Foreign direct investment theories
Differences in strength of currency between host and source countries was used as one of the preliminary theories to explain the strategic advantage of foreign direct investments. Weaker currency firms were seen as more probable than those with stronger currencies to attract foreign direct investment for market capitalization purposes (Horst, 1972). However, even with United States laws and regulations acting as barriers to entry, recent Chinese investments in American companies experienced enormous increases estimated to be around 11 Billion in 2015 and 81.6 Billion in 2016 (JPM, 2017).
The slowdown of economic growth in emerging countries (the slowest in 25 years for China in 2015) leads to an increase in inorganic growth through mergers, acquisitions, and international market expansion in pursuit of diversification and growth of business activities in international markets by domestically competent firms. This may be, in part, due to the difficulties that businesses in developing countries encounter when attempting to invest in R&D or to build global brands. This type of entry model allows for quick access to technology, channels, and brands with little startup/R&D costs through the purchase of an already developed product.
The modern international business environment seems to adhere to a hybrid form of the internalization theory where concerns extending the direct operations of the firm and bringing under common ownership and control of the activities conducted by intermediate markets link the firm to customers/profits. Firms will then gain in creating their own internal market where transactions can be carried out at a lower cost within the firm (Buckley, 1988). Once companies from emerging markets have demonstrated a degree of success they will then be able to utilize capital and talent markets in developed countries. Like American or European companies, they then have the option to list themselves on the NYSE to further promote growth from investors.
Johnson & Johnson Actelion acquisition analysis
Upon closer inspection of the pharmaceutical sector we see the same concept working in reverse pushing companies to re-evaluate global acquisition strategy. A combination of costly organic growth through R&D strategies, regulatory and quality assurance, and marketing to an international audience makes it more profitable for well-developed companies to participate in direct M&A rather than incur development costs themselves. Johnson and Johnson’s recent 30 billion all cash deal with Swiss biotech Actelion was a strategic purchase using the profits generated overseas to mitigate currency risks/fluctuation and heavy taxation of domestic acquisition. The deal closed at 30x Actelion’s projected 2018 valuation with no promise into Actelion’s R&D pipeline. However, with promise to add value to EPS, accelerate revenue, and earnings growth rate instantaneously, it is the type of inorganic growth that management thinks will contribute to the sustainable growth and diversification (entry into Cardiovascular devices) of the company.
Buckley, P.J. (1988), “The limits of explanation: testing the internalization theory of the multinational”, Journal of International Business Studies, Vol. 19, pp. 181-93.
Horst, T. (1972), “Firm and industry determinants of the 2. decision to invest abroad”, Review of Economics and Statistics, Vol. 54, pp. 264-5.
J.P. Morgan’s Survey of M&A leaders across Asia, titled “Asian Corporates Aggressively Using M&A to Pursue Growth,” was published in November 2015. For more information, please visit https://www.jpmorgan.com /country/US/EN/insights/asiamastudy.