Industrial Policy for National Champions

9. Economic Patriotism, Foreign Takeovers, and National Champions

9 Economic Patriotism, Foreign Takeovers, and National Champions Jens Suedekum 9.1 Introduction In a recent paper Suedekum (2010) argued that globalization may buttress government aversion toward attempts of foreign corporations to acquire large domestic firms. In his model the government recognizes the positive aspects of cross-border mergers, particularly for domestic consumers who benefit from cost reductions due to merger synergy effects. However, governments also often entertain a bias against foreign takeovers of domestic target firms, and falling transport costs can initially reinforce this bias. Suedekum (2010) shows that even a biased government may accept a foreign takeover if transport costs are sufficiently high, essentially because the consumer gains are then substantial , but not if trade integration has proceeded too far. At such a later stage of trade integration, the government will rather attempt at creating a “national champion.” In other words, the government will promote large-scale mergers between domestic firms in order to keep domestic profits from drifting to markets of foreign competitors. These theoretical results may provide a rationale for some recent examples from the international business world. Maybe the clearest case is that of the SUEZ/ENEL/GAZ-de-FRANCE proposed merger. The Italian gas and electricity provider ENEL attempted to acquire its French counterpart SUEZ, in an endeavor to become a “European champion” in the relevant markets and to capture, in particular, market shares in France. The French government, which is well known to pursue a patriotic and biased industrial policy, heavily opposed the takeover and advanced the argument that foreign acquisition would lead to a buyout of national assets. The government instead promoted a merger of SUEZ with the national firm GAZ de FRANCE (GdF), which would create a “national champion,” and one of the largest gas 178 Jens Suedekum providers worldwide, with headquarters based in France. Several other merger cases have followed a similar pattern. Some of these proposed mergers, including the EON/Endesa/GasNatural, the ABN-Ambro/ Antonveneta, the Arcelor/Mittal, and the Danone/Pepsi cases, are discussed in other chapters of this book. From the time line of merger events, it appears that cases of “national champions” have popped up quite frequently in recent years. In fact the general trend of economic integration in Europe is more often than not countered by instances of economic patriotism. This is despite the generally observed trend that cross-border mergers are becoming the dominant form of foreign direct investment (UNCTAD 2005). This dichotomy is precisely predicted by the model of Suedekum (2010). For an unbiased government that is not a priori opposed to foreign takeovers , he finds that falling transport costs make cross-border mergers more likely compared to purely national mergers, thereby confirming earlier results by Horn and Persson (2001). However, upon including a government’s initial bias, he finds that trade integration makes national champions more likely. In this chapter I study these issues using an alternative model of the underlying market structure. Suedekum (2010) assumes that firms compete in quantities of a homogeneous good; that is, he uses the standard model of Cournot competition. I assume instead that firms have differentiated products and compete in prices à la Bertrand. This alternative allows an important check of robustness because it is well known that Cournot and Bertrand models sometimes lead to drastically different results in merger analysis. For example, Salant et al. (1983) show that horizontal mergers without synergy effects are typically not profitable for the participating firms under Cournot conditions unless all firms that merge create a monopoly. This “merger paradox” does not hold in a model of Bertrand competitition with differentiated products where mergers tend to be profitable to insiders and outsiders (see Deneckere and Davidson 1985).1 In my model two domestic firms and one foreign firm compete in the domestic market. A foreign firm may produce more efficiently, namely at lower unit costs than the national firms, but it faces transport costs for servicing the market. Starting from this initial situation, I consider a three-stage game. In the first stage firms negotiate about changes in the ownership structure through mergers & acquisitions (M&A). In particular, the foreign firm wants to acquire one of the domestic firms in order to improve its market access; alternatively, the Economic Patriotism, Foreign Takeovers, and National Champions 179 two domestic firms may merge to become a national champion that captures market shares from the foreign...