The role of cities in cross-border mergers and acquisitions — Evidence from China

This study explores the impact of an international friendship city, serving as diplomatic relations between cities, on the transaction time and equity ownership choice in cross-border mergers and acquisitions (CBMAs). Analyzing data from Chinese firms spanning the period 2001 to 2019, we discover a positive and significant correlation between the establishment of an international friendship city and shorter CBMAs duration and higher CBMAs share of equity. Further evidence suggests that the effect is more pronounced (a) in target countries that keep cooperative partnerships with China, (b) countries along the Belt and Road, and (c) state-owned enterprises (SOEs) acquirers. In addition, we identify effects at the provincial level, demonstrating a correlation between the number of international friendship cities and positive outcomes. Mechanism tests show that the subnational-level friendship relationship consolidates cultural exchange and lessens institutional barriers, thereby reducing the completion time and raising the ownership of acquirers. Drawing on political perspective, our results provide new insights into the important role of friendly diplomatic relations to cross-border investment for enterprises internationalization.