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M&A and Corporate
Consolidation
A Study of the Role
of Competitive
Government Behavior

Fengrong Wang
M&A and Corporate Consolidation
 Fengrong Wang

M&A and Corporate

Consolidation
A Study of the Role of Competitive Government
Behavior
Fengrong Wang
Shandong University
Jinan, Shandong, China

This book is the result of a co-publication agreement between Social Sciences

Academic Press and Palgrave Macmillan based on a translation from the Chinese
language edition: 政府竞争视角下的企业并购与产业整合研究 © Social Sciences
Academic Press, 2016 All Rights Reserved

ISBN 978-981-15-6674-5    ISBN 978-981-15-6675-2 (eBook)

https://doi.org/10.1007/978-981-15-6675-2

© The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer
Nature Singapore Pte Ltd. 2021
Jointly published with Social Sciences Academic Press.
This work is subject to copyright. All rights are solely and exclusively licensed by the
Publisher, whether the whole or part of the material is concerned, specifically the rights of
translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on
microfilms or in any other physical way, and transmission or information storage and retrieval,
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exempt from the relevant protective laws and regulations and therefore free for general use.
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This Palgrave Macmillan imprint is published by the registered company Springer Nature
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189721, Singapore
 Contents

1 Introduction  1

2 Government Competition, M&A, and Corporate

Consolidation: A General Analysis 17

3 M&A Waves in China: A Survey from the Government

Behavior Perspective 73

4 The Mechanism of M&A Under the Impact of Local

Government Competition: Models and Empirical Studies175

5 Corporate M&A and Corporate Consolidation Under

Government Competition: Regional Specialization and
Industrial Agglomeration255

6 Government Competition and Intra-industry M&A:

Studies on Micro and Macro Performances345

7 Government Competition and Conglomerate Merger:

Performance Extension Studies from the Perspective of
Life Cycle Theory405

v
vi Contents

8 Conclusions, Suggestions and Prospects459

Bibliography489
 List of Figures

Fig. 2.1 M&A and corporate consolidation from the perspective of

government competition: a new analysis framework 64
Fig. 3.1 Number of corporate M&A in the US in the third to fifth
M&A waves 75
Fig. 3.2 Total amount of US corporate M&A in the third to fifth M&A
waves76
Fig. 3.3 Number of corporate M&A in China 78
Fig. 3.4 Total amount of corporate M&A in China 79
Fig. 3.5 Average transaction amount of corporate M&A in China 80
Fig. 3.6 Number of corporate M&A in China (after smoothing) 83
Fig. 3.7 Total amount of corporate M&A in China (after smoothing) 83
Fig. 3.8 Filtered movement of the number of China’s overall M&A
events84
Fig. 3.9 Filtered movement of total transaction volume of China’s
overall M&A events 84
Fig. 3.10 China’s GDP growth rate from 1994 to 2012 87
Fig. 3.11 Analysis framework for the local SOE control rights transfer
under regional public governance 99
Fig. 3.12 Number of enterprises in various industries listed in the
A-share market from 2003 to 2012. (Data source: Collated
from the relevant data of CSMAR database) 113
Fig. 3.13 Sum of total assets of the enterprises in various industries listed
in the A-share market from 2003 to 2012. (Data source:
Collated from the relevant data of CSMAR database) 113
Fig. 3.14 Regional distribution of local state-owned listed companies
control rights transfer from 2004 to 2012 133

vii
viii List of Figures

Fig. 3.15 Quantity trend of RTO transactions in China’s Shanghai and

Shenzhen A-share markets. (Data source: Collated from the
relevant data of CSMAR database and RESSET database) 149
Fig. 4.1 Distribution of the combination of tax burden and the
regional environment score of each province 223
Fig. 4.2 The number of different kinds of M&A from 2002 to 2005
and from 2006 to 2009 246
Fig. 4.3 The amount of M&A in each year before and after the
environmental regulations 246
Fig. 5.1 Movement of industrial structure similarity coefficient in the
three major economic zones 271
Fig. 5.2 Provincial mean of Krugman specialization index in China in
1999–2010285
Fig. 5.3 Krugman specialization index by region 296
Fig. 5.4 Relative effective tax rate of foreign-funded enterprises by
region298
Fig. 5.5 Relative stock of national development zones by region 298
Fig. 5.6 Number of M&A of listed state-owned enterprises in
manufacturing industry. (Data source: CSMAR database) 327
Fig. 5.7 Amount of listed SOE M&A in manufacturing industry (Unit:
100 mln yuan). (Data source: CSMAR database) 329
Fig. 5.8 Industrial concentration ratio (ACR4). (Source: RESSET
database)330
Fig. 5.9 Industrial concentration ratio (ACR8). (Source: RESSET
Database)331
Fig. 5.10 Industrial concentration ratio (HHI). (Source: RESSET
Database)332
Fig. 5.11 Manufacturing industry profit variation (Unit: 100 mln yuan).
(Source: RESSET Database) 333
Fig. 5.12 ROE of the manufacturing industry (Unit: %) 334
Fig. 6.1 2000–2009 marketization index of China’s provinces,
municipalities, and autonomous regions. (Source: China’s
Marketization Index: Report on the Development of
Marketization in Various Regions NERI Index of
Marketization of Chin’s Provinces 2011 Report)363
Fig. 6.2 Trend for regional concentration of high-tech industry 396
Fig. 7.1 Trend of conglomerate merger in the representative industries 449
 List of Tables

Table 2.1 Evaluation index system of local government competitiveness

in China 53
Table 3.1 DF test results of three variables 80
Table 3.2 AR (2) results of the three variables 80
Table 3.3 Three-variable AR (1) residual term autocorrelation test 81
Table 3.4 Smoothed data descriptive statistics 82
Table 3.5 Test of China’s overall M&A transaction volume trend 86
Table 3.6 Test of China’s overall M&A transaction trend 86
Table 3.7 China’s two waves of M&A 86
Table 3.8 Correlation analysis of China’s overall M&A and GDP
growth rate 88
Table 3.9 Correlation analysis of China’s overall M&A amounts and
GDP growth rate 88
Table 3.10 Stationarity test of time series data 92
Table 3.11 Transaction time and industries of samples 105
Table 3.12 Definition and values of dependent variables 107
Table 3.13 Descriptive analysis of data 107
Table 3.14 Empirical results of motivations for control rights transfer 109
Table 3.15 Industries of control rights transferred local state-owned
listed companies in 2004–2012 132
Table 3.16 Comparison of descriptive statistics and the mean values 139
Table 3.17 Regression results of the models 141
Table 3.18 Distribution of corporate ownership of sample “shell
corporations”150
Table 3.19 Sample “shell corporations” by region 151
Table 3.20 Changes of regions in RTOs 152

ix
x List of Tables

Table 3.21 Distribution of local and non-local RTOs of shell resources

of different ownership 162
Table 3.22 Definition of variables 163
Table 3.23 Descriptive statistics of major variables 165
Table 3.24 Analysis of correlations between variables 166
Table 3.25 Binary Logistic regression results 168
Table 4.1 Return matrix of the acquirer and the target enterprise 178
Table 4.2 Inter-regional M&A by year 220
Table 4.3 Evaluation index system for regional investment environment 222
Table 4.4 Meaning of analysis variables and data source 224
Table 4.5 Descriptive statistical analysis of major regression variables 225
Table 4.6 Tax competition, regional environment and inter-regional
M&A—analysis of total samples 226
Table 4.7 Tax competition, regional environment and cross-regional
capital flow 228
Table 4.8 Investment attraction effects of tax competition and regional
environment: analysis of the relative scale of inter-
regional M&A 232
Table 4.9 Robustness test of the impacts of different tax burdens on
cross-regional M&A 234
Table 4.10 Tax competition and inter-regional M&A under the
influence of headquarters economy 235
Table 4.11 Statistical analysis of major variables 239
Table 4.12 Financial expenditure competition among local governments
and inter-regional M&A 240
Table 4.13 Number of M&A of different types in 2002–2005 and
2006–2009245
Table 4.14 Explanation of empirical variables 248
Table 4.15 Regression results of M&A trend ①249
Table 4.16 Regression results of M&A trend ➁249
Table 5.1 Definition of major variables and their symbol expectation 268
Table 5.2 Industrial structure similarity coefficients of each economic
zone by year 270
Table 5.3 Descriptive statistics of government competition variables in
the economic zones 272
Table 5.4 Unit root test of each variable 273
Table 5.5 Model 1 and Model 2 multiple regression results 275
Table 5.6 Descriptive statistics of government competition variables 277
Table 5.7 Estimation results of the impact of government competition
on regional specialization 293
Table 5.8 Model estimation results by region 297
Table 5.9 Estimation results by period 300
 List of Tables  xi

Table 5.10 Modes and years of M&A deals 311

Table 5.11 Multiple regression analysis of the performances of M&A 313
Table 5.12 Statistics on distribution of intra-industry M&A in the three
categories and M&A by year 314
Table 5.13 Multiple regression analysis of performance comparison of
Intra-industry M&A in the three categories of industries 316
Table 5.14 Empirical results of industrial concentration of capital-
intensive industries 317
Table 5.15 Type and year of inter-industry M&A 318
Table 5.16 Comparison of Tobin’s Q of industrial innovation and
non-industry innovation M&A 319
Table 5.17 Comparison of M&A performance of industrial innovation
M&A and non-industrial innovation M&A 321
Table 5.18 Correlation analysis 336
Table 5.19 Industrial concentration ratio (acr4) regression analysis 337
Table 5.20 Industrial concentration ratio (ACR8) regression analysis 337
Table 5.21 Industrial concentration ratio (HHI) regression analysis 338
Table 5.22 Manufacturing industry ROE regression analysis 339
Table 6.1 2009 marketization index by province 371
Table 6.2 Enterprise performance evaluation index system 374
Table 6.3 Financial index descriptive statistics 374
Table 6.4 KMO and Bartlett Tests 375
Table 6.5 Extracted Sum of common factors one year before M&A 376
Table 6.6 RTOating principal component matrix for one year
before M&A 377
Table 6.7 Factor score coefficient matrix for one year before M&A 377
Table 6.8 Principal component score covariance matrix for one year
before M&A 377
Table 6.9 Regression analysis results 379
Table 6.10 Indicator system of marketization index 382
Table 6.11 Sample companies by industry 384
Table 6.12 Micro performance evaluation indicators for M&A 385
Table 6.13 Average tax burden of enterprises by industry 387
Table 6.14 Industrial policy scores by industry 388
Table 6.15 M&A performance test results under different intensity of
tax competition 389
Table 6.16 M&A performance test results under different industrial
policies391
Table 6.17 Multiple regression results of the impact of government
competition on intra-industry M&A performance 393
Table 6.18 Main regions of China’s high-tech industry concentration
from 1999 to 2009 397
xii List of Tables

Table 6.19 Unit-root test results 398

Table 6.20 Model regression results 399
Table 7.1 M&A samples by year 407
Table 7.2 Distribution of life stages of sample enterprises 408
Table 7.3 Definition and calculation of variables 410
Table 7.4 Comparison of enterprise characteristics indicators at
different stages of life cycle 411
Table 7.5 Independent samples t-test for the stages of the enterprise
life cycles 411
Table 7.6 Mean test and positive value ratio of sample enterprises
at the growth stage under different government
intervention415
Table 7.7 Mean test and positive value ratio of sample enterprises at
their maturity stage under different government
interventions416
Table 7.8 Mean test and positive value ratio of sample enterprises at the
decline stage under different government interventions 418
Table 7.9 Multiple regression empirical results for M&A performance 420
Table 7.10 Robustness test results 422
Table 7.11 Division standard of industry life cycle 433
Table 7.12 Results of life cycle division of China’s industries 433
Table 7.13 Sample M&A by year 438
Table 7.14 M&A score factors 440
Table 7.15 Definition of variables and expected symbols of main
variables441
Table 7.16 Test results of government intervention on M&A
performance in the year of the merger 442
Table 7.17 Number of conglomerate merger in the representative
industries449
Table 7.18 Variance contribution rate 452
Table 7.19 Statistics of score difference 453
 CHAPTER 1

Introduction

1.1   The Questions

Corporate mergers and acquisitions, or M&A, and corporate consolida-
tion have, for nearly half a century, been one of the areas of greatest con-
cern to economists and policy-makers. At the beginning, scholars of
industrial economics made their fundamental explorations on the issues.
George Joseph Stigler and Oliver Williamson have been leading scholars
exploring the effects of M&A from the aspects of corporate consolidation
performance and public welfares. But as the welfare effects of M&A are
complicated in theory and non-convergent in conclusion, many empirical
studies have been conducted on the effects of M&A performances. And
these explorations mostly resort to event studies and accounting informa-
tion. As for the social effects of M&A, discussions are mostly carried out
following diverse M&A models (Barros 1998; Yoshio Kamijo and Yasuhiko
Nakamura 2009), M&A types (Julia et al. 1996), and the impacts of M&A
policies (Khemani and Shapiro 1993, with remarkable research results
achieved. In response to the waves of M&A in China, studies on M&A
theory and empirical studies on M&A have flourished, making the field a
thriving branch of research. Many scholars, focusing on the aspect of
enterprises, study the mechanism and micro effects of corporate consoli-
dation using event studies and accounting information. And from the
aspects of M&A and industrial market structure, helpful explorations have
been made by Gao Feng et al. (2001), Fan Conglai and Yuan Jing (2002),
Liu Yu (2008), and Wen Haitao (2010).

© The Author(s) 2021 1

F. Wang, M&A and Corporate Consolidation,
https://doi.org/10.1007/978-981-15-6675-2_1
2 F. WANG

As a mode of stock resources allocation, corporate M&A is internally

driven by an institutional environment. In economic transitions, the con-
ducts of governments, particularly government competitions, are key fac-
tors affecting M&A and corporate consolidation. Li Shanmin (2006), in
the light of local government intervention, has carried out studies on value
issues like restructuring through M&A and diversified M&A. Pan Hongbo
(2008) has made empirical and normative studies on the “tunneling” and
supporting effects of restructuring through M&A. Feng Xingyuan (2001)
and Zhou Ye’an and Zhao Xiaonan (2002), with the paradigm of govern-
ment competition, have explored the rise and progress of local govern-
ment competitions in China and their positive and negative effects upon
economic growth and regional economic development.
On the whole, previous studies on M&A and corporate consolidation
are mostly based on a mainstream economic theoretical framework, fol-
lowing the perfect market hypothesis. In empirical studies, the explora-
tions on the effects of M&A are in many cases limited to the micro level.
Discussions on the basis of industrial market structures mostly take indus-
tries and market structures as exogenous variables and conduct analyses of
their impacts upon the conduct and timing of M&A. This book will reex-
amine the industrial nature of M&A from the perspective of intra-­
governmental competition and endeavor to build a corporate consolidation
model and framework for analysis of the issue. It will further explore the
issues concerning M&A in the process of economic transition. The results
are expected to enrich and improve the relevant literature on M&A and
will be of great significance to more empirical studies on intra-governmen-
tal competition and the effects of industrial economy and the perfor-
mances of regional economy.
Since the 1990s, corporate M&A has been an issue of great academic
interest in China, socially and economically, with the country’s economy
transforming from “the incremental reform” to “the stock reform.” Since
2009, ten programs for industrial revitalization and adjustments of key
industries have been intensively introduced by China’s State Council and
the regional governments of China, exposing the significant role M&A
can play as a means for corporate consolidation and the market structure
optimization in the aspects of policy-making and economic performance.
“Industrial concentration” driven by governments has become a striking
feature of a new round of corporate M&A in China. But a definite fact
concerning the issue is the rise of local protectionism, market segmenta-
tion (Zhou Ye’an 2003; Bai Chong’en et al. 2004a, b) brought by
 1 INTRODUCTION 3

intra-­governmental competition in the period of economic transition, and

the regional industrial “homogenization” and industrial “decentraliza-
tion” in corporate M&A (Jiao Guohua 2009; Wang Fengrong, Ren Meng,
Zhang Fusen 2011). Then, against the backdrop of economic transition,
what has been the motivation and mechanism of government actions,
especially government competition, involved in M&A? and what has been
the working mechanism and effects of government competition in seeking
ways for corporate consolidation and in reshaping market structure and
industrial structure? How can the allocation of resources be rationalized
and optimized? Empirical studies on these issues will be of practical signifi-
cance for a better understanding of the mechanism and effects of the inter-
action between government and market in resource allocation and the
rectification of local government competitions. They can clarify the direc-
tion for industrial growth under the existing systems and provide empirical
references for the transformation of economic growth pattern.

1.2   Definitions of Key Concepts

1. Government and Local Governments

In economics, the term “government” derives from homo economicus.

Scholars, with Adam Smith at the head, have interpreted man as homo
economicus pursuing the maximization of their self-interests. Though the
hypothesis basically manifests the principles of human activities, it has its
own grave defects. On this basis, new institutionalism has revised the
assumption about economic agents and changed the hypothesis of the
agents’ complete rational behaviors into bounded rational behaviors, mak-
ing the premise of behaviors for economic agents more reasonable. Later
on, scholars of public choice theory use the revised reasonable person
hypothesis to explain government conducts and believe that the govern-
ment, as the agent of public interests, also meets the behavior hypothesis
of maximizing the self-interests in itself and the individual officials. Among
them, Niskanen (1971), through its probes into the behavior motives and
the external environment of government officials, has established a theory
of monopoly and bureaucracy economy, concluding with the proposition
that the government will pursue budget maximization. It believes that the
government, in its social process, also plays the role of homo economicus,
although the government is not representing a single person, but a
4 F. WANG

behavioral agent embodying various interest subjects. From this, the

results of government’s “public choices,” like those choices of enterprises,
are the results of gaming among all interest subjects. Unlike the public
choice theory, the classical economics likens the government to a “black
box,” holding that the government is the “night watchman” of the market
economy, “the almighty charity organization” addressing market failure at
zero cost, the general representative of all people and social interests with-
out its own independent benefit target, and a kind of “paradise model.”
The institutional economists, employing the theory of public choice, take
the government as a reasonable person seeking the maximization of its
own interests, and, by bringing the government down to earth from para-
dise, stress that the goal of government actions is to maximize its own
benefits.
In this book, the concept of government is defined in the light of insti-
tutional economics. The government, as an economic organization, has as
its own goal to maximize its own interests. But unlike economic organiza-
tions in the common sense, its objective function is multifaceted. The local
governments, as essential components in government systems, have their
own interests as well, which involve the public interests in the jurisdiction,
the interests of the local government departments, and the individual
interests of the local government officials. In short, the government rep-
resents not only public interests, but public interests at various levels and
of diversified value orientations. Meanwhile, with the changing restraint
conditions and incentives for government conducts, the objective func-
tions of local government conducts will have to make corresponding
adjustments.

2. Government Competition

Government competition can be traced to the assumption of “foot vot-

ing” in Tiebout (1956). Albert Breton (1998) has put forth the concept
of competitive government, and Wallace E. Oates (1999) has gone further
and presented the Leviathan model of government. He Mengbi (2001),
establishing “an analysis model for competitive government,” has general-
ized three conditional frameworks for making analysis of government
competition, that is, the initial structure condition, political mechanism
and culture, and foreign trade relations, pointing out that government
competition may be divided into horizontal competition and vertical com-
petition, or in other words, there exist competitions between local
 1 INTRODUCTION 5

governments and governments at a higher level in respect to resources and

control power, and also competitions between government organizations
on the same level.
Following the analysis model of competitive government by He, Feng
Xingyuan (2001) has stated that government competitions are to a large
extent institutional competitions, there being a contention for tangible
and intangible resources among different government organizations.
Wolfgang Kasper and Manfred E. Streit have carried out studies on trans-
national government competitions from the perspective of institution,
believing that the concept of institutional competition highlights the
internal rules system and the external rules system of a nation and has a
significant impact upon the cost level and international competitiveness of
a nation. Thomas Apolte (1999) has also raised the point of government
competition being a competition of institutions. It holds that there are
many problems existing in political vote competition. Supplementary
mechanisms are expected to be added to the vote competition through
institutional competition so that the citizens in a certain jurisdiction can
effectively exercise supervision over the administrators. So the drive for
institutional competition derives on the one hand from the supervisory
pressure of citizens in the jurisdiction and on the other from the competi-
tion with other jurisdictions.
Yang Hutao (2006) explores the influence of institutional changes on
government competition and puts government competition into three
kinds. One, government competition is for grabbing scarce productive
resources. Two, government competitions are the local governments’ atti-
tudes toward capitals and services beyond their own jurisdictions and their
regulatory measures for strengthening their own advantages under “the
federal system.” As it is hard to measure the market admittance policy and
the effective tax burden, this kind of government competition is also
referred to as “covert government competition.” Three, government
competition is the general appraisal on the performance of local govern-
ments based on the policy information of other administrative regions by
citizens of a certain administrative division. The process has impacts on the
migration of citizens and can drive the politicians for better work.
Government competition of this kind is the government competition
brought up by Albert Breton.
The above discussion sums up the intension of government competi-
tion from various viewpoints. The concept of government competition we
are adopting in this book refers to the transnational or transregional
6 F. WANG

competitions staged among governments in different countries or among

the regional governments in a country for attracting productive factors
like capital, technology, talents, and for providing public goods or public
services in the fields of investment environment, government perfor-
mance, and institutional innovation. Under China’s framework for transi-
tional economy, the competitions between local governments have been
interregional competition driven by incentives, fiscal and political, brought
by the central government with the institutional supply mode, generally
unfolding around the resources. And their specific performances are of
two kinds: one is to attract the inflow of essential factors of production,
and the other is to prevent the outflow of local productive factors.
As government competition is an interactive concept, we will use in
some chapters of the book concepts with a broader sense like “govern-
ment intervention” or “government conducts” on the ground of chang-
ing views and the limitation of empirical data. For the definition of
“government intervention,” the interpretation in the past studies is diver-
sified. The Chinese version of The New Palgrave Dictionary of Economics (
新帕尔格雷夫经济学大辞典) has interpreted the English term “regula-
tion” as “管制” (meaning “management and control”), and its antonym
“deregulation” as “放松规章限制或放松管制” (meaning “loosen regula-
tory restrictions or loosen control”). In some classic dictionaries of eco-
nomics, government regulations refer to all acts of government policy
decisions for exercising restraints over the pricing, marketing, and produc-
tion of enterprises, including, for example, the control over the pricing
level and the setting of standards for products and service quality. This
book, based on the current situation in China, holds that government
intervention can be regarded as a collective term for all government activi-
ties where governments, under the market economy condition on the
ground of market mechanism, regulate the conducts of economic agents
to redress, improve, and remedy market defects through macro indirect
control and micro direct control under the laws and policies. Theoretically,
all government conducts that may influence the acts of economic agents
fall into the category of government intervention.

3. Corporate M&A

Corporate M&A is an economic phenomenon in the modern market

economy. It first emerges in the operation of a capitalist market economy
and has been the most important mode of economic activities for the
 1 INTRODUCTION 7

centralization of capital. Karl Marx was the first to foresee the trend for
capital centralization and the irresistible mergers and acquisitions in capi-
talist enterprises when he observed that the splitting up of the total social
capital into many individual capitals or the repulsion of its fractions one
from another is counteracted by their attraction. This is centralization
proper, as distinct from accumulation and concentration.
From a micro (the enterprise) point of view, mergers and acquisitions is
a mode for the external development of an enterprise (Wang Fengrong
2002). Specifically, there are two types of corporate mergers and acquisi-
tions: merger and acquisition. Acquisition refers to the legal act where a
company exercises the control of a target company by acquiring all or part
of the shares of the target (the acquired company). Based on what is
acquired, acquisition can be classified into stock acquisition and asset
acquisition. Merger refers to any transaction through which two or more
than two entities merge to form an economic unit. The common ground
of merger and acquisitions is to from an economic unit in the end. The
difference between them lies in that merger means the formation of a new
entity by the merging of two or more units, while, through acquisition,
the acquired party is incorporated into the company system of the acquir-
ing party and rarely is the case that the acquiring company has no struc-
tural changes after the merger of the acquired company; therefore,
acquisition is often seen as a kind of merger. As the motivation and prin-
ciples are similar in merger and acquisition, and acquisition is an important
mode and means of merger, so they are often pooled together and referred
to as mergers and acquisitions, or M&A for short.
From a macro point of view, M&A is the reallocation of stock capital
and is also a micro process of capital flow in regions and industries; thus,
M&A has effects on both the regional economy and the industrial
economy.
This book, merging the macro and micro perspectives of M&A,
explores on the one hand the occurring mechanism and the influence fac-
tors of M&A from the industrial point of view, and on the other hand
studies the corporate consolidation and regional economic effects of
M&A, with the latter being the emphasis and our original idea.

4. Corporate Consolidation

In contrast to the many in-depth discussions on corporate M&A,

studies on corporate consolidation are fewer. As of today, there has been
no consensus on the definition of corporate consolidation. Lyu Lachang
8 F. WANG

(2004) observes that corporate consolidation refers to the process

where advantageous and leading enterprises and corresponding indus-
trial structures, with big corporations and enterprise groups as their
core, are formed through the reallocations of the transregional and
cross-ownership productive factors in industries to achieve a long-term
competitive edge on the ground of the laws for industrial development.
Yang Jianwen holds that corporate consolidation is a process featuring
the division of production and specialization, aiming at the realization
of effective coordination among big and medium and small businesses
in an industry to improve its core competitiveness and international
competitiveness through cooperative competition. The definitions
above specify the goal of corporate consolidation as to gain a kind of
competitive edge, though in different approaches, one through the
reallocation of productive factors, and the other through the coopera-
tive interaction between enterprises.
Corporate consolidation in the general sense means a process from
decentralization to centralization at two levels. At the meso level, corpo-
rate consolidation is a process to realize the optimizing, upgrading, and
reallocating of resources in an industry. It embodies two dimensions:
regions and industries. At the macro level, corporate consolidation is a
process for the effective disposition of the internal factors of an industry.
The two levels are complementary and unite to give corporate consolida-
tion a relatively comprehensive definition.
This book, taking the logic and empirical studies into account, will
place particular emphasis of corporate consolidation on the meso level and
regard corporate consolidation as a phenomenon when at a certain period
large scales of M&A occur and bring about the optimization and upgrad-
ing of industrial structure, leading the industry from decentralization to
centralization. In empirical analysis, the book, out of the necessity for
comparative analysis, will survey the corporate consolidation (M&A)
effects at the industrial level.

1.3   Research Framework and Contents

Based on the paradigm of government competition, this book, starting
from the inherent issues of M&A in the economic transition period in
China, explores the working mechanism and performance of M&A on the
development of industrial economy and regional economy, taking as the
logic thread “the existence of M&A wave—the occurring mechanism of
 1 INTRODUCTION 9

M&A under government competition—the process of corporate consoli-

dation under government competition—the macro and micro effects of
M&A.” Meanwhile, with “motivations for government competition—
conducts of government competition—effects of government competi-
tion” as an invisible line, the book sheds lights on the changing paths and
impact mechanism of government competition. The analysis for govern-
ment competition is manifested in the logical framework of M&A and
corporate consolidation. The book consists of eight chapters.
Chapter 1 is Introduction. It raises the questions, lays out the basic
concepts, states clearly the contents, framework for analysis, and method-
ology of the project, and points out the originality and significance of
the work.
Chapter 2 gives a general analysis of government competition, indus-
trial M&A, and corporate consolidation. The chapter, starting from the
delimitation of the theoretical framework for the book, tries to set up an
analysis framework for the research based on a survey and review of the
literature on government competition, M&A, and corporate consolida-
tion. It provides a theoretical framework and serves as a basis for further
discussions in the following chapters.
Chapter 3 is a survey of the waves of M&A in China from the perspec-
tive of government conducts. It discusses, deductively and empirically, the
support and restraint effects that government behaviors, especially gov-
ernment competition, in an economic transition period, can exercise on
the waves of M&A and typical cases, that is, the privatization of local state-­
owned enterprises (SOEs), the connectivity of local SOEs with the state-­
owned enterprises directly under the central government (the central
SOEs), and the reverse takeovers (RTOs). Or this section can be said to be
a part devoted to the study on the motivation of government behaviors on
M&A. This chapter provides a general description of the background for
discussions in the following chapters.
Chapter 4 deals with the construction of a model of M&A occurrence
mechanism under government competition and gives empirical analysis
with the model. Corporate M&A is in nature a game play between both
parties involved in the transaction focusing on pricing and M&A strate-
gies. The chapter first introduces the M&A model of government behav-
iors using the cooperative gaming method on the basis of the Cournot
model. And in this context, the chapter further includes an endogenous
M&A model under regional government competition to explain the
impact mechanism the local government conducts may have on the
10 F. WANG

occurrence of M&A of local SOEs. Next, an exogenous model for M&A

under regional government competition is also set up from the perspec-
tives of tax competition, expenditure competition, and institutional com-
petition to carry out quantitative examination and evaluation of factors
affecting the occurrence of M&A.
Chapter 5 provides studies of the effects of corporate consolidation
through M&A against the context of government competition from the
perspective of the regional economy. It first explores the relation between
government competition and regional industrial structure to explain the
impact mechanism of government competition on regional specialization
based on an extended yardstick competition model. And on this basis, the
study focuses on the industry path of SOE M&A and their effects on mar-
ket structure and industry structure, and carries out empirical analysis of
the relation between M&A and industrial agglomeration.
Chapter 6 is an exploration on government competition and the macro
and micro effects of intra-industry M&A. On this basis, the study carries
out the measurement of M&A effects, and brings in a discussion on gov-
ernment competition actions and related institutional factors. First, the
chapter, by taking industry or market structure as an exogenous variable,
investigates the M&A effects and impact factors of relevant industries
under the established market structure. This is what is called static micro
effects analysis. Next, the part presents how institutional environment may
exert impacts on the performance of intra-industry M&A in light of the
marketization process. This is an examination of the macro factors affect-
ing the micro effects of M&A and can lay the groundwork for an analysis
of macro effects. In the end, taking industry agglomeration as an endog-
enous issue and from the perspective of governance, investigation is con-
ducted, from the viewpoint of government, on the impact of M&A for the
growth of industrial market structure with the regional concentration of
an industry as the measurement index for macro effects. This is the
dynamic macro effects analysis.
Chapter 7 is an extension on government competition and the effects of
conglomerate merger from the aspect of life cycle. Introducing life cycle
theory, the chapter gives an analysis of the relationship between government
intervention and the performance of M&A on an examination of the life
cycle of enterprises and further explores the impact mechanism of conglom-
erate merger under government competition on the upgrading and optimi-
zation of industrial structure in the life cycle of an industry. The part also
provides empirical studies on emerging industries of strategic importance,
which serves as an extended investigation on the performance of M&A.
 1 INTRODUCTION 11

Chapter 8 consists of the conclusion and suggestions for further stud-

ies. It sums up the previous discussions and the conclusions of empirical
studies and puts forth suggestions for government participation in M&A
and for promoting the optimization of market structure. It also points out
the limitations of the project and offers suggestions for future studies.

1.4   New Findings and Significance of the Project

1. A new framework has been built for the analysis of corporate

consolidation theory of M&A from the perspective of govern-
ment competition.

Previous studies on M&A and corporate consolidation are, in theory,

mostly based on the framework of mainstream economics, following a full
market assumption. And in empirical studies, analyses on the performance
of M&A are in most cases restricted to the micro aspect. And most studies
on M&A from the aspect of industry market structure take industry and
market structures as exogenous variables for the analysis of their impacts
on the transaction and occasion of corporate M&A. Few explorations on
M&A and the growth of industry market structure have been conducted
from the viewpoint of government competition. But as the government in
the period of economic transition is a key adaptive agent for economic
growth, we set to build up a framework for analysis of corporate consoli-
dation through corporate M&A under the government competition in an
economic transition period. In view of government competition, we start
from a discussion on the nature of M&A in China in its economic transi-
tion period to explore the operating mechanism and effects of M&A on
the economic structure of an industry and the growth of regional eco-
nomic structure, following the thread of “the existence of M&A wave—
the occurring mechanism for M&A under government competition—the
process of corporate consolidation under government competition—the
micro and macro performances of corporate M&A.” Meanwhile, with
“the motivation for government competition—the actions of government
competition—the performances of government competition” as an invis-
ible line, the changing paths and affecting mechanism of government
competition are also explored. And the analyses of government competi-
tion are manifested in the logical framework of M&A and corporate
consolidation.
12 F. WANG

2. An M&A game theoretic model for government conducts is

established and new approaches for studies are put forth.

M&A, in essence, is a game both parties involved in the process play

around pricing and M&A strategies. This book, based on the Cournot
model, and using the cooperative game theory, sets up an endogenous
M&A model integrating local government competition to explore the
market structure at the time when the market reaches expectation equilib-
rium. Starting from this, the author endeavors to build an exogenous
M&A model under the paradigm of local government competition, con-
ducting qualitative identification and examination of the impact factors of
M&A in view of tax competition, expenditure competition, and institu-
tional competition, using the measurement method. Besides, different
from the past studies on the cross-section analysis of “the plundering hand
of government” and “the supporting hand of government,” the book
explores the time series analysis from the perspective of life cycles, enrich-
ing and expanding the theory of government intervention under the
framework of law and finance.

3. The book has promoted or expanded previous studies and put

forth and discussed new viewpoints.

The key viewpoint of the book is that the intrinsic logic of institutional
changes in China’s economic transition has decided the mechanism for
government competition and its effects on M&A and corporate consolida-
tion. Against the backdrop of China’s economic transition, the regional
governments, motivated by incentives both financial and political, bear the
many characteristics of manufacturers in the market. Their goals for maxi-
mizing self-benefit and regional benefits naturally determine their com-
petitive relations with each other. The fundamental driving force for local
government competitions is the regional segmentation of capital flow—
attracting the inflow of capital and restricting the outflow of capital. M&A
and corporate consolidation, as the mechanism for allocating inventory
resources, is determined by the joint work of market and government
conducts. Firstly, government competition, as an essential component for
the development of marketization in China, comes as the macro motiva-
tion for the occurrence of M&A and corporate consolidation. Secondly,
the regional government competition, as a key institutional factor for
 1 INTRODUCTION 13

progressive reform in China, can couple with the market environment and
together determine the M&A and corporate consolidation and exert influ-
ences on the performances of M&A and corporate consolidation. The
performance of M&A under government competition will diversify for the
different modes and paths in government competitions.
In addition, the book has put forth the following viewpoints: (1) the
wave of China’s M&A has been a periodic economic phenomenon acti-
vated jointly by market, economic, and institutional factors; (2) in the
process of the privatization of SOEs, the shift of control power in regional
governments assumes binary motivations, and the motivation is oriented
from economy toward politics; (3) regional government competition has
double-edge effects on regional industry specialization and interregional
market integration; (4) the performances of corporate M&A and corpo-
rate consolidation under government intervention assumes life cycle diver-
sities. The book has also tested and verified these propositions using
theoretical analysis and empirical methods.

4. Based on empirical studies of large-scale samples, the book has

conducted evaluations on the effects of the implementation of
industrial policies by the government and has practical refer-
ence values.

In 2009, taking M&A as a means for corporate consolidation and

upgrading the market structure in China, the central government and all
local governments of China launched the ten key industries adjustment
and revitalization plan. To test and empirically study the industry perfor-
mance of this policy, the book has made the explorations from two aspects.
One is based on the manufacturing industry. The book explores the effects
of M&A on industrial agglomeration and industrial performance quality
from the perspective of M&A in SOEs. The other is based on the emerg-
ing industries of strategic importance. The book makes investigations and
comparisons of the changes in the inflow of social resources into emerging
industries before and after the introduction of the ten programs for revi-
talization and adjustments of key industries from the perspective of con-
glomerate merger. These vigorous and systematic empirical studies can be
of practical reference values for government departments and micro
industries.
14 F. WANG

Bibliography
Apolte, T. 1999. Die ekonomische konstitution eines foderativen systems.
Tübingen: Mohr.
Barros, P. P. 1998. Endogenous mergers and size asymmetry of merger partici-
pants. Economics Letters, 60(1), 113–119.
Breton, A. 1998. Competitive governments: An economic theory of politics and pub-
lic finance. Cambridge University Press.
Kamijo, Y., & Nakamura, Y. 2009. Stable market structures from merger activities
in mixed oligopoly with asymmetric costs. Journal of Economics, 98(1), 1–24.
Khemani, R. S., & Shapiro, D. M. 1993. An empirical analysis of Canadian merger
policy. The Journal of Industrial Economics, 161–177.
Niskanen, W. A. 1971. Bureaucracy and representative government. Transaction
Publishers.
Oates, W. E. 1999. An essay on fiscal federalism. Journal of Economic Literature,
37(3), 1120–1149.
Tiebout, C. M. 1956. A pure theory of local expenditures. Journal of Political
Economy, 64(5), 416–424.
Bai Chong’en, Du Yingjuan, Tao Zhigang, Tong Yueting. 2004a. Local
Protectionism and Industrial Concentration in China: Overall Trend and
Important Factors. Economic Research Journal, (4). 29–40.
Bai Chong’en, Lu Jiangyong, Tao Zhigang. 2004b. Effects of Investment Climates
on Foreign Invested Firms’ Performance: Evidence from Firm Level Data
Economic Research Journal, (9), 82–89
Fan Conglai, Yuan Jing. 2002. An Empirical Analysis on M&A Performance of the
Public Companies of the Growing, Mature and Declining Industries. China
Industrial Economy, (8).
Feng Xingyuan. 2001. On Institutional Competition Among Governments.
Journal of National School of Administration, (6), 27–32.
Gao Feng et al. 2001. Theoretical and Empirical Study of Chinese Enterprise M &
A. China Financial and Economic Publishing House.
He Mengbi. 2001. Government Competition: Analytical Paradigm of the Theory
of Institutional Transformation of Big Powers. Tianze Institute of Economics
Internal Manuscripts Series, (1).
Jiao Guohua. 2009. On Scale Preference and Adverse Concentration Phenomenon
in China’s Steel Industry. D. Central South University.
Julia Porter Liebeskind et al. 1996. “Corporate Reconstructing and the
Consolidation of US Industry,” The Journal of Industrial Economics 44: 53–68.
Li Shanmin, Zhu Tao. 2006. Can Diversified Mergers and Acquisitions Create
Value for Shareholders? Management World, (3).
Liu Yu. 2008. Research on Market Structure Effect of Horizontal M & A of State-­
owned Listed Companies. Securities Market Herald, (5).
 1 INTRODUCTION 15

Lyu Lachang. 2004. An exploration to a few issues about the integration of indus-
tries. Journal of Guangzhou University(Social Science Edition), (8).
Pan Hongbo, Xia Xinping, Yu Minggui. 2008. Government Intervention, Political
Connections and the Mergers of Local Government-Controlled Enterprises.
Economic Research Journal, (4).
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Beijing: Economic Science Press.
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Evidence from the M&A of Local Government-controlled Listed Companies.
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Wen Haitao. 2010. The Performance of M&A in Industrial Consolidation
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 CHAPTER 2

Government Competition, M&A,

and Corporate Consolidation: A General
Analysis

The institutional changes in China’s economic transition have endoge-

nously determined the competitions among local governments. As a mode
of resource allocation, M&A and corporate consolidation represent the
degree of marketization and are subject to administrative barriers and mar-
ket segmentation brought about by government intervention. In this
chapter, we will first review the relevant literature and the development of
government competition and establish an index system for the measure of
government competitiveness. And, on this basis, a new framework for the
analysis of corporate M&A and corporate consolidation from the perspec-
tive of government competition will be established.

2.1   Economic Transition

and Government Competition

Economic transition is essentially a process of institutional changes. The

main participants of institutional changes, including the central govern-
ment, local governments, and non-governmental institutional bodies like
enterprises, are involved in the interest relationship between the partici-
pants and the resulting benefit pattern evolution throughout the transition
process. In the following, we will, against the background of the system of
economic transformation, give an elucidation of the connotation and
extension of government competition and the means and measures of the
practice, so as to lay a theoretical foundation for the follow-up studies.

© The Author(s) 2021 17

F. Wang, M&A and Corporate Consolidation,
https://doi.org/10.1007/978-981-15-6675-2_2
18 F. WANG

2.1.1  
Government Behaviors in Economic Transition

2.1.1.1 The Connotation of Economic Transition

Economic transition is, in a certain sense, synonymous to “transitional
economy.” The studies of economic transition focus on China in its pro-
cess of reform and opening up. And the key issues of the economic transi-
tion concern the process of China transforming from its planned economy
to a market economy (Sheng Hong 1994; Fan Gang 1996). At present, a
relatively classical definition of transition economy has been given by
Gérard Roland (2002), which holds transition as a large-scale institutional
change process, or the transformation of the economic system mode. In
addition, “emerging market economy” and economic transformation are
identical concepts, as the so-called emerging market economies are gener-
ally countries in the course of economic transition.
Many overseas scholars will not limit their understanding of economic
transition to the scope of economic system. J. Sacks holds that the exis-
tence of a system core is fundamental to economic growth, and economic
transition is a process of convergence between the post-socialist state sys-
tem and the global capitalist state system, meaning that the process does
not lay emphasis on the reform of systems. Economic transition, in the
long run, must be based upon “constitutionalism” in political theory, or
else the results for the transition will not be stable. In the long run, the
economic transition with the temporary state of politics far away from the
market will not be successful. Jànos Kornai (2005) believes that eco-
nomic transition is a systemic, multifaceted, and complicated concept. It
will not be fully explained by simply taking into consideration the changes
from a plan-oriented economy to a market-oriented economy. It will
have to take into its analysis framework informal restraints like life style
and culture and formal rules like political governance and laws and
regulations..
Xu Zheng and Quan Heng (2003) believe that the understanding of
economic transition in China is based on the discussions of five aspects,
namely, system transition, economic patterns, the combination of eco-
nomic system and the transition in social patterns, transition from tradi-
tional socialism to the primary stage of socialism, and the combination of
the mode for economic growth and system reform. Hong Yinxing (2006)
further proposes that economic transformation includes not only market-­
oriented transformation, but also transformation for modernization and
globalization, which are key aspects of transition economics. Zhang Liang
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