Question

If a country like China allows foreign ownership of domestic companies, what makes thses firms attractive for acquisition?

Answer 1

Chinese markets have always been very restrictive for foreign players. Even though t's been years since they became liberal and an open economy, they've remained closed for business. The biggest attraction of China for foreign investors is the access to their expanding market, it's one of the fastest growing economies of the world with ever increasing consumption and demand for goods and services. There are economic and political reasons that make the foreign players keen on tapping their market.

Economically, acquisition of Chinese companies have scope of creation of benefits on both Production and Demand Side. On the production side, China's expertise in creation of economies of scale through focus on volume maximisation, cheap labour, low cost plant and machinery makes it one of the most promising industrial hubs and hence it has gained a dominant position as a manufacturing economy. On the demand side, the developing high growth market of China brings in bright prospects for foreign companies to move from their mature saturated markets to expand their top line.

Capital Availability: China is the largest recipient of foreign capital and has overtaken US in this respect. Availability of capital can make it easier for companies to carry out their expansion plans.

Competitiveness: Resource availability, productivity and workforce skills, strong business value chain and sound physical infrastructure makes the industries of China highly competitive in the global market.

Local Chinese Market and Dynamics of Demand: The size of population, the demand and consumption patterns especially in the higher-end industries such as healthcare, information technology, engineering, robotics and luxury goods

Perception towards local companies and knowledge of the domestic market : Chinese consumers are highly skewed towards using locally produced goods and services. Given the expertise the local companies hold to sense the pulse of the market and the perception of the people towards Chinese goods , it is easier for foreign players to invest in established growth startups and companies than start a business from scratch in the country.

China's growing prominence in E-commerce, infrastructure and renewable energy makes these industries particularly lucrative for foreign investors. the startups in this space are growing exponentially and may be undervalued, thus making them a value for investment proposition from acquisitions perspective.

Politically, the restrictions on Trade licenses and Made in China policy are against the globalisation measures taken by world economies and the restrictive access to Chinese markets leads to disruption of the idea of a level-playing field and also erodes the political ties between China and other countries.