Going Abroad in Search of Higher Productivity at Home

You have your eye on a foreign company with an exciting business model—or maybe it has knowledge your firm lacks—and you’re pondering whether to acquire it. In theory, the acquisition would give your company new expertise and help it grow, but integrating a foreign firm might hamper your domestic operations. Should you make the purchase? Until now, leaders have had to take a leap of faith that integrating the target firm wouldn’t disrupt operations at home. However, our study of French firms provides a solid basis for action. Companies that had acquired firms in other countries showed greater productivity in their domestic operations three years later than companies that hadn’t. We also found that cross-border acquisitions generated more learning than domestic ones. Our analysis of 183 cross-border acquisitions shows that the more competitive the target country or industry, the greater the gains, because the acquired firms are more likely to be sophisticated about operations or positioning. The greatest gains are realized when the acquirer also makes capital investments at home. Cross-border acquisitions and internal investments are mutually beneficial to productivity. Domestic productivity was higher by 12%, on average, among companies that had made cross-border acquisitions than among companies that hadn’t. Consider the French dairy giant Danone’s 2004 acquisition of the U.S. organic-yogurt leader Stonyfield, which had expertise in marketing organic products and in sustainability. Danone benefited from this expertise—for example, it used Stonyfield’s carbon metric for measuring environmental impacts and learned that processes for reducing cows’ methane emissions can mean healthier animals and milk richer in omega-3s. Soon after the acquisition, Danone launched its own organic brand, Les 2 Vaches, which now accounts for nearly 20% of the French organic-yogurt market. Another example is L’Oréal, whose acquisitions of the U.S. firms SoftSheen (1998) and Carson (2000), along with an $11 million investment in research on African people’s hair and skin, gave it expertise in what’s known in the industry as “ethnic hair care.” The company went on to create SoftSheen-Carson Europe and to offer ethnic care products under its existing French brands. Today it is making major inroads in African markets. Previous research has shown that by expanding operations across borders, companies often gain a great deal of knowledge through exposure to new market ecosystems, R&D capabilities, functional skills, organizational processes, and managerial practices. We confirmed that this effect holds for cross-border acquisitions, too. Our study also provides a counterpoint to research indicating that foreign direct investment reduces domestic investment roughly dollar for dollar. We found that international acquisitions tend to raise the overall efficiency of the acquiring company’s home industry.

Going Abroad in Search of Higher Productivity at Home

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