Eindhoven University of Technology

MASTER

How do Chinese companies catch up technologically via overseas mergers and acquisitions the case study of WuXi Apptec

Fang, Feng

Award date: 2013

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• Users may download and print one copy of any publication from the public portal for the purpose of private study or research. • You may not further distribute the material or use it for any profit-making activity or commercial gain Eindhoven, May 2013

How do Chinese companies catch

up technologically via overseas Mergers and Acquisitions: the case study of WuXi Apptec

By Feng Fang

BSc Pharmaceutical Engineering — CSU, China 2006

MEng Pharmaceutical Engineering — ECUST, China 2009

Student identity number 0786120

in partial fulfilment of the requirements for the degree of

Master of Science

in Innovation Management

Supervisors: prof.dr. G.M. (Geert) Duysters, UVT dr. M.M.A.H. (Myriam) Cloodt, TU/e, IE&IS, ITEM

TUE. School of Industrial Engineering.

Series Master Theses Innovation Management

Subject headings: catch up, open innovation, mergers & acquisitions, innovation performance,

II

“Our greatest glory is not in never falling but in rising every time we fall”

— Oliver Goldsmith

III

Acknowledgement

This master thesis indicates that my study journey in TU/e is approaching the end. My abroad study trip however began in Tilburg University rather than TU/e. In 2010, I attended the summer school of International Entrepreneurship in Tilburg, where I met, for the first time, Geert Duyster and Myriam Cloodt who became my supervisors of this thesis. The exciting topics of the program and their kind encourage were the trigger for my decision to pursuit this master degree. Over the course of working on this thesis, I have constantly received valuable guidance and suggestions from Geert. Our discussions, might it be via email or in person, on the research issues, have always been helpful during the different stages of my master program. The meetings we had in his office were always joyful as well as fruitful. He has been always responsible when I needed some help. Once we even had a meeting at the Eindhoven railway station. Geert, special thanks for your guidance and for being always supportive! I would also like to take this opportunity to express my gratitude to Myriam. Thank you so much for devoting a lot of your time to go through the first draft of this thesis thoroughly and to give me a greatly detailed feedback with in-depth advices. I am sure that my thesis has been improved significantly thanks to those advices.

I have also been fortunate to meet all my fellow students. Many thanks to my dear friends, Ramunas, Edwardo, Benedikt, Antti, Burak, Geoffrey, Ewa, Andana, Tan, Ali, Deniz, Reinier, Roland, Sjoerd and .... Without you, my student life would have never been so colourful. Together we have had a lot of fun. I hope you guys will still remember and do “gan bei” after several years.

Finally, I would like to thank my family. Baba, Mama and Meimei, thanks for your unconditional love and support. The last thanks to my special love, Juan!

Delft, the Netherlands

May, 2013

IV

Summary

Though China has experienced an excellent economic growth with an annual rate around 10% for almost two decades, it, at present, faces many great challenges to keep the growth sustainable. One of the greatest challenges is the unhealthy economy growth model, which relies to a large extend on low value-added and export-oriented manufacturing. The best solution to overcome this challenge is to transform its growth model into an innovation-based one, since the only way to grow sustainably is to innovate continuously. However, being innovative is not an easy task for Chinese companies due to their limited experiences in innovation. Thus researches on innovation capabilities development of Chinese companies become extremely valuable and urgent. Liu (2005) stated, open innovation has been widely applied by Chinese companies to catch up. However, there is only a limited amount of literature covering this topic. And even less have documented the mode of outbound Mergers and Acquisitions (M&As), although the outbound M&As is increasingly popular in China due to the government’s policy of “go abroad”. It is the aim of this thesis to fill this literature gap. Another motives of this thesis comes from the fact that the successful M&As occur disappointedly rarely in China. In sum, we devote this thesis to answer the following research question: how do Chinese companies catch up technologically via outbound M&As?

The case of the Chinese Company WuXi’s acquisition of the US Company AppTec was studied to investigate the barriers and success factors for a successful acquisition in terms of innovation. Our main findings of this case study are that firstly, culture differences, management gap and rising cost are three major challenges for Chinese firms to overcome during the integration process of M&As and secondly, five main success factors for WuXi to catch up technologically through this acquisition are technology-related objective, complementary technology & market fields, strong internal knowledge base, retaining key personnel, and adapted business model, respectively.

The findings from this case study give several managerial implications for other Chinese practitioners who are trying to apply M&A strategy aiming for catching up technologically. In pre-acquisition stage, Chinese companies should build up their own internal knowledge bases in both management field and technological field. During the selection stage of M&As, Chinese companies should consider targets that operate in a complementary market and technology fields. And also the deal should be consistent with their innovation strategies. In post-acquisition stage, Chinese companies should screen for cultural alignment and misalignment, based on which increase communications with new employees and organize culture trainings to enhance interactions between two emerging parties, thus to achieve successful culture integration. Furthermore, it is important to appoint a leader who can best represent the new enterprise culture. Finally, Chinese companies should adapt their

V business models in a way that not only take advantage of low-cost in China but also explore potential business value in overseas markets.

Besides the managerial implications, this thesis also contributes to the academic literatures. On one hand, the thesis adds perspectives on an emerging country to the open innovation literatures. We discussed how Chinese companies catch up technologically by applying open innovation technique M&A. The thesis also, on the other hand, develops six propositions based success factors of enhancing innovation through M&As in a Chinese context and therefore contributes to the literatures on the topic of Innovation and M&As.

The first limitation of this thesis is the single data source — secondary data. One of the principles of the case study design is to use multi-source data. Therefore, we propose a future research to improve the research on the case study by using additional primary data from interviews. The second limitation of the thesis lies in applying the single case study to study the research questions rather than multi-case study, which limits the generalization of the findings and reduces its external validity. We propose another future research on applying quantitative data of Chinese overseas M&As to test the propositions developed in this case study.

VI

Table of Contents

Acknowledgement ...... IV Summary ...... V List of figures ...... IX List of tables ...... IX 1. Introduction ...... 1 1.1. Rise of China ...... 1 1.2. Challenges to China ...... 2 1.3. Innovation for sustainable growth ...... 5 2. Technology catching up and open innovation ...... 6 2.1. Catching up ...... 6 2.2. Catching up strategies ...... 7 2.3. Open Innovation ...... 9 2.4. Content of open innovation ...... 10 2.5. Open innovation and catching up ...... 10 3. China’s OFDI ...... 12 3.1. Growth of China’s OFDI ...... 12 3.2. Trend of China’s OFDI ...... 13 3.3. Growth of China’s Outbound M&As ...... 13 3.4. Drivers to the growth of China’s outbound M&A ...... 13 3.5. Catching up through Outbound M&A ...... 14 4. M&As and innovation ...... 15 4.1. Measurement of innovation performance ...... 15 4.2. Why M&A can stimulate innovation ...... 15 4.3. Barriers to innovation via outbound M&As ...... 16 4.4. Effect of M&As on Innovation...... 16 4.4.1. Effect of M&As on R&D input ...... 16 4.4.2. Effect of M&As on R&D output ...... 17 5. The methodology ...... 18 5.1. Research objective ...... 18 5.2. Research method ...... 18 5.2.1. Case study ...... 18

VII

5.2.2. Case selection ...... 19 5.2.3. Data collection method ...... 19 5.2.4. Criteria for judging case study design ...... 20 6. Case study of WuXi Pharma Tech’s acquisition of AppTec ...... 20 6.1. Introduction ...... 20 6.2. The acquirer: WuXi Pharma Tech ...... 21 6.3. The target: AppTec ...... 21 6.4. The deal ...... 21 6.5. Barriers ...... 22 6.6. Post-acquisition ...... 24 6.7. The successful story ...... 24 6.8. Success factors ...... 26 6.9. Conclusion...... 30 7. Conclusion and Discussion ...... 30 7.1. Conclusion...... 30 7.2. Discussion ...... 31 7.3. Managerial Implications ...... 32 7.4. Literature contributions, limitations and future researches ...... 32 Reference ...... 34 Appendix ...... 39 Appendix 1 Ranking of GDP PPP in 2002 ...... 39 Appendix 2 Ranking list of GDP in 2010 ...... 40 Appendix 3 China Outbound M&A Transactions ...... 41 Appendix 4 Growth of WuXi's R&D services ...... 47 Appendix 5 Technology comparison between WuXi and AppTec ...... 48

VIII

List of figures

Figure 1.1 GDP growth rates of China and major western countries

Figure 1.2 GDP projections on China and other major countries (at PPPS)

Figure 1.3 The Smiling Curve

Figure 1.4 GDP per capita in China and US

Figure 2.1The Closed Innovation Model

Figure 2.2 The Open Innovation Model

Figure 3.1 China’s Outward Foreign Direct Investment

Figure 6.1 WuXi AppTec’s Revenue Growth from 2007 to 2012

Figure 6.2 Growth of technological employees in WuXi AppTec

List of tables

Table 1.1 Apple IPhone 3G's major components and cost drivers

Table 6.1 Five dimensions of Culture between China and America

Table 7.1 The barriers and success factors in outbound post-acquisition integration

IX

1. Introduction

1.1. Rise of China

In 1800, China produced around one-third of the total global manufacture output, comparing to only 18 percent by the West. In the sequential 180 years, however, China’s share of global Gross Domestic Product (GDP) experienced dramatic shrinking. In 1990, China’s GDP (at market prices) was just 1.6 percent of the world total. After that China went through a remarkable growth for two decades with a growth rate of around 10% per year compared with average less than 3 percent in high-income countries (See Figure 1.1). Especially while most of western countries suffered recession in 2009, China still had 9.6% of GDP annual growth rate. According to a recent report issued by World Bank, China became second largest economy in 2002 in terms of GDP PPP (Purchasing Power Parity) in current international dollars and in 2010 in terms of GDP at purchaser’s prices in US dollars (See Appendix 1 & 2). In 2009 China overtook Germany to become the world’s largest exporter. By 2010 it had forty-two firms in the Fortune 500 and twenty-three in the FT 500 (Nolan, 2012). Nowadays, the topic of “China’s Rise” is no longer news to the world. China is at the forefront of the developing world in the era of globalization. According to the projection from PwC in 2011, China’s economy will surpass United States becoming the world’s largest in 2019 and it will be almost one and half times as large as United States in 2050 (See Figure 1.2).

19,00 GDP growth (annual %) China 14,00 14,2014,00 14,20 United states 13,10 12,70 Netherlands 10,90 11,30 10,10 10,40 10,00 10,00 9,60 9,30 9,10 9,20 9,30 Germany 9,00 8,40 8,30 7,80 7,60 United Kingdom France

4,00

Percentage % Percentage

1992 2000 2007 1994 1995 1996 1997 1998 1999 2001 2002 2003 2004 2005 2006 2008 2009 2010 2011

-1,00 1993

Year -6,00 Source: World Bank

Figure 1.1 GDP growth rates of China and major western countries

1

GDP Projection (at PPPs)

70.000,00

60.000,00 China; 57.784,54 50.000,00 India; 41.373,68 40.000,00 US; 38.060,89 30.000,00

20.000,00

10.000,00 Billions of international Dollars internationalof Billions

0,00

2027 2029 2009 2011 2013 2015 2017 2019 2021 2023 2025 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 US China Year India Japan Russia Brazil UK Germany Source: PwC

Figure 1.2 GDP Projection on China and other major countries (at PPPS)

1.2. Challenges to China

Though China has maintained fast and steady growth in recent years and become the second largest economy in the world, it faces several tough challenges on the road to sustainable growth. The biggest challenge is that its economic structure is not healthy. Powell (2008) has shown that much of China’s rapid growth was built on the low-end, low-wage, export-oriented manufacturing, about 37 % of GDP in 2006. In other words, China’s economy heavily depends on low value-added manufacturing. The smiling curve model proposed by Shih (2005) best showed the situation of China’s manufacture industry. The model indicates that the business process consists of five main parts, product design and R&D, manufacturing of core parts, manufacturing of general parts, assembly & processing, and brand management & marketing. As we can see in Figure 1.3, among these five parts, two highest value-added parts are product design & R&D and brand namagement & marketing. According to Wei et al. (2010), western countries dominate in these two parts in the global value chain, whereas China plays its role mainly in assembly and processing with lowest added value to the whole value chain.

2

Source: Wei et al. (2010)

Figure 1.2 The Smiling Curve

Moreover, according to Wang et al. (2008), the share of foreign content in china’s exports is extraordinary high (50%). The percentage is even higher in those sectors, such as electronic devices (80%), which are likely to be labeled as relatively sophisticated. The case of IPhone can best present the above mentioned challenges. iPhones are designed and marketed by Apple, one of the most innovative US companies. Apart from its software and product design, other core parts and general components are produced by Toshiba (Japan) , Samsung (Korea), Infineon (Germany), Broadcom (US), Numunyx (US), Murata (Japan), Dialog Semiconductor (Germany), Cirrius Logic (US), etc. All iPhone components produced by these companies are shipped to Foxconn, a Chinese company located in Shenzhen, for assembly into final products and then exported to the US and the rest of the world (Xing & Detert, 2010). Table 1.1 lists major suppliers and costs of iPhone components and parts. As shown in this table, only a mere 6.5 US dollars out of 178.96, the total cost is added in China, though the final products are exported from China. The manufacturing process of iPhones illustrates how the global production network functions, why China can export high-tech goods—at least according to the currently applied methodology for calculating trade statistics—and why the US, the country where iPhone was invented, becomes an importer.

The drawback of being too dependent on exportation has appeared. There is a strong indication that China’s economy is slowing down this year, 2013. One of possible underlying reasons is that the Europe's debt crisis and lackluster growth in the United States have sapped demand for China's exports, leading to a decline in manufacturing growth in China. And the situation is even worse for China because of the emerging of other low-cost south-east Asian countries, such as India, Vietnam, Malaysia and Indonesia. A report from KPMG pointed out that China was losing its edge as the

3 world’s cheapest place to manufacture goods due to rising wages caused by the shortage of the labor and increasing inflation rate.

Table 1.1 Apple IPhone 3G's major components and cost drivers

Apple iPhone 3G’s Major Components and Cost Drivers Manufacturer components costs Flash Memory US$24.00 Toshiba (Japan) Display Module US$19.25 Touch Screen US$16.00 Application Processor US$14.46 Samsung (Korea) SDRAM-Mobile DDR US$8.50 Baseband US$13.00 Camera Module US$9.55 Infineon (Germany) RF Transceiver US$2.80 GPS Receiver US$2.25 Power IC RF Function US$1.25 Broadcom (US) Bluetooth/FM/WLAN US$5.95 Numonyx (US) Memory MCP US$3.65 Murata (Japan) FEM US$1.35 Dialog Semiconductor (Germany) Power IC Application Processor Function US$1.30 Cirrus Logic (US) Audio Codec US$1.15 Rest of Bill of Materials US$48.00 Total Bill of Materials US$172.46 Manufacturing costs from China US$6.50 Grand Total US$178.96

Source: Xing & Detert (2010)

There are also social and environmental challenges for China to overcome in order to grow sustainably. China is the first country in the modern world to have so large economy without having achieved a high level of income per person (Nolan, 2012). We can see from Figure 1.4 that GDP per capita in China is only around one tenth of that in United States in 2011.

4

GDP per capita 60.000,00 United States:

50.000,00 48.441,56

40.000,00 30.000,00

20.000,00 Current US$ Current 10.000,00 China: 5.444,79 0,00 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

China United States Source: World Bank

Figure 1.4 GDP per capita in China and US

And the inequality of income and wealth has threatened the country’s social and political stability. The Gini coefficient of income distribution has increased from around 0.28 in the early 1980s to around 0.48, reported by Luo & Nong in 2008, which meant almost one-half of the total household wealth is possessed by only around 0.1 percent population. And China also faces deep challenges to contain and reverse the heavy damage to its physical environment, which has been caused during recent two decades owing to the over emphasis on fast economic growth regardless of environment protection. This will lead to huge costs for Chinese government and people.

1.3. Innovation for sustainable growth

Like we discuss above, Unhealthy structure of economy will prevent or may has already prevented China from sustainable growth. Low valued-added and export-oriented manufacturing model is no longer a good model for China’s economic growth. Therefore, in order to be more sustainable, China should transform itself into a strong economy, not just big, that lies on innovation, since innovation provides more added values and is the main driver to sustainable growth. In other words, the solution for China to be sustainable is knowledge-based or innovation-based growth model. Actually Chinese government has taken actions aiming to enhance country’s innovative capability. Firstly, the progress in strengthening Intellectual Property Rights (IPR) has been made over the past several years. The country has pursued a deliberate policy of gathering as many patents as possible and developing home-grown technologies. Moreover, the spending on R&D has steadily increased for a decade, which amounted to 1.5% of GDP in 2010. And also china’s leaders are determined to reverse the drain of top talent that accompanied its opening to the outside world over the past three decades. They are using their ample financial resources and a dollop of national pride to entice scientists and scholars home. However, becoming an innovative country is not just about launching a 5 rigorous law of IPR, increasing R&D budget, and attracting talent back. Probably the greatest challenge is to make Chinese companies more innovative (Tse, 2007). Then the question “how to become more innovative” rises.

The main direction of this thesis is to explore this question. The rest of this thesis is organized as follows. In Chapter 2, literature on topics of “catching up” and “open innovation” are reviewed. And an investigation on China’s Outbound Foreign Direct Investment (OFDI) follows in Chapter 3. Both two chapters help to define our research question: “How do Chinese Companies catch up technologically via overseas M&As?” A literature review on the topics of “M&As and Innovation” is given in Chapter 4, which refines the focus of this thesis. We present our research methodology in Chapter 5, which is followed by the case study of WuXi Pharma Tech’s acquisition of AppTec in Chapter 6. Finally, Chapter 7 concludes this thesis with discussions and our main contributions both to managerial implications and to literature.

2. Technology catching up and open innovation

2.1. Catching up

“Catching up” relates to the ability of a single country to narrow a gap in productivity and income with a leader country (Fagerberg & Godinho, 2003). The history of modern world economy was a history that was full of catching-ups by the less developed countries. During the most of the nineteenth century the economic and technological leader of the capitalist world was United Kingdom. However, United States and Germany were both starting to catch up with Britain before the turn of the century. More recently, Japan was believed to be able to catch up with United Stated after the end of the Second World War. In addition to Japan, other Asian countries or areas such as South Korea, Hong Kong, Taiwan also had rapid catching up with western developed countries. Fagerber and Godinho (2003) pointed out that successful catching up had historically been associated not merely with adoption of existing techniques in established industries but with innovations. However, it is also clear that different country has been catching up successfully in different way. In the next session, we will investigate strategies used by companies to catch up in Asian countries, which is more relevant to Chinese context, compared to strategies used by western companies. And our focus will be narrowed on the technological side of catching up, because technology and innovation are the keys for countries or companies to catching up.

6

2.2. Catching up strategies

In recent years, number of literature on catching up strategies has increased dramatically. According to Yu et al. (2006), the majority of these studies were from macro-level perspective. Few has investigated catching up strategies from firm-level point of view. Due to our focus on technological capability development in the firm-level perspective we follow the study of Wong (1999), which proposed five generic routes for technological catching up by latecomer firms. First of all, “Reverse Value Chain” Strategy is a strategy that latecomer companies follow the routes from OEM (Original Equipment Manufacturing) to ODM (Original Design Manufacturing) to OIM (Original Idea Manufacturing) or OBM (Own Brand Manufacturing). To be more specific, latecomer firms start as an OEM, who only master simple component subcontracting or assembly operation on a subcontract basis where end-buyers provide detailed design specifications. Then they acquire product design capability becoming an ODM for end-buyers, who only need to provide broad product requirement. After that they attempt to further develop their own idea as an OIM or to sell products under their own brand as an OBM. In short, this strategy starts with developing process capability, and then followed by extension to the product design capability and finally to the new product creation or branding activities. The second strategy is “Reverse Product life Cycle”. In this strategy, latecomer firms attempt to move from late-followers to the fast-followers in product market, and finally culminate in parity with or even leapfrog over the established leaders. More specifically, latecomer firms start by producing relatively mature product with technology from three possible sources, namely licensing from leading companies, imitating from pioneer companies, and transferring under the help from third party consultant companies. The technologies used by latecomer firms at this stage tend to be several generations far from the lead-edge technologies. After quickly mastering the mature product and process technologies, the firms ought to shift toward products involves more sophisticated technologies which are closer to the leading-edge technologies. And eventually firms may aim to overtake the leaders by out-matching the leaders in terms of R&D efforts, capacity investment in times of industry downturn, or aggressive pricing for market leadership. It is particularly important to point out that, at the end stage of this strategy, the latecomer firms will be forced to substantially invest in their own R&D of product and process technologies due to the fact that leading firm refuse to license technologies any more, caused by fear of losing leading position in the technology market. The third strategy is “Process Capability Specialist”, under which latecomer firms focus on mastering the latest process technologies rather than product technologies. And then they embed them into operational processes which lead to best performance with lowest cost, highest quality, maximal flexibility, or some combination thereof. The objective of this strategy is either to become a turnkey

7 contract assembler that is responsible for the entire supply chain from the end-buyers, or to become the supplier of specialized niche components for process steps. However, firms using this strategy have to keep investing in process technologies in order to stay at production frontier. They can either acquire the latest process technologies externally or develop their own proprietary process know- how internally. The fourth strategy is “Product Technology Pioneer”. In this strategy, the latecomer firms, as other leading firms, seek to leapfrog to become the pioneer of new products through radical product technology innovation, and to establish their innovations as the dominant designs through subsequent rapid incremental innovations. In order to overcome two drawbacks being as latecomer firms, which are distant from lead-user markets and the main sources of advanced science and technological knowledge, they appear to adopt the following four approaches: a) Establish a strong presence in the lead-user market aiming to pursue product technology or market channel distribution development, while tapping supporting resources in the home market. b) Invest in or acquire promising high-tech startups in the leading countries to jump-start the entry process. c) Lure qualified personnel with advance technological know-how to relocate to the latecomer firms. d) Involve in substantial R&D, either by their own or in collaboration with external parties, such as local universities, other local firms or foreign leading firms, in order to achieve technological leadership over competitor firms from advanced countries. The fifth strategy is “Applications Pioneer Strategy”. Instead of aiming to become an innovator of new product technologies, latecomer firms who apply this strategy try to explore innovative way of applying existing technology. The success of this strategy is rooted in the company being an early and innovative adopter of new but available technologies, rather than a creator of radically new technologies. From all five strategies, we conclude that the essential step of each strategy lies on the technology capability development, which is in line with the conclusion of Fan (2006) and Gao (2011). Fan (2006) stated that innovation capability and self-developed technologies have been the key to leading Chinese firms’ catching up with the multinational firms from developed countries while Gao (2011) argued the new strategy for Chinese firm to succeed is to apply innovation-based differentiation by developing themselves core technologies. In terms of internal technology capability development, the catching-up strategies are consistent with imperatives of open innovation strategy coined by Chesbrough (2003), under which firms are able to survive in this turbulent technology environment by innovating continuously. One of the most popular definitions of open innovation is: “the use of purposive inflows and outflows of knowledge to accelerate internal innovation and to expand markets for external use of innovation, respectively” (Chesbrough et al., 2006, p1). The basic premise

8 of open innovation lies in the wide use of external knowledge sources to accelerate the innovation process and strengthen internal technology capabilities. In the next session, we will discuss how firms develop technology capability by using open innovation strategy.

2.3. Open Innovation

Open innovation has become one of the most popular topics in management field for almost a decade since Henry Chesbrough developed this concept in 2003. Before open innovation thrived in the 21st century, however, the industry world was dominated by the closed innovation model, which is visualized in Figure 2.1. In the model of closed innovation, companies believe that successful innovation needs control. In other words, they believe that, in order to reap from innovation, they have to generate their own ideas, and then develop and commercialize these ideas all the ways by themselves (Chesbrough, 2003).

Figure 2.1The Closed Innovation Model

Chesbrough (2003) pointed out that thanks to the dramatic rise in the number and mobility of knowledge workers, which makes it extremely difficult for companies to control their proprietary ideas and expertise, and availability of private venture capital, which help to finance startups and their efforts to commercialize ideas, the paradigm has been shifted from closed innovation to open innovation since the end of 20th century. This happened to almost all the industries except some special industries, for instance nuclear reactor industry, which still keeps their business model closed. The idea of the new model of open innovation (see Figure 2.2) that firms should commercialize their own ideas as well as innovation from external source, and seek ways to bring its in-house ideas to markets by deploying pathways out of the boundaries of current operations (Chesbrough, 2003).

9

Figure 2.2 The Open Innovation Model

2.4. Content of open innovation

The fundamental premise of open innovation model is opening up the innovation process. Based on this definition mentioned above, open innovation processes are divided into two categories, namely inbound open innovation and outbound open innovation. Inbound open innovation refers to internal use of external knowledge, while outbound open innovation refers to external exploitation of internal knowledge (Huizingh, 2011).

Furthermore, from organizational modes perspectives, inbound open innovation consists of in- licensing, minority equity investment, acquisition, joint venture, R&D contract and research funding, purchase of technical and scientific service and non-equity alliance (Bianchi et al., 2011). On the other hand, outbound open innovation is made of out-licensing, spinning-out of new venture, sale of innovation projects, supply of technical and scientific service, corporate venturing investment, joint venture for technology commercialization and non-equity alliance.

2.5. Open innovation and catching up

As we discussed on the session of catching up, innovation capability and self-developed technologies are the keys for latecomer companies to catch up (Fan, 2006). However, it is difficult for latecomer companies to invest substantially in R&D as multinational companies do. Open innovation paves a new way for latecomer companies to develop their own innovation capability, though they have to do it in a faster and more efficient way than companies in developed countries (Liu, 2005). As innovation model in the developed countries evolved from the closed innovation model to the open innovation model, catching up model in developing countries also switched from a closed model to an open model. The following comparison between Japan and Korea‘s catching up model and China’s catching up model depicts the process of this evolution.

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In the era of Japan and Korea’s catching up, manufacturing technology played the most important role in the process of economic growth. The catching up strategies of “Reverse value chain” and “Reverse life cycle” worked perfectly in this manufacturing domain. Under these two strategies, many efficient closed networks among related manufacturing firms were created. Therefore, Japanese and Korean manufacturers developed new products within this closed networks, based on their own in-house technology and in-house procurement of manufacturing parts (Kondo and Watanabe, 2003). Liu (2005) concluded that Japan and Korea’s catching up models were relatively closed in terms of the nature and degree of foreign involvement in the new product development process of their companies. For instance, companies using catching up strategy of “Reverse Life Cycle” imported foreign technology but did not innovate together with foreign companies. Instead they focused on in-house R&D to improve imported and mature foreign technology gradually. We have learned that Japan and Korea’s catching up model were effective in a manufacturing-based industrial system. However, question arises when looking at China’s model of catching up. Can their strategies be effectively applied in China in the era of globalization?

Though in the early period of catching up, China was mainly characterized by two factors, as Japan and Korea, namely diffusion of new technology and the government, other factors, such as using global outsourcing, alliance, big market size, market-oriented innovation, Foreign Direct Investment (FDI), have taken the leading positions in China’s catching up process, leading to significantly different catching up model from Japan and Korea (Liu, 2005). Liu also (2005) stated Chinese firms were more open in their innovation activities than those in Japan and Korea. In China’s model, companies were able to get access to the latest technologies thanks to the presence of high-quality inward FDI, technology licenses, international alliance and acquisition. Thus they do not need to wait for technologies to be mature before they can be imported or acquired and then be incrementally improved. By using this open innovation catching up model, Chinese firms had been increasingly improved their capability in technology and science over time. Wang et al. (2011) argued that Chinese firms tended to explore the following sources in order to build their technology capabilities, technology licenses, knowledge spillovers form high-quality inward FDI, collaborations with Universities and R&D institutes, and OFDI such as outbound M&As and strategic alliance.

Though open innovation techniques have been applied by Chinese companies increasingly, the academic study on this topic in Chinese context has failed to catch up. As Chesbrough (2011) pointed out, open innovation has been studied almost exclusively in technologically advanced countries but has not yet been properly investigated in developing countries. Especially, among the literature which studied open innovation in China, most of them paid attentions to governmental policy

11

(Savitskaya et al., 2010), and Fu & Xiong, 2011) and modes of open innovation applied (Liu, 2005). To my best knowledge, few of them explored how Chinese firms employ open innovation to accelerate the development of technological capability. Wang et al. (2011) was the most recent one of them. The paper studied 91 native Chinese firms in high-tech industries and the empirical results showed that technology in-licensing agreement, long-term alliance with foreign partners and collaborations with local universities, R&D institutes, and local industrial communities had positive effects on Chinese firms’ technology capabilities. Given the limited literature on open innovation in China, it is valuable to study Chinese companies’ catch up in the perspective of open innovation. The research topic of this thesis iss narrowed into: how can Chinese companies catch up technologically via open innovation strategy?

Since China’s OFDI has dramatically increased given the fact that EU and US has not yet recovered from the financial crisis. Companies from developed countries are seeking more financial supports from external sources, which give more opportunities for Chinese companies to build their innovation capabilities through OFDI. Thus it is valuable to study the situation of OFDI in China and further define the research question to a more specific level.

3. China’s OFDI

3.1. Growth of China’s OFDI China’s OFDI enhanced significantly as Inward Foreign Direct Investment (IFDI) increased, since China opened its market to the rest of the world in 1978. As we can see from Figure 3.1, China’s OFDI experienced a sharp increase from 2.7 billion US$ in 2002 to 68.81 billion US$ in 2010. And the total accumulated stock of OFDI exceeded 317.2 billion US$ at the end of 2010, which was more than 10 times of that in 2002.

500

400 317,21 300 245,75 183,97 Stock 200 Flows 117,91 100 90,63 44,8 57,2 55,91 56,53 68,81

Deal value (US$) Billions (US$) value Deal 29,9 32,2 26,51 0 2,7 2,85 5,5 12,26 21,16 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Ministry of Commerce of People’s Republic of China

Figure 3.1 China’s Outward Foreign Direct Investment 12

3.2. Trend of China’s OFDI

Among the different forms of OFDI, M&A has emerged as a popular choice for Chinese companies expanding abroad. A recent survey conducted by the Economist Intelligence Unit (EIU) shows that “Acquisition” and “Minority Equity Stake” together account for 45% of the respondents of Chinese executives, who were asked about the type of outbound investment they would prioritize over the next three years, compared to 47% to “Joint Venture” and “Alliance”(Wu et al., 2011) . We conclude that M&A is very likely to remain a popular strategy for Chinese companies in future.

3.3. Growth of China’s Outbound M&As

China’s excellent economic growth is demonstrated quite clearly in its outbound M&A activities over the past several years. As we can see in Figure 3.2, China’s overseas acquisitions have tripled since 2005 to a total of 177 transactions 2011. And the total value of outbound M&A transactions rose nearly five-fold from 2005 to US$63.1bn in 2011.

Source: Squire Sander’ Global M&A Series

Figure 3.2 China's outbound M&As from 2005 to 2012

3.4. Drivers to the growth of China’s outbound M&A

There are five main drivers behind the dramatic growth of China outbound M&As, according to the report from Baird, namely New Market Entry, Natural Resources, Access to Brands, Government Support and Technology Capability. To be more specific, Firstly, through outbound M&A, Chinese 13 companies can acquire global distribution and service network, market share, local teams, and closer ties to customers in foreign markets, which facilitate Chinese companies to enter the overseas markets. Moreover, many Chinese companies, especially metals and energy companies, aim primarily to gain secure access to supplies of critical raw materials. Another driver for overseas deal is the desire of Chinese firms to control global brands due to building a globally recognized brand originally can take years of investment (Luedi, 2008). Furthermore, as China looks to rebalance its economy and switches from an export-oriented growth model to an innovation-driven growth one, the Chinese government has launched the “Go global” policy in order to encourage more Chinese companies to invest overseas(Wu et al., 2011). The last but the most important, Chinese companies aim to acquire advanced technology as they seek a shortcut to move up the value chain (Wu et al., 2011).

3.5. Catching up through Outbound M&A

As we discussed in the introduction, innovation-based growth model is the only solution for the sustainability of Chinese economy. Being the most important player in Chinese economy, Chinese firms are aware that innovation is essential for them to have sustainable competitive advantage to compete in an international context. And because of limited technology know-how and resource, they tend to use outbound M&A aiming for catching up. The mechanism behind catching up via outbound M&A is that the outbound M&A allow Chinese firms to get access to advanced technology. And through the process of technology transfer, learning and assimilation during the post-acquisition phase, Chinese firms can achieve development of internal technology capability, which is crucial to Chinese firms’ catching up (Fan, 2006; Gao, 2011). However, international M&A is not an easy task, which requires long experience and practice. It is not a surprise that the failure rate of Chinese outbound M&As was significantly high (Zhang & Ebbers, 2010), given the fact that Chinese companies just started “going out” and they have limited experience of outbound M&As. Under this circumstance, researches on the topic of success of outbound M&As can be extremely valuable for Chinese practitioners. However, most of literature (Hong & Xiao, 2011; Zhang & Ebbers, 2010; Zhang et. al., 2011) related to this topic merely focus on the success of transaction instead of integration success. These papers considered a merger or acquisition as a success/failure, when the transaction of the deal was conducted/ canceled (rejected, left to be expired). And among the literature focusing on the integration step, most of them (Li & Chen, 2002; Wu & Xie, 2010; Yu & Liu, 2004) were from economic point of view rather than from innovation perspective. Therefore, it is valuable to study integration success of M&As in innovation’s point of view. Taking into account the result from previous literature review on catching up and open

14 innovation, and aiming to contribute to the existing literature of outbound M&As, the research question is finally defined as following: How do Chinese companies catch up technologically via overseas M&A?

4. M&As and innovation

Literature review in this session explores what main factors are for technological success in M&As in the existing literature, aiming to build up an comprehensive idea about which aspects to concentrate on in our thesis.

4.1. Measurement of innovation performance

Before discussing the relationship between M&As and Innovation, we should clarify the notion of innovation performance. According to Meglio (2009), operational definitions of innovative performance were frequently referred to R&D input, R&D output or knowledge exploration and exploitation. When innovative performance refers to R&D input, it can be measured by R&D expenditure or R&D intensity (R&D expenditure/number of employees) (Hitt, Hoskisson, Ireland, & Harrison, 1991). The R&D output can be measured by counting number of patent issued, number of patent application , number of patent citation, (Ahuja & Katila, 2001; Hagedoorn & Duysters, 2002; Puranam & Srikanth, 2007; Paruchuri et al., 2006; Ernst & Vitt, 2000; Kapoor & Lim, 2007). While Knowledge exploration and exploitation refers to R&D function rationalization, new product in the pipeline/launched and R&D project portfolio (James, 2002)

4.2. Why M&A can stimulate innovation

De Man and Geert (2005) concluded that there were a number of reasons why M&A could stimulate innovations. Firstly, M&A can facilitate the transition of Technology know-how which is often tacit and difficult to transfer. Secondly, M&As may increase the overall R&D budgets of companies engaged, which allows to reap economies of scale and thus enables them to have larger R&D projects than each individual firm could have done. A larger budget may also allow them to have a more diverse project portfolio, economies of scope, which can spread the risk of innovation (Ahuja and Katila, 2001). Thirdly, M&As may results combinations of complementary knowledge from firms involved, leading to development of new technologies or products that each partner on its own would not have been able to achieve. The last, but not the least, given companies are likely to possess different innovation management techniques, M&A may stimulate exchange of best practices within the merged entity, thus improve the R&D productivity.

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4.3. Barriers to innovation via outbound M&As

As we learned above, M&As can promote innovation through technology transition, achievement of economies of scale & scope in R&D, and synergy of technology knowhow and innovation management know-how. However, all these achievements are under the assumption of a successful integration in post-merger or acquisition. As high as 80% of failure rate in mergers reported by Prichett (1987) has showed that integration between two different firms is not an easy task to perform. The M&A requires huge managerial time and effort which may imply a reduced attention to R&D projects (Cassiman, 2006).This may be a short run effect, but in quite some cases the organization of the partner have not yet integrated, argued by De Man and Geert (2005). There exist barriers to successful integration after M&A. Culture difference was identified as a great challenge to overcome in the integration process in a international context (Cartwright & Cooper, 1993; Morosini et.al., 1998; Jöns et.al., 2007). Huang & Shi (2010) also pointed out that it is crucial to resolve the conflict caused by culture differences between merging firms, because culture conflicts often lead to the loss of human resource and customer resources.

4.4. Effect of M&As on Innovation

In the session, we review previous literature about the effect of M&A on innovation. As we discussed above, innovation performance can be measured in terms of R&D input or output. Therefore, effects of M&As on R&D input and R&D output are reviewed respectively.

4.4.1. Effect of M&As on R&D input Hitt et al. (1991) argued that managers tended to forgo other investment opportunities, mostly R&D projects, given the limited resources remaining for managerial allocation. Thus firms may substitute the acquisitions to innovation. In other words, there exist a negative relationship between M&A and R&D input (R&D intensity). And the result of analyzing data with a sample of 191 US M&As supported the author’s argumentation. Hitt et al. (1991) also found that debt levels further impede R&D and leads to less risk taking. After comparing firms’ R&D intensity to the industry average, Ravenscraft and Scherer (1987) found M&A had a negative impact on R&D input rather than had been as a stimulant to R&D input. Hall (1990) investigated 2500 US manufacturing firms and found out that there was only weak evidence of a decline in R&D intensity after acquisitions. Hitt et al (1996) also found that M&A only had direct negative effect on internal R&D inputs, but also indirect negative ones as a result of higher levels of financial control but lower levels of strategic control.

As a conclusion, mostly negative effects of M&A on post-acquisition R&D investment in the merged firms are found. However, the evidences are always not strong enough to draw a robust conclusion. 16

The result can be explained by the argumentation of Cassiman et al. (2005). They argued that R&D input may decrease after M&A because of the elimination of duplicated R&D, however it may increase due to the fact that economies of Scale and/or scope in R&D may be achieved after M&A, which motivate firms to perform more R&D projects.

4.4.2. Effect of M&As on R&D output Though Hitt et al. (1991) found out a negative relationship between firms’ acquisitions and R&D output (patent intensity measured by number of patents divided by sales), most of previous studies (Granstrand and Sjolander, 1990; Chakrabarti et al., 1994; Ahuja and Katila, 2001; Ernst and Vitt, 2000) which focus also on impacts of M&As on R&D output, all found a positive relationship between M&A and R&D output. At least when the following conditions are met: 1) the objectives of firms involved in the M&As are technology related. 2) Firms are able to retain key people and have a strong own internal know-how base, which allows better evaluation of potential targets and realization of synergies after acquisitions.

As we can see from the previous literature, M&As can have either positive or negative impacts on innovation. The result depends on the specific context and the way by which firms manage the M&As. Therefore, it is important to know in which situation, firms have better opportunity to achieve a better R&D output. Hagedoorn and Duysters (2002) suggested that strategic fit and organizational fit were two important factors driving the improvement of technological performance of companies. The strategic fit refers to relatedness including technology relatedness and market relatedness, while organizational fit refers to the similarity in sizes of companies involved. Market relatedness has been proofed by Hagedoorn& Duysters (2002) and Cassiman et al. (2005) that it increased the innovative performance of M&A. when focusing on technology relatedness, the evidence is also favorable for positive effect on innovative performance of M&A (Ahuja & Katila 2001; Cassiman et al. 2005; Cloodt et al., 2006). However, there is significant evidence for curvilinear relationship between technology relatedness and innovative performance, which indicates that companies should target M&A partners that are neither too unrelated nor too similar in terms of their knowledge base (Ahuja & Katila 2001; Cloodt et al., 2006). In terms of organizational fit, there still doesn’t exit an definite conclusion on its impact on innovation success of M&As. Ahuja and Katila (2001) argued that large company should focus their M&A activity on small targets if they aim to increase their innovation performance. While Chakrabarthy (1994) and Hagedoorn & Duysters (2002) concluded companies of equal size performed better.

As a conclusion, the above literature concludes that there exists barriers in international acquisitions, for instance culture difference, and technology-related objective, strategic fit (technology

17 relatedness and market relatedness), organizational fit (relative company size), internal know-how base, and retaining of key personnel are main factors influencing the effect of M&As on innovation. However, because there is still no consensus on relationship between organizational fit and technological success of M&As, which means the mechanism why organizational fit affect the success is not clear yet. Therefore, we decide to focus on barriers and all success factors without considering organizational fit.

5. The methodology

5.1. Research objective

The research objective is to find out the answer to the research question: how do Chinese companies catch up technologically via overseas M&As. To be more specific, what are the barriers needed to overcome and the main factors for Chinese companies to improve their innovation capabilities successfully through oversea M&As.

5.2. Research method

5.2.1. Case study A case study was designed for this research. And within the case four aspects was analyzed, namely the acquirer, the target, the new entity and the acquisition deal. The case study methodology is very well suited to this research. As literature review showed, success factors for companies to improve their innovation capabilities through M&A in Chinese context have been seldom explored. The case study methodology is the most suitable one for this situation. Moreover, according to Yin (2009), Case study methodology is most appropriate method to provide answer to research questions about “how” and “why”. And the objective of the research is to find the answer to the “how” kind of research question.

Literature review uncovered that technology-related objective, strategic fit (technology relatedness and market relatedness), internal know-how base, and retaining of key personnel were major factors that impact the relationship between M&As and innovation. Thus, besides barriers to successful acquisition, the case study investigated those factors to see if they apply to Chinese context and also explored new factors which might lead to success. And based on the success factors, propositions were developed for future researches.

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5.2.2. Case selection Case selection was one of the most important decision making in case study design. The decision was made based on the objective of the research. The goal of the research is to find out how Chinese companies improve their innovation capability successfully, thus catch up technologically, through oversea M&As. Therefore, the first criterion is that the case should be a successful overseas M&A in terms of both innovation and financial performance. Moreover, the merger or acquisition should be conducted at least 3 years ago, because it takes at least 3 years for the effects of a merger or acquisition on innovation to show up (de Man & Geert, 2005). Additionally, in order to make sure the effect on the innovation is coming from the specific single merger or acquisition, the transaction should be the only one merger or acquisition conducted by the acquirer during the time investigated. Based on the above mentioned three criteria, the WuXi Pharma Tech’s acquisition of AppTec is selected among 181 China’s outbound M&A transactions between 2008 and 2011 (see the list in Appendix 3).

The case of WuXi Pharma Tech’s acquisition of AppTec was selected because of the following reasons. Firstly, both acquirer and target companies are CROs (Contract Research Organization), which are organizations that provide support to the pharmaceutical, biotechnology, and medical device industries in the form of research services outsourced on a contract basis. In other words, two companies both provide R&D service to its customers. Therefore, as innovation-oriented companies, both companies were significantly relevant to the topic of this essay. Moreover, the transaction was conducted in January 31st, 2008, thus the effect of the M&A on the innovation performance of acquirer has completely showed up. In addition, the acquisition of AppTec was the only one transaction till its second acquisition of Abgent in October 14, 2011. The investigation only focused on the period from the time of the acquisition of AppTec was conducted to the time when the second acquisition was conducted. The last but not the least, the M&A was a big success not only in terms of finance but, more importantly, also innovation, which allowsed us to explore what the main factors to successful integration during post-M&A phase.

5.2.3. Data collection method As Laurea (2012) stated, it was difficult to collect data of international mergers and acquisitions. The main reasons for this difficulty were physical distance, time distance and secrecy reasons. The last reason applies especially to Chinese companies. They tend not to talk about their strategies to the external party who they are not familiar with, due to their conservative characteristics. Thus, the case study was analyzed based on the secondary data. The secondary data was collected through three main sources: Company website (Press release, corporate web pages, annual reports,

19 conference presentation and internal magazines “OUR”), Articles from media news (Bloomberg, Financial Times, The Economist, CNN, BusinessWeek, Economic Times, NY Times, BBC, China Daily) and Research papers through Google Scholar, ABI/Inform, and JSTOR.

5.2.4. Criteria for judging case study design 5.2.4.1. Construct validity

Construct validity requires that the study establishes correct operational measure for the concepts being studied (Cassiman & Colombo, 2006). The existing literature on M&As and innovation has already identified several constructs, such as culture differences, management gap, strategic fit. Based on these constructs, the case study was designed to establish link between outbound acquisition and innovation capability, which satisfies the construct validity. Nevertheless, we also attempted to develop new theoretical constructs through data analysis. For instances, rising cost and adapted business model were defined.

5.2.4.2. Internal validity

Internal validity requires establishment of causal relationship. In this case, it was the relationship between different activities in acquisition stages and its effect on innovation. Pattern matching was used to strengthen the internal validity of the case study. the pattern matching in this thesis occurred in the following manner: If the initially predicted values (i.e. success factors) have been found, and at the same time alternative “patterns” of predicted values (including those deriving from methodological artifacts, or “threats” to validity) have not been found, strong causal inferences can be made (Yin,2009). 5.2.4.3. Reliability

Reliability refers to that the case study can be repeated by a different researcher and that this researcher should come up with the same results. This demands that the procedure of data collection is carefully detailed. In this case, the case study protocol was developed, providing detailed procedures and sources of secondary data.

6. Case study of WuXi Pharma Tech’s acquisition of AppTec

6.1. Introduction

On January 4 2008, the Chinese CRO WuXi Pharma Tech (referred by WuXi) announced to buy the US-based biotechnology company with cash payment of $151 million and the assumption of about $11.7 million of AppTec debt. The transaction was the biggest Chinese acquisition of an American company after the famous deal of Lenovo Group acquiring IBM’s PC business for $1.75 billion in

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December 2004. In 2007, AppTec produced just over $70 million of revenue, representing a compounded growth rate of 46% over the past three years, While WuXi’s revenues was $135 million in 2007. And WuXi Pharma Tech’s stock value doubled from its initial offering price after the acquisition.

6.2. The acquirer: WuXi Pharma Tech

Founded in 2000, Shanghai-based WuXi PharmaTech was the leading China-based pharmaceutical and biotechnology R&D outsourcing company. As a research-driven and customer-focused company, WuXi PharmaTech provided pharmaceutical and biotechnology companies a broad and integrated portfolio of laboratory and research manufacturing services throughout the drug discovery and development process. WuXi 's services were designed to assist its global partners in shortening the cycle and lowering the cost of drug discovery and development by providing cost-effective and efficient outsourcing solutions that save its customers both time and money. Its operations were grouped into two segments: laboratory services, consisting of discovery chemistry, service biology, analytical, pharmaceutical development & process development services, and research manufacturing, focusing on manufacturing of advanced intermediates and active pharmaceutical ingredients for R&D use. In 2007, its 80 customers included nine of the world's top ten pharmaceutical companies by revenue.

6.3. The target: AppTec

With over 20 years’ experience, AppTec was a trusted leader in providing high-value testing, contract R&D, and cGMP (Good Manufacturing practice) manufacturing services for the biopharmaceutical and medical device industries. AppTec offered a fully integrated approach for the development of highly regulated products such as biopharmaceuticals, traditional pharmaceuticals, cellular therapeutics, medical devices, and combination & tissue-based products. Possessing the full set of competencies, facilities, and key personnel, AppTec helped clients take their products efficiently and cost-effectively through the product development process. The company had three state-of-art facilities, which were located in St. Paul, Minnesota; Philadelphia, Pennsylvania; and Atlanta, Georgia.

6.4. The deal

The starting point of the acquisition was from AppTec, who had been securing venturing capital to further grow its business on biotechnology and medical devices since it spin off from its former company ViroMed Laboratories. Due to the focus on Chinese companies in this thesis, we looked at the deal more in the perspective of WuXi. The main motive for WuXi to conduct the acquisition was 21 that the deal was consistent with its growth strategies. The growth strategy was to build a more comprehensive innovation capability and capacity to drive future growth, and complemented by selective strategic alliances and acquisitions. After 7 years’ success in Chemistry business, WuXi was eager to improve its innovation capability and capacity on the field biotechnology due to the fact that biologic R&D service market increased dramatically in drug industry. In fact by 2010, annual sales of biologics would have increased by $26 billion, compared to a $13 billion increase for small molecules (chemistry), according to Pharmaceutical Business Review in 2006. And thanks to the acquisition, WuXi could obtain capabilities and expertise in biologics testing and manufacturing and also expand its ability to provide R&D services in medical devices. Therefore AppTec was the perfect target to acquire in terms of strategy fit. Besides getting access to the new technology, acquiring AppTec could also lead to expansion of its US customer base and addressable market, while gaining significant US operational footprint. As a conclusion, in addition to expanding US market and gaining US operations, the objective, more importantly, was o build new innovation capability and capacity in biotechnology and medical devices.

6.5. Barriers

According to Ge Li, CEO of WuXi, the company almost did not have any difficulties to reach the agreement with AppTec for the acquisition. Because both companies shared the same value of customer-orientation, focusing on delivery the best services to its customers. And furthermore, both companies believed that the acquisition would bring mutual benefits. Dr. Ge Li commented, "We are very excited to announce the combination of WuXi and AppTec, an important milestone in realizing our vision of becoming the global R&D outsourcing leader. WuXi's chemistry services will be complemented by AppTec's biologics testing & manufacturing capabilities to create a fully integrated service platform, from which we will be able to provide more value-added services to our customers. With an expanded geographic footprint, and a broader and deeper scope of services, we are well positioned to drive growth and continue to increase shareholder value." While Dr. Bonita L. Baskin, Chief Executive Officer of AppTec, said, "Combining these two companies creates a unique single source platform that has the ability to transform the outsourced R&D model globally. I, along with the AppTec team, share with Dr. Li our excitement over the prospects of this combination."

Though the transaction was finalized successfully without any obstacles that other Chinese companies often have when trying to acquiring companies from US, such as governmental intervention due to national security concerns, the main challenges lied in the synergy in the post- acquisition process. The first challenge was the Culture differences. According to Geert Hofstede, National culture consists of five dimensions, namely Power Distance (the extent to which the less 22 powerful members of institutions and organizations within a country expect and accept that power is distributed unequally), Individualism (pertains to societies in which the ties between individuals are loose: everyone is expected to look after himself or herself and his or her immediate family), Masculinity (the extent to which the dominant values of a society are "masculine"), Uncertainty Avoidance (the extent to which the members of a culture feel threatened by uncertain or unknown situations and try to avoid such situations), and Confucian Dynamism (long-term vs. short-term orientation in life). Chinese culture and American culture are significantly different from each other in terms of Hofstede’s five culture dimensions. We can easily see the differences in the Table 6.1. Though most of executive management had foreign work experience, WuXi has never been operating in outside China since established in 2000. Thus culture conflicts due to culture differences were the first barrier, which WuXi needed to tackle in order to have a good past-acquisition synergies.

Table 6.1 Five dimensions of Culture between China and America

Power Individualism Masculinity Uncertainty Confucian Distance Avoidance Dynamism America Low Individualistic High Low Short-term China High Collectivistic High Low Long-term

The second challenge was the management gap, especially in the two aspects of leadership & functions and human resources management. More specifically, American management always has strict, clear functions and responsibility for the enterprise departments and the responsible persons and follows scientific rules to make the enterprise operate orderly and systematically. While Chinese management system emphasize the emotion-connected atmosphere on the basis of people and values the custom of courteous reception and formalities. Furthermore, in respect of the human resource management, the Chinese management system follows the principle of “on the basis of people with the priority” whilst American system more favor a series of strict, scientific systems. In order to remain the key personnel, WuXi had to solve both above mentioned challenges successfully, because those are the two main reasons cause employee loss after the acquisition in the international context.

The third challenge was the rise of cost when operating in US market. One of the WuXi’s biggest advantages was the relatively low-cost of R&D services. The cost of a Chinese scientist was about $30,000 a year. However WuXi had to pay almost ten times more for an American researcher with annual cost of $250,000 to $300,000 according to the report by Jinsong Du, a health-care analyst

23 with Credit Suisse in Hong Kong. Thus the American scientists that WuXi got in the deal came at a much higher cost. The new entity had to deal with the problem of cost rise seriously in order to keep operating in US.

6.6. Post-acquisition

After acquisition, the AppTec was entirely controlled by WuXi. However, rather than replacing AppTec by the name of WuXi PharmaTech, WuXi decided to assign a new name to the new entity by emerging two names of companies. WuXi Pharma Tech co. in China has become WuXi AppTec Co. and the acquired AppTec has been renamed as WuXi AppTec Inc. Both two operations share the same board and executive team. The board of directors consists of 8 members who are all Chinese. While the executive team is composed of nine members of which one is non-Chinese. Though the executive team and board of directors in the WuXi AppTec Inc. changed completely compared to the AppTec, the all three operations in St. Paul, Philadelphia and Atlanta and their staff, including mediate management team, remained the same as before. In order to have a better synergy between two operations, Firstly, the entity changed its previous vision of “being the emerging market pioneer and leader in the pharmaceutical R&D outsourcing industry with its strong chemistry- based services and significant china advantage” to the new vision of being “The global R&D outsourcing leader with world-class capabilities of providing integrated service, spanning the entire R&D chain”. Secondly, Edward Hu, Chief Operational Officer (COO) of WuXi, was appointed to be responsible for managing the integration after the acquisition. He had more than 11 year’s management experience in biotechnology and pharmaceutical industry in US. Especially 7 years’ experience working as COO in Tanox, which was a company specializing in biomedical research, allowed him to have good understanding of biotechnology industry. Thirdly, good communication with employees about the acquisition was made through internal magazine “ours” and press release on website, which were organized by department of Investor Relationship. Both executives and employees were interviewed by asking their opinions acquisition and their expectations of the new entity. And the report was published focusing on the rationales of the acquisition, and benefits from acquisition for both the companies and all employees. Finally, training sessions were often organized between US and Chinese operations to improve the interaction between two sides.

6.7. The successful story

The acquisition was a very successful case in terms of both financial and innovation performance. After acquisition, the two companies were integrated into one company under the name of WuXi AppTec. As we can see from Figures 6.1, the revenue of the acquirer continued to grow after 24 acquiring the US target. Till the WuXi AppTec’s second acquisition in the end of 2011, it has achieved revenue four times as much as it had in 2007 before the acquisition of AppTec. More importantly, the revenue from US operation continued to grow after the acquisition in 2008. We concluded that the acquisition of AppTec has affected positively on the financial performance of WuXi.

WuXi AppTec’s Revenue Growth 600 500 Revenue from U.S.-based 400 laboratory service 300 Revenue from China-based 200 manufacturing service 100 Revenue from China-based 0 laboratory service 2007 2008 2009 2010 2011 2012

Figure 6.1 WuXi AppTec’s Revenue Growth from 2007 to 2012

Besides the positive impact of the acquisition on WuXi’s financial performance, it, more importantly, has positive impact its innovation performance. We looked at innovation performance from three perspectives, number of scientists/technology employees, and new R&D services.

Figure 6.2 shows that the number of employees of WuXi kept growing from 2007 to 2010. Especially in 2008, Number of technological employees increased dramatically after the acquisition with value of about 1000. And after that the number of technological employees increased steadily. Based on this trend we conclude that the acquisition had a positive impact on the innovation input of WuXi.

Growth of Technological employees 5000

4000

Number of 3000 Technological

2000 employees Number 1000 Total Number of employees 0 2007 2008 2009 2010 year

Figure 6.2 Growth of technological employees in WuXi AppTec

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WuXi was a company who provided pharmaceutical and biotechnological R&D outsourcing services to help its customers develop new drugs in a more effective and efficient way. As we can see from Appendix 4, the process of new medicine development consists of three main phases: discovery, preclinical/development and clinical/commercial. In 2007, WuXi only had ability to provide R&D services in the field of chemistry for its customers. However, after the acquisition of AppTec in 2008, its R&D capabilities extended to biologics and medical devices fields with the coverage among all three stages in the new product development process of medicine and medical devices. And in 2011, WuXi AppTech has developed an almost complete integrated R&D Service platform for its customers in health care. Thus we concluded that the acquisition had a positive impact on the innovation output of WuXi.

As a conclusion, WuXi conducted a very successful acquisition in 2008, which had a significantly positive impact on both the innovation (input and output) and financial performance of the company.

6.8. Success factors

The analysis of innovation performance after acquisition showed that the company improved significantly its innovation capabilities through the acquisition of AppTec. However, the question: “How did the company achieve the success?” remains. In this chapter, we will explore what the success factors of the acquisition are to test the second and third hypotheses and answer the research question.

Technology-related Objective: The first success factor is the technology-related objective of the acquisition. The growth strategy of WuXi was to build strong innovation capabilities and capacities, complemented by strategic alliances and acquisitions to drive future growth. To be more specific, the objective of the acquisition was to acquire AppTec’s innovation capabilities in biotechnology and medical devices. With a technology-related objective is significantly important for acquiring firm, since it guards the acquiring firm scan and select potential targets who with sufficient technology base. And only targets with sufficient knowledge base can contribute added value to the acquiring firms. With technology-related objective, WuXi has successfully targeted AppTec, who had sufficient technology base. Hence:

Proposition 1: Technology-related Objective is a pre-determinant factor for Chinese companies to improve their innovation capabilities successfully through overseas M&As.

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Technology relatedness: The second success factor is that the merging firms were active in the complementary technological fields. As we can see in the Appendix 5, Chemistry-based, biology- based and manufacturing services are the three main R&D services in the health care industry. WuXi was specialized in providing chemistry-based R&D services, such as Synthetic & Medicinal Chemistry, Analytical/Bio-analytical Chemistry, Drug Metabolism & Pharmacokinetics (DMPK), Process Chemistry & Scale-up and Chemistry-based Research Manufacturing. While AppTec was capable of offering biology-based R&D services, such as Biological Safety Testing, Viral Clearance, In vitro & in vivo Toxicology, Bio-based Medical Devices and Biological Research Manufacturing (Monoclonal Antibodies, Therapeutic Proteins, Cellular Therapeutics and Vaccines). Though they had an overlap on the technology of in vitro & vivo Toxicology, the rest of capabilities from two companies were complementary, which enabled the new entity to have a more integrated R&D service platform, covering all three main aspects of R&D process of new drug and medical device. The complemetary technology relatedness offered enough diversity, enriched WuXi’s knowledge base and created opportunities for learning, while the enough overlap on biotechnology facilitated the absorption process. Thus emerging the complementary technologies helped the new entity WuXi AppTec achieve the economy of scope in R&D and generation of technological synergies, leading to improvement of innovation capability. Hence:

Proposition 2: Complementary technology relatedness is a pre-determinant factor for Chinese companies to improve their innovation capabilities successfully through overseas M&As.

Market relatedness: The third success factor is complementary market fields. WuXi’s customers were Pharmaceutical and Biotechnology companies. While in addition to Pharmaceutical & biotechnology industries, AppTec’s also had customers in medical devices industry. 50% of WuXi’s revenue came from it most important 20 clients and 25 percent of the clients were also AppTec’s clients. However, the two companies were not direct competitors, because they provided the same companies with different R&D services. WuXi was providing chemistry-based R&D service while AppTec serve its customers with biologic-related and medical device R&D service. We can see that two companies were active in the very complementary market fields, as they had some common customers, but provided them different R&D services. Due to the overlap on customers, the new entity received opportunities to achieve cross selling, which increased its market power, leading to improvement of return to R&D, thus achieving positive effects on innovation. Hence:

Proposition 3: Complementary market relatedness is a pre-determinant factor for Chinese companies to improve their innovation capabilities successfully through overseas M&As

27

Internal knowledge base: The fourth success factor is the strong internal knowledge base in both chemistry and biotechnology. WuXi had more than 2000 technological employees of which 70% hold master or higher degree. More than 100 employees were US-educated scientist returnee, who graduated from universities such as Columbia, Dartmouth, Harvard, NYU, Northwestern, and Yale. Especially many senior managers had significant work experience in biotechnological companies, such as Genentech, ImClone Systems, Tanox, TargeGen, Wellcome Biotech and Wyeth. Moreover, though WuXi’s main business was on chemistry, WuXi has started building its biotechnology capabilities since the department of biology was established. We can clearly see that WuXi has developed a strong base both in technology and management fields. The strong internal knowledge base ensured WuXi to have ability to identify most valuable target to acquire and have a good digestion of the newly acquired technologies in biologics and medical devices and allowed it to manage integration process in a good way, as when a firm expands its internal knowledge base and technological capability, it also enhances the ability to absorb and utilize external knowledge (Cohen & Levinthal, 1989, 1990). Hence:

Proposition 4: Strong internal knowledge base is a pre-determinant factor for Chinese companies to improve their innovation capabilities successfully through overseas M&As

Retaining key personnel: The fifth success factor is retaining key personnel. Key talents were the most valuable assets that WuXi acquired from AppTec, because new technology in biologics and medical devices were partly embedded among them. WuXi has achieved in retaining key employees by applying the following steps. Firstly, as the announcement of no lay off before the acquisition, WuXi kept all the staff from AppTec the same as pre-acquisition in the early stage of the integration process, which reduced sense of uncertainty among the new employees. Secondly, instead replacing the name of AppTec by WuXi, the acquirer emerged two company names into one and created a common vision (being a global leader of R&D service by providing integrated R&D platform cross chemistry, biologics, and medical devices industry) to new entity. It delivered a message to the new employees that the acquisition benefited both companies and it helped increase trust, faith, and belongness among new employees to the new entities. Thirdly, WuXi appointed a leader who can best present two cultures. As discussed above, COO Eduard Hu was assigned to be responsible for managing the integration. He was born in China but received his PhD and MBA degree in US. And more importantly, he got more than 11 years management experience in bio-tech companies. He had sufficient knowledge of both cultures and known how to reduce conflict based on the culture differences to achieve more synergy. Fourth, WuXi made a good communication with employees on the acquisition. Both executives and employees were interviewed by asking their opinions acquisition

28 and their expectations of the new entity. Besides the report of interviews, articles explaining the rationales were published on the internal website, internal magazines and internal newspapers. Fifth, organize culture trainings to increase interaction between US and China operations. Since newly acquired technologies were embedded in new employees, the continuity of key personnel facilitated the process of technology transfer, learning and assimilation, which lead to positive impact on WuXi’s innovation performance. Hence:

Proposition 5: Retaining key personnel is a determinant factor for Chinese companies to improve their innovation capabilities successfully through overseas M&As

Adapted business model: As we discussed above, one the biggest challenges for WuXi in the integration process in post-acquisition was the rising cost when operating in US market. WuXi solved this problem by applying adapted business model. The US operation focused on providing two main R&D services in biologics, manufacturing services and laboratory services. Because manufacturing services were more cost-sensitive business and also due to smaller market of biologics in the moment of acquisition, WuXi decided to close the business in US in the end of 2008, almost one year after the acquisition. They transferred the manufacturing business to China, where the new cGMP biologics manufacturing facility was built in the city WuXi in 2012. For the laboratory services, WuXi continued the business in both locations. However, two operations focus on two deferent directions. China-based operation specialized in providing more cost-sensitive biologic laboratory services while US based operation focused on developing more time-sensitive biologic laboratory service. For instance, the bio-analytical operations which provide testing services in both small molecules and biologics in preclinical and clinical samples locate in both countries. The US facility was sited in order to offer fast turnaround time (1-2 days) for its customers rather than 4-6 days when seeding the sample to China. For some very sensitive trials, the extra few days cost more than the saving realized by using lo-cost locations. WuXi understands the time-sensitive situations in biotechnology industry. With this adapted business model, WuXi has achieved to provide tailor-made R&D services to its customers, significantly strengthening its market power. Therefore, we conclude the adapted business model enhance WuXi’s innovation capability, since market power stimulate return on R&D to improve. Moreover, rising cost may lead to failure in WuXi’s business, which is one of the barriers to realization of innovation through acquisition, according to De Man and Geert (2005). And WuXi has successfully solved the issue by applying adapted business model in a way that simultaneously sustaining its low-cost advantage and exploring new business value in US market. Hence: Proposition 6: Adapted business model is a determinant factor for Chinese companies to improve their innovation capabilities successfully through overseas M&As

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6.9. Conclusion

As a conclusion for the acquisition, we discover that with the pre-conditions of having technology- related objective of acquisition, being active in complementary market & technology fields, having strong internal knowledge base, WuXi has achieved the successful integration, by retaining the key talents and applying adapted business model, given the challenges of culture difference, management gap and rising cost.

7. Conclusion and Discussion

7.1. Conclusion

The objective of this thesis is to find out how Chinese companies catch up technologically via overseas M&As. After reviewing the existing literature on relationship between M&As and Innovation, we conclude culture differences is the first barrier to achieve technological success by M&As. With the focus on barriers and success factors, we carried out a case study on WuXi’s acquisition of AppTec. After comprehensive analysis on this case, we recognize two novel barrier — rising cost & management gap — in Chinese context, in addition to culture differences.

Moreover, the result also confirms the success factors found in existing literature, which are technology-related objective, complementary market & technology relatedness, strong internal knowledge base and retaining key personnel in China’s context. And more importantly, the new success factor adapted business model is identified. Based on success factors (summarized in Table 7.1), ten propositions are generated for future researches.

Table 7.1 The barriers and success factors in outbound post-acquisition integration

The barriers and success factor in outbound post-acquisition integration Culture differences Barriers Management gap Rising cost Technology-related objective Complementary market relatedness Complementary technology relatedness Success factors Strong internal knowledge base Retaining key personnel Adapted business model

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7.2. Discussion

Our findings suggest that culture difference, management gap and rising cost are three main barriers to successful integration. As Jöns et.al (2007) argued, culture difference is the major barrier for successful international M&As, which is also applied in the Chinese context. According to Huang & Shi (2010), Chinese firms tend to ignore the cultural factors and focus more on economic and technology factors compared to western firms. Therefore, hopefully the finding from this thesis could trigger more attentions from Chinese practitioners and researchers to study on this topic. Management gap and rising cost are more Chinese context dependent barriers. Due to historical issue, contemporary management just started after Chinese government opened its market in 1978. There is still a huge gap between Chinese firms and western firms in terms of management experience. And also, as most of Chinese firms succeed by using low-cost strategies, rising cost isa rather predicted challenge when they operating in developed countries.

Our findings also show that technology-related objective, complementary market & technology relatedness, strong internal knowledge base and retaining key personnel and adapted business model are underlying drivers for Chinese companies to achieve technology catching up via M&As. It is logically that technology-related objective is one of the success factors, because acquiring advanced technology and aiming to seek a shortcut to move up the value chain is one of the most popular goals for Chinese companies when applying overseas M&A strategy (Wu et al., 2011). One of our findings replicates the result documented by Ahuja & Katila (2001) that technological acquisition has a significant impact on innovation. Furthermore, our finding about the importance of complementary technology relatedness stays in line with conclusions by Ahuja & Katila (2001), Cassiman et al. (2005) and Cloodt et al., (2006). Concerning the success factor of complementary market relatedness, this thesis follows the same logic as in Cassiman et al. (2005) that the complementary market relatedness could build up the acquiring firm’s market power, leading to enhancement of return R&D. Therefore, it has positive impact on the acquiring firm’s innovation performances. The next success factor is strong internal knowledge base. Cohen & Levinthal (1989 & 1990) stated that strong internal knowledge base was the basis to absorb and utilize external knowledge knowhow. However, it was constrained in the technology domain. We also remark that it is necessary to have strong management know-how for Chinese companies to prepare themselves for the post-acquisition integration. Moreover, the success factor of retaining key personnel confirms the idea (Ernst and Vitt, 2000) that key personnel are the crucial technology source needed in the process of technology transfer. Finally, the novel success factor of adapted business model is a Chinese context dependent factor. It is triggered by the cost rising when expanding business from China to a developed country.

31

The causal logic behind this factor is the same as that used by Cassiman et al. (2005) for the success factor of complementary market relatedness.

7.3. Managerial Implications

The success of WuXi’s acquisition of AppTec brings some implications for other Chinese companies who are also trying to enhance their innovation capabilities through overseas M&As. In pre- acquisition stage, Chinese companies should build up their own internal knowledge base in both management field and technological field. Insufficient internal knowledge base will prevent the firms to understand the technology acquired and result in indigestion. And management capabilities should be sufficiently developed to ensure well management of integration. During the selection stage of M&As, Chinese companies should consider targets that operate in a complementary market and technology fields. And also the deal should be consistent with their innovation strategies. In post-acquisition stage, Chinese companies should screen for cultural alignment and misalignment, based on which increase communications with new employees and organize culture trainings to enhance interactions between two emerging parties, thus to achieve successful culture integration. Furthermore, it is important to appoint a leader who can best represent the new enterprise culture. Both actions help company head off culture clashes and retain key talent. Finally, Chinese companies should adapt its business model in a way that not only take advantage of low-cost in China but also explore potential business value in overseas markets.

7.4. Literature contributions, limitations and future researches

In this session, we will focus on the contribution and limitations of the thesis and possible future research questions. Besides the managerial implications to Chinese practitioners we discussed in the above session, this thesis also contributes to the academic literatures. On one hand, the thesis adds perspectives on an emerging country to the open innovation literatures. We discussed how Chinese companies catch up technologically by applying M&As. The thesis also, on the other hand, develops eight propositions based on seven success factors of enhancing innovation through M&As in a Chinese context and therefore contributes to the literatures on the topic of Innovation and M&As.

The first limitation of this thesis is the single data source – secondary data. One of the principles of the case study design is to use multi-source data. Therefore, we propose a future research to improve the research on the case study by using additional primary data from interviews. The second limitation of the thesis lies in applying the single case study to study the research questions rather than multi-case study, which limits the generalization of the findings and reduces its external validity.

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We propose another future research on applying quantitative data of Chinese overseas M&As to test the propositions developed in this case study based on success factors.

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Appendix

Appendix 1 Ranking of GDP PPP in 2002

Ranking Economy GDP PPP(Millions of Current international US$, )

1 United States 10590200

2 China 3669086 3 Japan 3471742 4 Germany 2263786 5 India 1824677 6 United Kingdom 1713386

7 France 1704948 8 Italy 1539908 9 Brazil 1322846 10 Russian Federation 1166680

11 Spain 994354

12 Mexico 956326 13 Canada 937829 14 Korea, Rep. 936042

15 Turkey 572094 16 Australia 567926 17 Indonesia 558946 18 Netherlands 515792

19 Iran, Islamic Rep. 503802

20 Poland 442062 source: World Bank

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Appendix 2 Ranking list of GDP in 2010

Ranking Economy GDP (Millions of Current US$, )

1 United States 14447100

2 China 5930529 3 Japan 5488416 4 Germany 3258947 5 France 2549027 6 United Kingdom 2251898

7 Brazil 2143035 8 Italy 2043640 9 India 1684324 10 Canada 1577040 11 Russian Federation 1487516

12 Spain 1383345 13 Australia 1131623 14 Mexico 1035871 15 Korea, Rep. 1014890

16 Netherlands 774229

17 Turkey 731144 18 Indonesia 708027 19 Switzerland 529395 20 Poland 469782

Source: World Bank

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Appendix 3 China Outbound M&A Transactions

Implied Enterprise Value Date Target Enterprise

Ann06o/22unced/11 Sun Moral IntAcqernauitiorornal Smart BaskeTargetts BrNatitishio Vnaliirginty InvTargestmete Inntd Husotryldin Grog up Valu$1e1 (9$mil).9 Revenue EBITDA Limited Investments Limited Islands Company 06/20/11 New World Hospitality Rosewood Hotels and United States Hotels, Resorts and 229.5 Resorts, LLC Cruise Lines 06/15/11 Wharf Holdings Ltd. Wheelock Properties Ltd. British Virgin Real Estate 434.6 Islands Development 06/09/11 Noble Group Ltd. Territory Australia Steel 155.3 0.8x 2.8x Resources Limited 06/01/11 Lenovo Group Ltd. Medion AG Germany Distributors 624.0 0.3 13.8 05/31/11 Mongolian Coal Corporation QGX Coal Ltd. Mongolia Coal and Consumable 950.0 Limited Fuels 05/31/11 HNA Property Holdings U.S. office tower assets United States Real Estate 294.4 Company Ltd. 05/30/11 CP Pokphand Co. Ltd. Modern State British Virgin Packaged Foods and 618.9 Investments Limited Islands Meats 05/23/11 Kuok Limited; Kerry Group Allgreen Properties Ltd. Singapore Real Estate Development 2,720.1 3.5 7.5 Limited; Kuok Brothers Sdn. 05/16/11 Baiyin Nonferrous Metal Co., Gold One Australia Gold 538.0 5.7 16.5 Ltd.; China-Africa International Limited Development Fund; Long 05/13/11 Kowloon Development Co., Ideaplan British Virgin Real Estate Operating 185.7 March Capital Group Ltd. Investments Limited Islands 05/06/11 Guoco Group Ltd. The Rank Group Plc United Casinos and Gaming 1,164.9 1.3 7.7 Kingdom 05/04/11 Investor Group JK Yaming International Singapore Auto Parts and Equipment 100.9 0.6 5.6 Holdings Ltd. 05/02/11 Shanghai E-Mart Supercentre Kim's Club Mart. Co. Ltd. South Korea General Merchandise 275.8 1.0 Co., Ltd. Stores 04/20/11 Evergreen Industries MagIndustries Corp. Canada Forest Products 147.8 7.0 Holding Group Co., Ltd. 04/16/11 Beijing Hainachuan Inalfa Roof Systems Group Netherlands Auto Parts and Equipment 373.0 Automotive Parts Co., Ltd. B.V. 04/08/11 Jizhong Energy Resources Wumeiniu Coal Mine Mongolia Diversified Metals and 259.7 Co., Ltd. Mining 04/05/11 Shandong Gold Mining Co., Aurora Empowerment South Africa Diversified Metals and 153.9 Ltd. Systems Limited, Grootvlei Mining 03/15/11 CLSA Capital Partners anPodm Oro Mixkneye dM-Uinsese A sset Singapore Real Estate Operating 199.3 Companies 03/05/11 CDH Investments Sinomem Technology Ltd. Singapore Environmental and 271.1 2.8 9.4 Facilities Services 02/28/11 China Aviation Industry Cirrus Aircraft Corporation United States Aerospace and Defense 210.0 General Aircraft Co., Ltd. 02/26/11 Chow Tai Fook Enterprises Limited S.I. Feng Shun and Tao British Virgin Real Estate 387.6 Properties Limited Islands Development 02/26/11 Chow Tai Fook Enterprises Limited Good Cheer British Virgin Hotels, Resorts and 156.5 Enterprises Limited Islands Cruise Lines 02/21/11 The Blackstone Group; Japanese Property Loan Japan Consumer Finance 385.0 China Investment Corp Portfolio of Morgan Stanley 02/14/11 MIE Holdings Corporation Emir Oil, LLC Kazakhstan Oil and Gas 170.0 Exploration and 02/02/11 Tencent Holdings Ltd. Riot Games, Inc. United States Home 328.6 Production Entertainment 01/28/11 Wing Hing International Taung Gold Limited South Africa Gold 1,165.9 01/18/11 Yuemei Group Co., Ltd. Mali Cotton Company Mali STeoftxtilwesare 134.0 01/14/11 Chinese Estates Holdings River Court Holdings Ltd. United Real Estate Operating 441.7 Ltd. Kingdom Companies 01/12/11 Affinity Equity Partners Tegel Foods Limited New Zealand Packaged Foods and 351.7 Meats 01/10/11 China National Bluestar Co. Elkem AS Norway Commodity Chemicals 2,000.0 01/10/11 PetroChina International Co., INEOS Refiniung Ltd. United Oil and Gas Refining 1,015.0 Ltd. Kingdom and Marketing 12/31/10 Greentown China Holdings Poly Link Management British Virgin Investment Holding 571.4 Limited; Zhejiang Railway Limited Islands Company 12/31/10 TInvaiyuaestmn eMntin Groing uMap Ccohin., Lerytd. Group Valley Longwall Australia Industrial Machinery 127.1 Coal Machine Co. Ltd. International Pty China Outbound M&A TransactLimited ions 41

Enterprise Value Implied Date Enterprise

Announced12/29/10 Chongqing AcquirorLight Indust ry & SaarGummi InTargetternational GmbH GermTargetany CoTargetmmodit Industryy Value$1 7($mil)2.5 Revenue EBITDA Textile Holdings Co., Ltd. Nationality ChGroupemica ls 12/23/10 New Hope Group; Agria PGG Wrightson Limited New Zealand Agricultural Products 754.9 0.9x 13.9x Corporation 12/20/10 Power Assets Holdings Meridian Cogeneration Canada Gas Utilities 123.0 Limited; Cheung Kong Facility 12/17/10 InfSinroastchremuctu Corre pHoraolditionngs Ltd. DSM Anti-Infectives B.V. Netherlands Pharmaceuticals 552.2 12/15/10 Unitas Capital Pte. Ltd. Hyva Group B.V. Netherlands Industrial Machinery 699.5 12/11/10 AVIC International Holding Teledyne Continental United States Aerospace and 186.0 Corporation Motors, Inc. Defense 12/09/10 Wanhua Industrial Group BorsodChem Zrt. Hungary Commodity 1,685.5

12/03/10 China Petrochemical Occidental Argentina Argentina OChemil anidc aGlsa s 2,450.0 Corporation Exploration And Exploration and 11/29/10 Eagle Infrastructure Fund ProT Nusantaraduction, In Infc. rastructure Indonesia PCroonstdurcuctitionon and 306.2 14.5 24.7 Ltd. Engineering 11/28/10 China Huaneng Group InterGen N.V. United States Electric Utilities 2,464.0 11/22/10 Shanghai Chengtou Cityland Springs JWNT Development Singapore Real Estate 1,112.0 (Group) Co., Ltd Holdings Pte. Development 11/19/10 Mandarin Capital Italmatch Chemicals SpA Italy Specialty Chemicals 136.5 1.0 4.6 Management SA; China 11/16/10 DLeadeve lWeaopmlthenty FInvinaesntmciael ntCo.s HPL-Hines Development Singapore Real Estate 135.5

11/11/10 PTT Mining Limited Straits Resources Ltd. Australia DivDeverelsifiopmede Mnte tals 329.1 1.1 and Mining 11/11/10 SYNNEX Investment SYNNEX Infotec Japan Technology 117.6 0.1 Holdings Corporation; SB Corporation Distributors 11/08/10 PacifGuangdic Corporatioong Risingn A Limitssetsed Caledon Resources plc United Kingdom Diversified Metals 427.2 6.3 Management Co. Ltd. and Mining 11/07/10 CK Life Sciences Int'l., Inc. Challenger Wine Trust Australia Specialized REITs 185.6 5.8 6.4 11/05/10 China Merchants Holdings Tin Can Island Container Nigeria Marine Ports and 324.2 Company Limited; China- Terminal Limited Services 10/28/10 AfRiTricEKa CorDevpe.l opment Fund Max Online Ltd. British Virgin Computer 150.4 Islands Storage and 10/28/10 Goodman Group; China ING Industrial Fund Australia Industrial REITs 2,898.6 10.9 Peripherals Investment Corporation 10/19/10 China Lumena Sino Polymer New Materials Cayman Commodity 1,491.9 6.6 11.0 New Materials Co. Islands Chemicals 10/18/10 China Steel Corp. Dongbu Metal Co. South Korea Steel 1,109.8 2.9 16.6 10/11/10 ChinCorpa. National Chemical Makhteshim Agan Industries Israel Fertilizers and 3,764.4 1.6 16.7 Corporation Ltd. Agricultural 10/07/10 Chi Lam Investment Hing Ying Services Limited British Virgin Real Estate Operating 460.4 Chemicals Company Limited Islands Companies 09/24/10 Texwinca Holdings Ltd. Baleno Holdings Limited British Virgin Apparel Retail 262.1 Islands 09/17/10 Jinchuan Group Ltd. Continental Minerals Corp. Canada Diversified Metals 398.9 and Mining 09/13/10 China Resources Gas Group Mega Fair Limited British Virgin Automotive Retail 270.1 Limited Islands 08/26/10 China Steel Corp. Formosa Ha Tinh Steel Vietnam Steel 2,700.0 Corporation 07/30/10 Hongkong Electric Holdings Electricity Distribution Assets in United Kingdom Electric Utilities 9,062.4 Limited; Cheung Kong UK of EDF Energy and CSW 07/22/10 InfTidreasttimructue Sunre ( HGrooldiupng) Ls tLd.td. IUnpvestments Energy In vestment (China) British Virgin Coal and 1,137.8 Ltd. Islands Consumable Fuels 07/07/10 Tempo Group; Beijing E- Nexteer Automotive Inc. United States Auto Parts and 450.0 town International Equipment Investment and 06/28/10 Genesis Energy Holdings Orion Energy International United States Coal and 349.5 Development Co. Ltd. Consumable Fuels 06/28/10 Macau Investment Holdings Sociedade de Investimento Macau Real Estate Operating 205.8 Limited Imobiliario Pun Keng Van Companies S.A.R.L

42

Enterprise Value Implied Enterprise Date Target Value ($mil)

Ann06o/21unced/10 Heinz (ChinAcquiaror) FoodstarTarget Holding s Pte SingNatapioorenali ty PackagTargeedt I nFooddustrys a ndGro up $165.0 Revenue EBITDA Company Ltd. Meats Investment Ltd. 06/21/10 Wuhan Iron and Steel Zambeze Coal Project Mozambique Coal and Consumable 1,100.0 (Group) Corporation Fuels 06/04/10 Chipbond Technology Chipmore Holding Cayman Research and Consulting 162.7 Company Limited Islands Services Corp. 06/04/10 Hongkong Electric Seabank Power United Electric Utilities 614.5 Kingdom Holdings Limited 05/28/10 Shanghai APM Terminals Belgium Marine Ports and Services 134.0 Group Co. Ltd. N.V. International Port Zeebrugge 05/19/10 Shanghai Electric Goss International United States Industrial Machinery 1,500.0*

05/18/10 (GroGet Nupic)e Holdings Great China Company Macau Hotels, Resorts and 228.5 Limited Cruise Lines Ltd. 05/18/10 Nam Hing Holdings Swift Profit British Virgin Electrical Components 220.2 Limited Islands and Equipment Ltd. International 05/13/10 China Investment Penn West Energy Alberta Oil and Gas Exploration 1,181.3 Corporation Bitumen Assets in and Production NorTrust,th ern Alberta 05/12/10 Hong Kong Energy HKE (BVI) Limited British Virgin Electric Utilities 130.8 Limited Islands Holdings 05/04/10 APAC Resources Kalahari Minerals PLC United Diversified Metals and 640.1 Kingdom Mining Limited 04/29/10 Cosco Pacific Ltd. Wattrus Limited British Virgin Holding Company 2,481.2 Islands 04/29/10 GD Midea Holding Misr Air Conditioning Egypt Household Appliances 176.9 Manufacturing Co., Ltd.

04/28/10 Cheung Kong CSeabanompanyk Powe r United Electric Utilities 550.3 Holdings Ltd. Kingdom Infrastructure Limited 04/26/10 Jinchuan Group Ltd. Kazakhmys PLC, Kazakhstan Diversified Metals and 244.9 Deposit Project in the Mining AyAkotogugayz Re gion 04/23/10 Sure Fancy T&T International British Virgin Investment Holding 276.5 Limited Investment Islands Company Investment Yangzijiang PPL Shipyard Pte. Ltd. 04/16/10 Corporation Singapore Oil and Gas Equipment 1,033.3 Shipbuilding and Services 04/12/10 Sinopec Chemical Syncrude Canada Ltd. Canada Oil and Gas Exploration 51,495.0 HCompanyoldings L Ltid.m ited and Production Sales 04/06/10 Jinchuan Group Ltd.; Crowflight Minerals Canada Diversified Metals and 141.0 8.9x & Manhattan, Inc., Mining InvForebstmes ent Arm Inc. 04/01/10 Polytec Asset SOJSC Caspi Neft TME Kazakhstan Oil and Gas Exploration 139.6 Limited and Production Holdings 03/26/10 Sinopec Corporation Sonangol Sinopec Cayman Oil and Gas Exploration 3,830.0 Hongkong International Ltd. Islands and Production

03/24/10 IEasntert natChinioanal M ineral Itaminas Iron Ore Brazil Steel 1,620.0 Exploration & Organisation Mine Development 03/22/10 PetroChina Co. Ltd. Arrow Energy Limited Australia Oil and Gas Exploration 3,371.7 and Production 03/16/10 Poly (Hong Kong) Rapid Bloom Limited British Virgin Real Estate Development 524.2 Investments Limited Islands 03/15/10 Hong Kong Resources China Gold Silver British Virgin Investment Holding 135.9 Holdings Company Company Limited Islands Company Group

03/12/10 LWuhaimitedn Iron and Steel Bong Iron Ore Mine in Liberia Steel 114.1 (Group) Corporation Liberia 03/11/10 CST Mining Group Cape Lambert Lady Australia Diversified Metals and 119.5 Exploration Pty Ltd Mining Limited Annie 03/09/10 Golden Concord Asia 23.85% Stake in Singapore Asset Management and 683.9 Union Enterprise and Custody Banks Ltd StakOveres easin OU E Realty 40% 02/11/10 CITIC 1616 Holdings Companhia de Macau Alternative Carriers 890.8 Limited Telecomunicacoes de Macau S.A.R.L. 02/08/10 Rainbow Brothers Market Season British Virgin Investment Holding 417.5 Limited Islands Company Holdings Limited 02/01/10 Zhen Hua Friede & Goldman, United States Oil and Gas Equipment 125.0 2.3 Ltd. and Services Engineering Co. Ltd. &A

43 ns

Enterprise Value Implied Date Target Enterprise

Ann01o/28unced/10 Bestway InternatiAcqonuiroral H oldings China FinancTargete Ener gy BrNatitishio Vnaliirginty DivTargersifieted In dMusettryals Valu$1,2e8 (7$mil).3 Revenue EBITDA Ltd. and China Finance Gold Islands anGrod Minup ing 01/18/10 North Asia Resources Holdings Golden Pogada LLC Mongolia Coal and 155.4 Limited Consumable Fuels 01/12/10 Fidelity Investments; Sequoia Coastal Projects India Construction and 343.0 Capital India; Deutsche Bank Private Limited Engineering 01/09/10 CST Mining Group Limited Chariot Resources Ltd. Canada Diversified Metals 218.2 and Mining 01/09/10 Pearl Oriental Innovation Limited Utah Gas and Oil Field United States Oil and Gas 381.0 Exploration and 01/06/10 Prudential Corporation Asia Prudential Life Assurance Singapore Life and Health 311.2 Production 12/30/09 Hon Hai Precision Industry Co. Ever Rise Holdings Limited Western Samoa HInosuraldingnc Coe mpany 141.5 Ltd. 12/28/09 Tongling Nonferrous Metals Corriente Resources Inc. Canada Diversified Metals 550.2 Group Co Ltd. and Mining 12/23/09 Zhejiang Geely Holding (Group) Volvo Car Corporation Sweden Automobile 1,800.0 Co., Ltd. Manufacturers 12/18/09 Thayer Lodging Group; Shanghai Jin Interstate Hotels & Resorts United States Hotels, Resorts 299.6 Jiang International Hotels (Group) Inc. and Cruise Lines Company Limited 12/18/09 Jackin International Copper Century Corp. United States Diversified Metals 107.3 Holdings and Mining 12/18/09 Atlas Copco North America LLC; Quincy Compressor, Inc. United States Industrial Machinery 190.0 Atlas Copco (China) Investment Co., 12/17/09 LtChind. a Steel Corp. Nacional Minerios S.A. Brazil Steel 9,425.1 12/17/09 Esprit Holdings Ltd. Glory Raise Limited British Virgin Distributors 500.3 Islands 12/04/09 Konmate Investments Limited GMG Media Group Limited British Virgin Investment Holding 161.1 Islands Company 12/01/09 Global Green Tech Group Westralian Resources Pty Australia Gold 165.6 11/30/09 Yueshou Environmental Holdings Fullteam Holdings Limited British Virgin Investment Holding 322.6 Limited Islands Company 11/17/09 Honbridge Holdings Limited Sul Americana de Metais Brazil Steel 390.0 11/17/09 Kwong Hing International PT Rimau Indonesia Indonesia Coal and 180.6 Holdings Bermuda Ltd. Consumable Fuels 11/16/09 China International Marine CIMC Raffles Offshore Singapore Oil and Gas 956.6 1.2x 11.0x Containers (Hong Kong) (Singapore) Ltd. Equipment and 11/12/09 Ming Hing Waterworks Central Asia Singapore Investment Holding 284.3 Services Holdings Limited Mineral Company 11/07/09 Honbridge Holdings Limited Xianglan Do Brazil Diversified Metals 177.9 Exploration Pte. Brasil and Mining 11/07/09 BreadTalk Group Ltd.; Beijing Katong Mall in Singapore Singapore Real Estate Operating 177.7 Ltd. Mineracao Hualian Group Investment Companies Ltda. 11/02/09 HShanoldixnig M Co.eij in Energy Group Co., Rocklands Richfield Limited Australia Coal and 152.6 0.6 Ltd. Consumable Fuels 10/30/09 Aptus Holdings Ltd. Casdon Management British Virgin Real Estate Operating 139.8 Limited Islands Companies 10/29/09 Baring Private Equity Asia Hsu Fu Chi International Cayman Packaged Foods 677.6 1.9 9.5 Ltd. Islands and Meats 10/27/09 Mandarin Capital Management I.M.A. Industria Macchine Italy Industrial Machinery 1,003.4 1.3 8.6 SA; China Development Automatiche S.p.A. 10/22/09 FChininanacia Soln Co.ang ol Land Pte. Ltd Property at 21 Angullia Singapore Real Estate Operating 203.0 Park Companies 10/21/09 HOPU Jinghua (Beijing) PT Lippo Karawaci Tbk Indonesia Real Estate 1,114.6 3.9 16.0 Investment Consultancy Co. Development 10/14/09 Solartech International Holdings Ltd. Ikh Shijir Erdene LLC Mongolia Oil and Gas 193.6 Exploration and 09/30/09 Far Eastern New Century Bermuda Far Eastern Bermuda Commodity 223.3 Production Corporation Polychem Industries Ltd. Chemicals 09/29/09 Industrial & Commercial Bank ACL BANK Public Thailand Diversified Bank 544.2 of China Company Limited 09/22/09 Fushan International Energy Mount Gibson Iron Ltd. Australia Steel 1,024.9 3.5 5.0 Group Ltd.

44

Enterprise Value

Implied Enterprise Date Target Value ($mil) Ann09o/21unced/09 YFY PackagiAcquinrorg, Inc. YFY MauTargetritius Corp. MauNatritoiusnali ty HoTargldinget CoInmpanydustry Group $401.6 Revenue EBITDA 09 /08/09 China Uranium Energy Metals Australia Coal and Consumable 103.1 Development Fuels Limited

09/08/09 ComNewp Envianyro nmental Smartview British Virgin Electric Utilities 169.2 Holdings Limited Holdings Ltd. Islands Energy Investment 09/05/09 Pacific Century Group PineBridge Global United States Asset Management and 677.0 Holdings Limited Investments LLC Custody Banks 08/31/09 China National Athabasca Oil Sands Canada Oil and Gas Exploration 2,877.7 Corp. Mackay River & and Production Petroleum SandCorp.,s Project Dover Oil 08/21/09 Birmingham Birmingham City plc United Movies and 141.9 2.6x Holdings Limited Kingdom International Entertainment 08/13/09 Yanzhou Coal Mining Felix Resources Ltd. Australia Coal and Consumable 2,569.4 4.0 8.0x

08/12/09 Co.Sino Lchtdem. Corp Emerald Energy plc United OFuile anls d Gas Exploration 753.0 7.6 10.6 Kingdom and Production 08/07/09 Jilin Jien Nickel Canadian Royalties Canada Diversified Metals and 242.0 Ltd. Mining Industry Co, Inc. 08/06/09 China Investment Goodman Group Australia Industrial REITs 421.1

08/05/09 CMeiyaorp. Power Company Hyundai Heavy South Korea Electric Utilities 102.0 Limited Oil-Fired Combined PIndowustrier Plantes, Cycle 07/29/09 EPI Mines Investment Have Result Argentina Oil and Gas Exploration 873.4 Limited and Production Ltd. Investments 07/24/09 Asia Resources 1,195 Hectares Iron Indonesia Steel 135.5 Ltd. Deposit in Propinsi Holdings Timur, Indonesia Jawa 07/14/09 Fullbloom Investment KazMunaiGas Kazakhstan Oil and Gas Exploration 5,135.2 1.4 3.0 Corporation and Production JSC and Production Exploration 07/07/09 Emperor International Luck United Holdings Macau Hotels, Resorts and 152.4 Holdings Ltd. Limited Cruise Lines 06/24/09 China Petrochemical Addax Petroleum Switzerland Oil & Gas-Exploration & 8,990.9 1.8 2.6 Development Corp. Corp. 06/22/09 Green Global Golden Pogada LLC Mongolia Coal and Consumable 259.8 Fuels Resources Ltd. (90%) 06/22/09 AU Optronics Corp M Setek Co Ltd (51%) Japan Computers & 125.0 Peripherals Electronics- 06/01/09 Prime View E Ink Corp United States Computers & 445.8 Services International Co Electronics- 05/24/09 PetroChina Co Ltd Singapore Petroleum Singapore Oil & Gas- 1,016.4 0.3 6.9 Ltd Refinery/Marketing Co 05/06/09 Hainan Airlines Group Allco Finance Group Australia Airlines 2,986.0 Ltd.; Bravia Capital Limited, Aviation Co

04/01/09 PaChinrtnaers Minm etals Corp BMinusininegss Ass ets Australia Mining-General 1,354.0 Golden Grove, Ro(Sespeoben,r y, Avebury, RCeivnetru, rHigy, h Lake, Izok LDugaldake an d other and development exploration

02/27/09 Noble Group Ltd aGslsoeucts)e ster Coal Australia Mining-General 302.9 1.9 4.8

12/18/08 Wuhan Iron & Steel (Min66.1%)ing Ass ets Australia Mining-General 129.3 Corp and South Central Group P(Seoninsuthuernla iron ore dEyerepo sits) 10/31/08 Rontex International Langfeld Enterprises Russian Holding Companies- 510.0 Holdings Ltd (90%) Federation Conglomerates Ltd 09/25/08 China Petrochemical Tanganyika Oil Co Ltd Canada Oil & Gas-Exploration & 1,988.6 Development Corp 09/10/08 Enric Energy Full Medal Ltd Netherlands Metal & Steel-Products 199.8

08/19/08 ZEuqeulliipgm Groentu p NA Inc Pharmacies (Symbion Australia Retail-Pharmacies 439.9 Pharmacy business) 08/14/08 China Shenhua Energy Mining Assets (Coal Australia Mining-General 260.7 Ltd exploration license in Co Watermark area near Gunnedah) 08/13/08 Li & Fung Ltd Van Zeeland Inc United States Textile-Apparel 495.0 of designing and Manufacturing an(Busind maessrk eting of handbimportingags) women's

45

Enterprise Value

Implied Enterprise Date Target Value ($mil) Ann07o/22unced/08 New SmaAcqrtui Enrorer gy Canada TargetCan-El ite CanadaNatio nality OiTargl & Geast I-nExdusplortryati on $320.6 Revenue EBITDA Ltd Ltd Development Group Energy & Group 07/10/08 Sinochem International GMG Global Ltd (51%) Singapore Holding Companies- 257.9 2.7x 9.8x Corp Conglomerates 07/09/08 Bestway International Mengya Minerals Co Mongolia Mining-General 164.1 Holdings Ltd Ltd 07/07/08 China National Awilco Offshore ASA Norway Oil & Gas-Field 4,319.7 Corp & Services Offshore Oil Equipment 06/24/08 Dore Holdings Ltd East & West Macao Leisure & Recreation- 229.9 Kong) Inc Gaming (Hong International 06/06/08 Hembly International Sergio Tacchini SpA Italy Retail-Apparel/Shoes 149.9 05/27/08 Shun Tak Holdings Ltd Many Gain Macao Finance-Miscellaneous 403.1 (Development right lIenvgaelst tmeitlents to, the sitof,e a innd Na m Van, vacant

04/28/08 Cheung Kong MWeacau)lling ton Electricity New Zealand Utility & Energy- 613.7 Holdings Ltd (50% / Distribution Network Diversified HInforngkastoructung Erelect ric Holdings Ltd 50%);

04/28/08 HJinodldinuicgshe ng Yukon Zinc Corp Canada Mining-General 100.5 Ltd; Northwest (Bid No 2) InvMoelystmbdeenunt mCo Co Ltd Nonferrous 04/03/08 Changsha Zoomlion Compagnia Italiana Italy Construction/Bldg 798.1 Industry Science & Acciaio SpA - CIFA Cement/Concrete TeHeavychno logy Forme Prods- Ltd; Mandarin Capital ManagDevelopmement SA;Co Goldman Sachs; Hony Capital Ltd 03/14/08 China Huaneng Group Tuas Power Ltd Singapore Utility & Energy- 3,205.5 1.9 13.0 Power Electric 03/11/08 Mindray Medical Datascope Corp United States Healthcare- 209.0 International Ltd monitoring business) (patient Instruments 03/07/08 China Petrochemical Oil & Gas Assets Australia Oil & Gas-Diversified 560.3 AC/L6 and AC/RL1 Corp an(AC/Pd Talb22,ot oil fields)) (Puffin 02/26/08 China Metallurgical Mining Assets (Cape Australia Mining-General 369.7 Corp Lambert Iron Ore Group

02/19/08 Nubrands Group PrSMoIj eLLCct) Mongolia Mining-General 106.0

02/19/08 HNolubdingrands s Group Sinotum Mongolia LLC Mongolia Mining-General 502.3

02/04/08 HSinolodingchems Corp SOCO Yemen Pty Ltd Australia Oil & Gas-Exploration 465.0 Development & 01/08/08 Standard Chartered Malayan Banking Bhd Malaysia Finance-Commercial & 426.5 (Hong Kong); Maybank (M$1.4bn Savings Banks ORBankIX Leasing Malaysia N- on-performing worth 01/06/08 BJinhdchua n Group Ltd lToylaerns.) Re sources Inc Canada Mining-General 213.4 01/04/08 WuXi PharmaTech AppTec Laboratory United States Healthcare- 203.1 2.9 (Cayman) Services Biomed/Genetics

Source: Dealogic and Capital IQ.

46

Appendix 4 Growth of WuXi's R&D services

2007

2008

2010

2011

47

Appendix 5 Technology comparison between WuXi and AppTec

48