Friends or Foes? Bilateral Relationships and Ownership Choice in Cross-border Acquisitions by Emerging Market Firms

Emerging market firms (EMFs) are increasingly recognized as a heterogeneous group of business enterprises, providing a unique context for examining the predictive power of existing theories. Drawing on real options and internalization theories, this paper predicts the contrasting effect of bilateral relationships on EMFs' ownership choice in cross-border acquisitions. The conflicting conjectures are tested using data consisting of almost 1,000 cross-border acquisition deals. Our results show that weak economic, political and military relationships between acquiring and target countries induce EMFs to opt for full acquisitions. The findings support the view of internalization theory, highlighting that EMFs prefer full ownership over partial ownership by coping with the political risk derived from weak bilateral relationships.