COE-RES Discussion Paper Series Center of Excellence Project The Normative Evaluation and Social Choice of Contemporary Economic Systems Graduate School of Economics and Institute of Economic Research Hitotsubashi University COE/RES Discussion Paper Series, No.238 February 2008 The Impact and Nature of Cross-Border Mergers and Acquisitions in the Rise of a Small Open European Economy: The Case of Denmark, 1970-2005 Martin Jes Iversen （Copenhagen Business School） Naka 2-1, Kunitachi, Tokyo 186-8603, Japan Phone: +81-42-580-9076 Fax: +81-42-580-9102 URL: http://www.econ.hit-u.ac.jp/~coe-res/index.htm E-mail: [email protected] The Impact and Nature of Cross-Border Mergers and Acquisitions in the Rise of a Small Open European Economy: The Case of Denmark, 1970-2005 (work in progress – please do not quote from this version) International Conference on Business History 2008 Tokyo 26 - 27 January 2008 Dr. Martin Jes Iversen, Associate Professor Centre for Business History Copenhagen Business School Denmark 1 1. Introduction April 13, 1988 the European Commission published a remarkable report entitled “Europe 1992 – The Overall Challenge”.1 The report, known as the Ceccini-Report, was a survey of the economic costs of disintegrated markets and it provided “the hard evidence … that the completion of the internal market will give a permanent boost to the prosperity of the people of Europe.” 2 Retrospectively the completion of the Common Market in 1993 indeed led to increased cross-border activities in terms of trans-European trade, mergers and acquisition and consequently strengthened competition and enhanced economies of scale within several sectors such as telecommunication, beverages and banking.3 Still consequences of the integrated markets differed and the mentioned “permanent boost to prosperity” was unevenly distributed between companies, industrial sectors and even between European nations. Remarkably the GDP per capita of small European economies such as Austria, Denmark, Finland, Ireland, Netherlands, Norway, Sweden and Switzerland outperformed the development of larger economies such as France, Germany and Italy congruently with the economic integration process.4 Table 1. Annual average Rates of Growth of Real GDP 1913-50 1950-73 1973-98 1913-98 Small countries 1.47 3.57 2.08 2.10 Large countries 0.81 4.12 1.70 1.98 Small countries=Austria, Belgium, Denmark, Finland, The Netherlands, Norway, Sweden, Switzerland Large countries=Germany, France, UK, Italy, Spain, USA Source: Mokyr, p. 9 (2006) According to the American economic historian Joel Mokyr these “Small Open European Economies” (SOEEs) had at least three patterns in common.5 Firstly they were marked by an efficient institutional setting. That is specifically well-functioning public institutions, long tradition for democratic regimes, low levels of corruption and a welfare oriented policy including high levels of education. Secondly they were traditionally open economies – politically democratic and economically always with emphasise on the liberal market principles often with ratio of foreign trade to GDP well above large nations. The final important characteristic of the SOEEs was the capability to define – and explore – niches in advanced technology. Through extensive cooperation between the public and private sectors the small economies established specialised technological leaderships which proved essential to the 1 The European Commission, Europe 1992 – the Overall Challenge, (Brussels, 1988). 2 Ibid., p. 1. 3 Adriaan Dierx, Fabienne Ilzkovitz and Khalid Sekkat, eds., European Integration and the Functioning of Product Markets, (Cheltenham, U.K., 2004) 4 http://www.conference-board.org/economics/downloads/TED07II.xls 5 Joel Mokyr, “Successful Small Open economies and the Importance of Good Institutions” in Jari Ojala, Jari Eloranta and Jukka Jalava (ed.), The Road to Prosperity, Helsinki, 2006. 2 exploitation of economic integration – the Swiss and Dutch examples of respectively high quality food and consumer electronics are well known. The point of departure of the paper is that the Danish economy can be regarded an almost archetypical SOEE and that the possible importance of economic openness and corporate specialization indicates that cross-border mergers and acquisitions (M&As) played a role for the rise of the Danish economy during the post-war decades of economic integration. The paper is thus focused on the changing importance and patterns of cross-border M&As for the Danish corporations, 1970-2007: which impact did the agents of these transactions have for the development of the Danish economy and how and why did the patterns of cross-border M&As change over time? The hypothesis is that the formula for the post-war economic success of SOEEs consisted of efficient institutions combined with “the corporate factor” defined as a long tradition of private economic openness and a corporate capability to define global niches. In the Introduction to Scale and Scope Alfred Chandler firmly stated that “the modern enterprise played the most fundamental role in the transformation of Western economies. … that transformation, in turn, brought the most rapid economic growth in the history of mankind“.6 Similarly this paper suggests that the multinational corporations constituted the heart of the dramatic rise of the SOEEs. These corporations were the economic agents able to exploit efficient national and international institutions – that is the high levels of education, new technologies, low corruption, public-private partnerships and in particular the new international – often European - political institutions of economic integration after 1957. The paper is divided in three sections which mirror three different analytical levels. In the initial contextual section I will discuss the existing explanations of the rise of the Danish economy and suggest that the influential “variety of capitalism” approach should be supplemented by a stronger emphasis on international institutions and cross-border corporations. 7 In the second comparative section the growth patterns of these important corporations are in focus. The quantitative analysis unveils the changing patterns of cross-border M&As in the decades of increasing openness and growth of the Danish economy following 1970. In the analytical section the detailed M&A experiences of one of these cross-border corporations will be qualitatively analysed. In the final conclusion these three levels will be combined and the question - how and why the patterns of cross- border M&As changed over time and which impact these transactions have had for the development of the Danish economy – will thus be answered. 6 Alfred D. Chandler, Jr., Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge, Mass., 1990), 3 7 This tradition is most notably represented by Peter Hall and David Soskice, Varieties of Capitalism, (Oxford University Press, 2001) 3 2. Different interpretations on the background for Denmark as an SOEE In the June 2007 issue of Business History Review Geoffrey Jones stated four fundamental principles of Alfred Chandlers research.8 One of them maintained that business historians should ask questions to which people want answers – in other words ask big questions. One of the most imperative questions in recent Danish history is how and why the economy developed so strongly from a severe crisis in the early 1980s towards a general prosperity 25 years later. By 2006 the economy was marked by a notable combination of increasing employment, still raising GDP per capita, low inflation and a strong balance of trade. All these major economic indicators had been either negative or stagnating in the early 1980s. Table 2. Major Danish Economic Indicators, 1982 & 2006 1982 2006 Inflation 10.1% 1,9% Balance of payments (DKK billion) -10.4 +44 Unemployment 10% 3,4% GDP per capita (2006$) 22.738 36.292 Source: Danish Statistics, Yearbook, (1984 and 2007) The most influential academic sample of explanations on the Danish upswing has been provided by the tradition of political economy. In October 2004 the Danish “Innovation Council” – appointed by the government and chaired by Jørgen Mads Clausen, owner and manager of the large industrial firm Danfoss – published a report entitled “The Danish Strategy – the Danish Potential in a Global Knowledge Society”.9 The fourth chapter consisted of an interesting historically founded explanation of the Danish wealth: The council suggested that the Danish wealth was based upon “social innovations”. Basically the Danes had had a long tradition for focus on cooperation rather than competition. When the society was met by external challenges then movements of social innovations had been able to response effectively. The French revolution (and demands for political reforms) had been met by increased education through the rural folk high schools while later the cheap grain from the industrialized US of the late 19th century had been met by the co-operative movement which changed Danish agriculture from a vegetable towards animalistic production. The important point was obviously that this story provided an opportunity for an efficient answer to the new challenges of China as an economic power and globalization – namely a specific Danish “innovation movement” equivalent to the former “cooperative movement” and “high school movement”. 8 Geoffrey Jones, “In Memoriam Alfred D. Chandler Jr., 1918-2007,” Business History Review 81 (Summer 2007): 326-27 9 Innovationsrådet, Den Danske Strategi