Adding Cultural Distance or Bridging Cultural Barriers? Business Group Affiliation and Ownership in International Acquisitions

Abstract

Several studies have examined the determinants of the degree of ownership in outward FDI from EMNES, however none of them have examined the specific role of business group affiliation. Business group affiliation has typically been perceived as helping to fill institutional voids in the home country, but the cross-border implications of such affiliation have rarely been examined. This is important for our theoretical understanding of the changing role of business groups as home country institutional environment improvements begins to fill in institutional voids, thus eroding the domestic role of business groups. We argue that business group affiliation fundamentally provides firms with greater affordability and risk-taking ability in acquiring equity stake in cross-border acquisitions. More importantly, business group affiliation serves to bridge cultural barriers, and serves to diminish the adverse effects of cultural distance in acquiring equity stake. Using a sample of 218 public and private firms from India entering into 26 host countries across a wide range of industry sectors, we find that Indian firms that are affiliated to business groups acquire significantly larger amount of ownership equity stake than non-affiliated firms. Furthermore, while cultural distance generally requires firms to acquire greater equity stake for greater control, firms affiliated to business groups are able to get by with lesser equity as compared to unaffiliated firms. Our study has practical implications for managers to appreciate the support they can derive from the valuable collective experience residing in business groups.