Study examines the risky business of international alliances and acquisitions

Andriy Bodnaruk

Andriy Bodnaruk, associate professor of finance, UIC College of Business Administration

A new study at the University of Illinois at Chicago examines the influence “country risks” have on U.S. firms’ choices to expand abroad.

Research by Andriy Bodnaruk, associate professor of finance, focuses on what drives the choice between alliances versus mergers and acquisitions as growth strategies, finding that strategic alliances with foreign companies are the most popular way of investing abroad.

“We tried to better understand the patterns and trends in U.S. foreign investment,” Bodnaruk says.“We hypothesize that the amount and form of U.S. investment into a country is significantly affected by the risks of expropriation (or misconduct) by either the local business counterparties (the other party in a financial transaction) or by the local government.”

When venturing abroad, a firm faces a set of decisions, according to Bodnaruk. Firms can either partner with foreign companies through alliances, or buy the foreign company outright through acquisition. Each type of investment has benefits and potentially damaging drawbacks for the U.S. firm.

The choice between an alliance and acquisition is based on the risk of misconduct a U.S. firm faces, either from its foreign partner company, called a direct partner, or the host country’s government, called an indirect partner, according to the study.

Bodnaruk and his co-authors studied worldwide alliances and acquisitions made by U.S. firms over the past two decades. They found that when the risk of being taken advantage of by a direct partner is high, such as when a local business partner may unjustifiably charge higher prices or distribution fees, then the preferred choice of investment by the U.S. firm should be outright acquisition. In such a case, by assuming full control of the foreign business, the U.S. firm eliminates the risk of misconduct by the local partner.

However, when the risk of being taken advantage of by an indirect partner is high such as when state or local governments want to revise contracts, committing lots of cash becomes “too risky” and the preferred form of investment for U.S. firms should be an alliance with a local business, Bodnaruk said.

“To our knowledge, our paper is the first one to separate the effects of country risk on foreign investment in two parts: risk of dealing with local private parties and risk of dealing with the local government/state institutions,” he said. “We showed that these two risks have very different implications for the form of expansion.”

As for the future of foreign investment abroad, Bodnaruk pointed out that alliances between firms have become progressively more dominant.

”This may indicate that U.S. firms perceive that the risks of dealing with foreign private counterparties/firms are decreasing over time,” he said.

The study, “Cross-border alliances and risk management,” by Bodnaruk and co-authors Alberto Manconi and Massimo Massa, was published in the Journal of International Economics.

Copies of this paper are available to credentialed journalists upon request; please contact Elsevier’s Newsroom at

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