Structural Economic Change and Foreign Acquisition

Abstract

In this paper, I study how structural economic change affects the relative benefits of foreign and domestic ownership in emerging markets. The central thesis is that rapid change (a structural economic shock) makes many of the capabilities of domestic firms obsolete. Under these circumstances, foreign acquirers from advanced economies can provide firms with access to knowledge that helps firms to adapt to post-shock economic circumstances more effectively than they could without foreign ownership. Hence, the benefits of foreign acquisition increase following structural economic change. I develop my argument in the context of the banking industry and test specific hypotheses on a large sample of banks in Central and Eastern Europe. In line with my predictions, foreign acquisition is followed by a period of post-acquisition restructuring that raises costs and reduces profitability. Thereafter, foreign-owned banks gradually improve their performance relative to domestically owned banks. This increase is more pronounced in countries that experience deeper structural change.