Chinese Takeover Companies Pay Higher Salaries than Other Investors

Employees in companies with Chinese investors receive higher salaries in the first years following the acquisition than those in companies acquired by buyers from other countries. At the same time, capital productivity is lower in companies with Chinese investors. These were the findings of a team of EconPol Europe researchers led by ifo President Clemens Fuest. The paper was co-authored by Felix Hugger (Ludwig-Maximilians-Universität Munich), Samina Sultan (Ludwig-Maximilians-Universität Munich), and Jing Xing (Shanghai Jiao Tong University).

“The lower capital productivity might be the product of these buyers’ higher investments in the acquired companies, and the higher salaries could be the result of those higher investments. It is also conceivable that Chinese investors have a greater desire than others to motivate employees with higher salaries or to discourage them from changing jobs,” says Fuest, interpreting the findings.

Another key finding of the study is that Chinese investors buy larger companies with higher debt levels and lower profitability.

On average, companies acquired by Chinese investors are seven times larger than companies acquired by investors from other countries, as measured by total assets. The debt ratio is 6.5 percentage points higher and average profitability at the time of acquisition is close to zero, while other investors focus on companies with positive earnings.

Chinese state-owned enterprises prefer targets in the field of raw material extraction and in the agricultural sector, while private Chinese firms are more likely to buy companies in the electronics, mechanical engineering, and automotive industries. However, Chinese state-owned enterprises are also active in the automotive industry.

“The preference for companies with greater debt and lower profitability may be explained by a longer-term investment horizon or better financing options through Chinese state-owned banks,” says Fuest. “In addition, the study shows that Chinese state-owned enterprises are implementing the government’s strategic economic policies, particularly the ‘New Silk Road’ and ‘Made in China 2025’.”

The EconPol research team examined more than 70,000 cross-border acquisitions of companies in 92 countries between 2002 and 2018. In 1,900 takeovers, the buyers were from China; in 171 cases, Chinese investors took over German companies.

Study (in English): “What Drives Chinese Overseas M&A Investment? Evidence from Micro Data,” by Clemens Fuest, Felix Hugger, Samina Sultan, and Jing Xing, EconPol Europe Working Paper No. 33, November 2019