE Policy Brief No. PB09-14, Peterson
Institute for International Economics, June 2009, http://www.iie.com/publications/pb/pb09-
14.pdf.
65 Peter S. Goodman and Ben White, ‘Haier Withdraws Maytag Bid: Move is Sign of Caution in
China’s Pursuit of Foreign Firms’, Washington Post, July 20, 2005, p. D02.
14 The Chinese Journal of International Politics, 2015, Vol. 0, No. 0
66 Our dataset includes transaction from January 1, 1999 to June 20, 2014.
67 All relevant transactions found in the SDC Platinum database, Heritage Foundation data-
base, and Chinese MOFCOM website were already included in the dataset extracted from
ThomsonOne Banker. Of course, our data still lack those transactions that were not
approved by the Chinese Ministry of Commerce, or not brought to them, and were thus
‘never initiated’. See Schüller and Turner, ‘Global Ambitions’. Because our study focuses
only on US domestic opposition to Chinese M&As, we disregard any of these missing trans-
actions that faced Chinese ‘political opposition’. Of course a deeper issue is the set of deals
that never get initiated because of expected opposition in the United States. Later on we
discuss the implications of this sample selection issue.
The Chinese Journal of International Politics, 2015, Vol. 0, No. 0 15
companies and private companies. This does not include private transactions that are
kept confidential within the US Securities and Exchange Commission and the business com-
munity.68 We would not expect political debates on these transactions even to be possible,
nor do we have any feasible way of measuring them. Our criteria for the ‘targets’ and ‘ac-
quirers’ were, respectively, companies operating or headquartered in the United States and
companies likewise in China, Hong Kong, or Macau.69 From this comprehensive dataset,
we filtered out M&A transactions in which the Chinese acquirer is a China-based subsid-
iary of a non-Chinese company (e.g., KPMG Hong Kong, Shenzhen Pepsi Cola, etc.), or the
target is an offshore subsidiary of a US company (e.g., Shanghai General Motors Company
Ltd).70 There are 566 transactions in our dataset that met these criteria.
68 Only publicly listed companies are required to report their M&A activity, including an-
nouncements and completions, to the Securities and Exchange Commission.
69 While many mainland Chinese private firms have located to Hong Kong for corporate gov-
ernance reasons, other Hong Kong firms predating the pre-1997 era may arguably be con-
sidered ‘non-Chinese’ firms by some scholars. However, we decided to maintain general
consistency and regard all firms based in Hong Kong and Macau after their dates of hand-
over to the P.R.C. (1997 and 1999 respectively) as ‘Chinese’. For the same reasons, we ex-
clude Taiwanese firms. Below we discuss briefly how our results differ by firms
headquartered in mainland China or Hong Kong.
70 Our reasons for this exclusion is two-fold: first, the purchase of a US target by an acquirer
whose ultimate corporate owners are not Chinese could not be defined by our research as
a US asset acquisition by foreign entities of Chinese origin. Second, although a foreign pur-
chase of an American-owned subsidiary operating outside the United States, could technic-
ally be deemed as ‘inward foreign direct investment’, the effects of such transactions on
U.S. political debate is virtually insignificant for most industries.
71 Although the USCC is a non-partisan organization, its commissioners are selected by each
of the majority and minority leaders of the Senate, and the Speaker and minority leader of
the House of Representatives. Because of its close relationship with Congress and it lead-
ing role in influencing congressional policy towards China, we include USCC’s concern with
any particular Chinese acquisition as a ‘congressional opposition’.
16 The Chinese Journal of International Politics, 2015, Vol. 0, No. 0
Mr. Speaker, the Committee on Foreign Investment in the United States must review and block
Bain Capital and Communist China’s Huawei Technologies’ deal with the 3Com Corporation.
If approved, Communist China’s Huawei Technologies stake in the 3Com Corporation will
gravely compromise our free Republic’s national security.73
Independent Variables
The independent variables for this project correspond to the three factors that we
hypothesized as driving opposition to inward FDI flows: national security sensitivity,
economic distress, and reciprocity.
72 We pool all instances of opposition because analysing different sources, although interest-
ing, leads to substantial sparseness with respect to local (non-congressional) opposition.
Future research should explore any differences in more qualitative terms.
73 Thaddeus McCotter, ‘Communist China and CIFUS: Dropping the Shark’, Congressional
Record, Vol. 153, No. 149 (2007), pp. 11, 226–27.
74 Overall, there are at least two potential criticisms to our approach. First, the produced list
of ‘politically opposed’ transactions might have large variation in their level of ‘contentious-
ness’ (US Department of Treasury Representatives. Telephone interview. 28 January 2010).
In other words, while many transactions were to some extent ‘politically unpopular’, not all
of them were blocked in the United States or had significantly affected US policy. However,
for the purpose of studying the presence of US political attitudes to the rise of Chinese
M&A activity in the United States, we deem all instances of contention—including those
considered by some scholars or politicians as ‘political noise’—to be significant and rele-
vant in our empirical analysis. Second, some information, especially the decisions of CFIUS,
cannot be legally disclosed for use in an academic study. In fact, talks with CFIUS repre-
sentatives reveal that there does exist an informal process in which Treasury Department
officials can advise parties on the possibility of CFIUS rejection before the submitting of the
application. CFIUS representative from US Treasury Department, Telephone Interview,
January 27, 2010.
75 We recognize that there could be instances of ‘false-negatives’ in our sample—that is,
cases where instances of political opposition existed but we could not find any records
indicating it. We tried to avoid this through exhaustive searches of a variety of government
and media sources, such as NewsBank, Lexis-Nexus, the Congressional Record, etc.
Furthermore, we have no reason to suspect that any miscoding would be systematically
related to any of our explanatory variables.
The Chinese Journal of International Politics, 2015, Vol. 0, No. 0 17
Economic Distress
In order to test the economic distress hypothesis, we use measures of unemployment as a
general proxy for the level of economic distress that a target company is facing. We have
two justifications for this decision. First, it would not be possible to measure this at the firm
level for non-publically traded companies (i.e., we do not observe stock prices, etc.).
Second, there are often industry associations in the United States that speak on behalf
of the business sectors they are associated with. Therefore, assessing levels of distress based
on macro industries will suffice for our analyses.78
To create our economic distress variable, we collect aggregate and industry-level un-
employment rates from 2000 to 2010 using the Bureau of Labour Statistics datasets from
the Global Insight database.79 Some studies use a measure of change in unemployment
rates to determine trends across time.80 However, such a variable does not take into
account the performance of the overall economy. Obviously, an industry experiencing an
unemployment rate higher than the US average (e.g., manufacturing) is likely to be regarded
by politicians as more distressed than an industry performing better than the overall econ-
omy (e.g., financial sector), in terms of unemployment. Thus, we construct a variable to
measure ‘abnormal unemployment’ (which we label as Economic Distress), which measures
the net unemployment rate that an industry is facing measured against the average un-
employment rate for the entire US economy in that year.81 A positive value for Economic
Distress would indicate that an industry is performing worse than the entire economy.
Reciprocity
In order to test the reciprocity hypothesis, we extract a dataset of American firms’ activity
in the Chinese M&A market from 1998 to 2014 using the ThomsonOne Banker database.
We include all transactions involving acquirers based in the United States and targets based
in China. Using similar criteria for exclusion as that in the Chinese dataset, we create a final
dataset of several thousand transactions.
Like the Chinese dataset, each transaction included the official deal status of the US
company’s acquisition bid (i.e., completed, pending, withdrawn, etc.). Unfortunately,
neither ThomsonOne nor other commercial databases hold detailed information on the rea-
sons for the failure of transactions given ‘withdrawn’ status. Soliciting such information
from Chinese government sources and newspapers would be equally difficult. For example,
many of these decisions would involve Chinese government-level decisions that are not cur-
rently available to us as researchers. Using the available data from ThomsonOne Banker,
79 The Bureau of Labor Statistics database did not have pre-2000 industry-level unemployment
rate data; for our 1999 transactions, we use 2000 data. For each industry and year, we also
use each industry’s January unemployment rate figure in order to maintain consistency.
The data we use for the average unemployment rate for the entire US economy also uses
January unemployment figures.
80 This could be percentage change in the unemployment rate in a macro-industry since the
previous year, ‘% Change in Unemployment’. For any given industry this would be ‘%
Change in Unemployment’¼ (Unemployment Rate, Year T – Unemployment Rate, Year T-1) /
(Unemployment Rate, Year T-1). This measure will isolate industries that have experienced
more job loss over the previous year, and thus more economic distress. Using such a meas-
ure generally gives similar results to those we report below. Martin J. Conyon, Sourafel
Girma, Steve Thompson and Peter W. Wright, ‘The Impact of Mergers and Acquisitions on
Company Employment in the United States’, European Economic Review, Vol. 46, No. 1
(2002), pp. 31–49.
81 For any given year ‘t’, ‘Abnormal Unemployment, industry x’ ¼ ‘Unemployment Rate, industry x’ –
‘Unemployment Rate, average’.
The Chinese Journal of International Politics, 2015, Vol. 0, No. 0 19
Control Variables
Along with our main independent variables, we assess two control variables that may be
significant factors in influencing incentives to oppose Chinese M&A activity.
82 For any given industry ‘x’ and year ‘t’: ‘Completion Rate of US deals’ ¼ ‘Number of com-
pleted deals’/‘Number of total announced deals’.
83 For the reciprocity variables, we employ ThomsonOne Banker’s scheme for labelling macro-
industries.
84 We also collected data on the failure rate of US deals ‘withdrawn’ for a given macro-
industry in a given year and failure count of US deals, which calculates the total number of
deals with status ‘withdrawn’ for a given macro-industry in a given year. These measures
are correlated and we get similar results with these alternative measures.
85 Prabhakar, ‘Deal-Breaker’; Krugman, ‘Competitiveness’; Robert Gilpin, Global Political
Economy: Understanding the International Economic Order (Princeton: Princeton University
Press, 2001).
86 Carlsten Holz, ‘Note on the Definition of “State-owned and State-controlled Enterprises”’,
Hong Kong University of Science and Technology, September 29, 2003, http://ihome.ust.hk/
socholz/SOE-definition.htm.
87 Andrew Delios, Zhijian Wu and Nan Zhou, ‘A New Perspective on Ownership Identities in
China’s Listed Companies’, Management and Organization Review, Vol. 2, No. 3 (2006), pp.
319–43.
88 In order to determine the ‘ultimate ownership’ of the Chinese acquirers’ shares for all trans-
actions, we consolidate primary and secondary data from three different sources.
Ownership data for most Chinese companies listed on the Shanghai Stock Exchange and
Shenzhen Exchange is found using the Chinese Stock Market Aggregate Resource
Database (CSMAR). However, many times, the principal listed shareholder of a company
might not be the ‘ultimate owner’ of the company, since the listed shareholder might in fact
be controlled by another larger organization. Therefore, we conduct additional searches on
the listed shareholders of a company using our CSMAR datasets until we find the final
owner, and cross-check our results using the dataset constructed by and used by Delios,
20 The Chinese Journal of International Politics, 2015, Vol. 0, No. 0
for each transaction, with a 1 indicating a ‘state-owned’ acquirer (i.e., ultimate owner is a
government-affiliated institution) and 0 indicating a ‘private-owned’ acquirer (i.e., private
individual or institution). We were unable to code this variable dispositively for a relatively
small number of firms. We, however, suspect that they are not government owned, and
hence created a second variable, GovtOwned2, where we set these observations at 0.
Size of Target
Other firm-specific attributes—namely, its brand recognition—may influence political
actors’ assessment of its acquisition by Chinese firms. We expect Chinese acquisitions of
more well-known American companies to be more salient in public discourse, and thus
Empirical Results
Our binary dependent variable indicating political opposition is coded as 1, indicating at
least one instance of federal, congressional, and/or local political opposition to a transac-
tion. On the whole, 10% of our sample has a dependent variable of 1. Hence, if we had a
baseline model with no explanatory variables, the constant would capture this baseline.
Below we present changes in the probability of the dependent variable. This baseline should
be kept in mind when interpreting these changes. We estimate a series of standard logit
models with robust standard errors. We also estimate models with year fixed effects. Year
fixed effects account for any unobserved or unmeasured variables that are constant at
the year level. This includes the overall state of US–Chinese relations, the partisan makeup
Notes: Standard errors in brackets; þp < 0.10, *p < 0.05, **p < 0.01. Models m2, m4, and m6 contain year
fixed effects. Differing sample sizes are due to missing data for government ownership, or to no variation in de-
pendent variable within a year in models with year fixed effects. All coefficients are from logit model with ro-
bust standard errors.
of Congress, the party of the president, or other factors in China, such as changes in the
overall FDI regulatory environment, that are constant for the year.91
The first model, m1, includes our three main explanatory variables. Model m2 adds
year fixed effects to this specification. Model m3 adds our control variables, and m4 adds
year fixed effects to model m3. Finally, models m5 and m6 modify models m3 and m4 by
using the alternative GovtOwn2 measure. When we include year fixed effects, the sample
sizes decrease slightly because in several years there was no variation in the dependent vari-
able (i.e., no protests). Results are presented in Table 1. Additional results using a linear
probability model—which does not drop observations due to year fixed effects—are pre-
sented in Table 2. As the results in Table 2 show, our results are robust to this alternative
specification.
Independent Variables
Security Sensitivity
Our results provide strong evidence in support of the security sensitivity hypothesis.
The variable Security is in itself positively and significantly related to the probability of trig-
gering political opposition, suggesting that a Chinese acquisition of a potentially security
91 Replacing these fixed effects with substantive variables that do not vary at the year level is
an important thing to think about, but leads to a proliferation of such potential variables.
Nevertheless, systemic variable such as those contained in the Tsinghua database on
US–China relations would be one such source of data (http://www.imir.tsinghua.edu.cn/
publish/iis/7522/index.html). Thanks to a reviewer we note that over time China has increas-
ingly delegated control from the national to more local level over determining FDI outflow
decisions. These dynamics might pose interesting temporal variation that we abstract away
from in the current paper.
22 The Chinese Journal of International Politics, 2015, Vol. 0, No. 0
Notes: Standard errors in brackets; þp < 0.10, *p < 0.05, **p < 0.01. Models m2, m4, and m6 contain year
fixed effects. All coefficients are from a linear probability model with robust standard errors.
The results presented in Table 1 strongly reject the null hypothesis that political opposition to Chinese acquisi-
tions cannot be explained by a set of political economy factors. Government opposition to a certain transaction
can be systematically predicted on the basis of national security sensitivity, economic distress, and reciprocity
factors.
sensitive US asset would be seen as a ‘security threat’, and would likely lead to opposition
from political actors. This variable is positive and highly significant in all models except
models 4 and 6, where the coefficient is close to statistical significance.
The substantive effect of this variable is also important. In Figure 2, we present the pre-
dicted probability of resistance when the target firm is not security sensitive (0) and when
it is sensitive (1), using model m5 and holding all other variables at their mean. The change
in probability is almost 0.06 on the 0 to 1 probability scale. This is substantively important
in light of our baseline probability of political protest. Furthermore, in additional models
not reported, this effect gets substantially stronger when we allow for an interaction
between our measure of Chinese government ownership and our security sensitivity vari-
able. This shows that the security sensitivity of a target is amplified if the acquiring firm is
a government-owned rather than private firm.
Economic Distress
Using the abnormal unemployment in the target industry as a proxy for the target industry’s
level of Economic Distress, we find a strong positive and statistically significant relation-
ship with political opposition. Chinese acquisitions in industries that are underperforming
in the US economy would likely trigger opposition. This variable is positive and statistically
significant in each model, including those with year fixed effects and additional control
variables. Substantively this effect is meaningful. As presented in Figure 3, the probability
of resistance at the lowest values of Economic Distress is 0.05, but at the highest level of
distress it is almost 0.4 in our data. Most of the data, though, is in the region of 1 to 2
(the 25th and 75th percentiles, respectively), over which the changes are more modest:
ranging from a 0.08 probability of resistance to 0.14. In short, higher levels of economic
distress generally predict greater likelihood of political opposition to a Chinese acquisition.
The Chinese Journal of International Politics, 2015, Vol. 0, No. 0 23
Fig. 3. Effect of Economic Distress Moving from Sample Minimum to Maximum Holding All Other
Variables at Sample Mean.
24 The Chinese Journal of International Politics, 2015, Vol. 0, No. 0
Fig. 5. Effect of GovtOwned2 and Firm Size Moving from Sample Minimum to Maximum Holding All
Other Variables at Sample Mean.
The Chinese Journal of International Politics, 2015, Vol. 0, No. 0 25
Reciprocity
Next we turn to our measure of reciprocity. Is protest more likely when US M&A attempts
in China fail within the same industry as that of the American firm targeted by Chinese
M&A? Higher values of this variable indicate greater amounts of completed deals, and
lower levels indicate less success. In Table 1, this variable is negative and statistically signifi-
cant in each model. Greater levels of US M&A success within industry in China are corre-
lated with a lower probability of political opposition. This suggests that US political
responses are mindful of American successes overseas. If things are going well for US firms
in China, there is less need to protest, which could imperil US firms overseas. Of course, as
we discuss below, our quantitative research design is unable to identify who the ‘original’
Control Variables
Government Ownership
On its own, ownership of the acquiring firm by the Chinese government was positively
related to protest in every model. However, it was only statistically significant in the models
with year fixed effects. As earlier discussed, when this variable was interacted with that of
Security the interaction term was positive and significant. Security considerations are most
salient when the Chinese government is linked to the acquisition. This makes intuitive
sense, and gives credence to our measures and results; it constitutes evidence in support of
92 However, we are unable to make this specific conclusion, because often the political resist-
ance we code cannot be directly linked to representatives within an industry. However, this
conclusion is reasonable if we assume that these firms have the greatest incentive to get
political actors to mount a protest. We also investigated models that split apart acquiring
firms according to whether they were mainland China- versus Hong Kong-based. We find
almost identical results, other than that the Security variable is not significant for Hong
Kong-based firms. This is an interesting result that may warrant additional research in the
future. Additionally, we are not able to include the government ownership variable for the
Hong Kong model because no firms in Hong Kong were owned by the government. We
thank an anonymous reviewer for raising these points.
26 The Chinese Journal of International Politics, 2015, Vol. 0, No. 0
Krugman and Prabhakar’s hypothesis that state ownership is perceived to threaten national
identity.93
Firm Recognition/Size
Using our binary measure of firm size to proxy the public familiarity with the US target, we
find that larger firms elicit more political complaints. Across models m3 to m5, this variable
is positive and significant. Translated into substantive terms, the change in probability,
holding other variables at the mean, is almost 0.1. While it is important to control for this
variable (it might, for example, confound one of our key explanatory variables), it has an
important impact on the dependent variable.
happened with a deal (whether it was it finally dropped, pending but in a way only known
to the investors, etc.). Future work may unpack these outcomes further.
Conclusion
This study focuses on how politicians in a developed country treat inward investments by
multinational firms from a developing country—a relatively recent phenomenon that is not
yet covered extensively in academic or policy-oriented research. Indeed, the literature on
direct foreign investment has focused much more on flows from developed to developing
countries; the research that has focused on FDI flows to developed states has not yet
94 ‘Abnormal unemployment’ may not account for certain aspects of a target industry’s eco-
nomic health, particularly intra-industry trends and firm-level performance. Likewise, a US
industry’s M&A completion rate in China did not precisely explain patterns of reciprocity
from Chinese political actors. However, given the strong involvement of the Chinese govern-
ment in its business sector, this measure was the most accurate proxy for reciprocity given
data limitations in ascertaining ‘political opposition’ by Chinese government officials.
28 The Chinese Journal of International Politics, 2015, Vol. 0, No. 0
have implications for many aspects of US–China relations, we will note three aspects of
economic relations between these countries that our results speak to. First, our research
most obviously helps to explain which Chinese M&As are most likely to produce political
opposition in the future. This information is potentially useful to both industry and govern-
ment. Of course, it is important to note that just because a Chinese M&A generates
political opposition does not necessarily signify that it will not ultimately be successful.95
For example, in 2013 a Chinese company bought Smithfield Foods in a deal worth $7.1
billion. The company is the world’s largest pork producer, and consequently a number
of US politicians raised concerns about security and reciprocity. This high-profile deal
was successful, however, despite political objections, which may in part be due to Chinese
Our study also suggests several avenues of future research. Specifically, future research
could consider other types of Chinese inward FDI, like greenfield investments or joint ven-
tures (although, compared to M&As, these cross-border investments have generally been
welcomed and triggered relatively little controversy).100 A more general study of developed
countries’ treatment of FDI from emerging economies would be extremely valuable. Is US
political opposition to Chinese inward M&A unique and dependent on the particular polit-
ical economy of the United States, or is it generally representative of developed countries’
reactions to Chinese investments? Although some research has suggested that the UK may
be more supportive of investment liberalization than the United States,101 more research
needs to be done to determine whether the factors that drive opposition to investment
Acknowledgements
This research directly grows out of Chris Xu’s thesis work at Princeton University. We are espe-
cially grateful to Torben Behmer and Amanda Kennard for research assistance. For comments on
previous versions, we thank Quan Li and other participants of the ‘Rise of China’ conference at
Tsinghua University, July 2014, as well as Eleanor Powell and APSA 2014 participants.
100 Unlike ThomsonOne Banker’s M&A database, there does not exist a large-scale commer-
cial database devoted to individual Greenfield investments or joint ventures in the United
States—let alone in China. Thus, a detailed and comprehensive dataset for Greenfield in-
vestments would actually be more difficult to construct than for M&A.
101 Nathan M. Jensen and René Lindstädt, ‘Globalization with Whom: Context-Dependent
Foreign Direct Investment Preferences’, Working Paper, Washington University, July 19,
2013.
102 Quan Li and Tatiana Vashchilko, ‘Dyadic Military Conflict, Security Alliances, and Bilateral
FDI Flows’, Journal of International Business Studies, Vol. 41, No. 5 (2010), pp. 765–82.
30 The Chinese Journal of International Politics, 2015, Vol. 0, No. 0
Appendix 1
List of instructions for determining the national security sensitivity variable (Security ¼ 1).
1. If the target company name falls under any that are ‘military contractors’ or ‘govern-
ment contractors’ (see http://www.fas.org/man/target company/index.html), code 1.
2. If the macro industry is under ‘Wholesale & Retail Trade’, code 0.
3. If the macro industry is under ‘TRANSPORTATION & UTILITIES’, check the mid in-
dustry description to see if it falls under ‘TRANSPORATATION’ or ‘UTILITIES’.
a. If it is under ‘UTILITIES’, code 1.