Very interesting topic. I am not sure if I would expect such significant loss for local suppliers?... finally, if foreign firm is interested in taking over the SOE (privatise it) there must be some reason behind – recognised brand, know-how, market access, other value etc. presumably also certain local embeddedness - close ties with local suppliers, networks of cooperating partners, etc. so they do not have to be inefficient or taken for granted as without any value, though, the new foreign owner might obviously induce further improvement and increase the productivity, upgrade the system, etc.  Besides if SOE represents a strategic sector or utility it is very likely that this (limited/restricted foreign acquisition) privatisation is strictly regulated and excludes total replacing of local suppliers by foreign firms. Some crowding out might happen, but I would not expect a complete substitution. I am not sure if this can be helpful but these are just my consideration.

Dear Marta,

Many thanks for your answer. I do agree it should work like you mentioned. But I also know from my business practice that quite often local suppliers are either overpaid for the existing services or paid for non-existing services. Let’s call this phenomenon by its real name: CORRUPTION. Even though the reasons may be various. And, realistically, when these corruptible links are cut by the foreign owners it means a (at least partially) loss of business for the local suppliers. Do you agree?

Dear Zoran,

Marta has raised a good point. In fact, from the description you gave to us, this case is rather a cross-border acquisition, and not brownfield FDI. The latter would mean that the acquiring firm keeps only the building and some other physical assets, discharges most of the workers, and starts a new product line.

We also have to take into consideration your point of overpaid, inefficient suppliers. We can foresee that the new owner will impose strict quality and delivery standards and will negotiate more realistic prices. In this process, some local suppliers will be able to adjust, but many others will be replaced by other local, and sometimes foreign, suppliers. However, you can not assume that this is bad for national development, unlike the case of replacing efficient suppliers due to other considerations such as uniformity of supply chains. 

Dear Kalman,

You providede a VERY realistic answer both regarding the change in suppliers and the point that "the acquiring firm keeps only the building and some other physical assets, discharges most of the workers, and starts a new product line". I have some evidence from the recent Russian acquisitions that the aquiring firm discharges ALL of the workers, keeping only the building and auxiliary infrastructure (electricity sypply, rail connection etc.).

Igor Gurkov

Dear Kalman,

Many thanks for your answer. I’ll take into consideration your distinction between cross-border acquisition and Brownfield FDI.

I do agree that the switch from »bad« to »better« suppliers is OK for the national economy. Even in the case when the local suppliers are replaced by the foreigners; after all, a profit-making company should be in the national interest, both as a potential employer and taxpayer. But, considering yours and Marta’s answer together, I clearly see that my initial question was not precise enough. To explain: it’s exactly the »bad« suppliers (to be replaced) who interest me. Who are they (their industries, repetitive patterns of their loss, any quantitative research…?).

To illustrate with the real example, which I’ve read in the press several months ago. A MNC in a drink industry bought a local company from the same industry, owned indirectly by the state. Just several months after info has been published that a local, state-owned insurance company-market leader, lost approximately 2/3 of their business they had with the overtaken company. This amount of insurance has not been replaced by any other insurance company. So, the state-owned insurance company lost a substantial amount of money which has been before paid to them (apparently, not really necessary) by the (previously) state-owned client.

Macroeconomic point of view: money lost for the insurance company, but gain in the costs for the overtaken company-no effect. Microeconomic point of view of the insurance company, still state-owned: the loss of business. Now, add the power of influence which this insurance company has in (the state-owned) media: would they support foreign M&A? And after a couple of years and maybe only 5-6 cases like the one mentioned (but well published): would public opinion (still) support FDI?

Zoran, thank you. This explanation and case study make things much more clear – so you assume right from the start the local supplier is rather inefficient/overpaid etc. and intertwined in some cosy “another-SOEs-ties” and that new MNC and its M&A give a chance to somehow heal the situation – to end up with these corrupted relations costly for the taxpayers. The question is with whom “the loser” will be replaced? – might happen that cosy unjustified relations, though, in another setting would be simply replicated, alternatively indeed a new better bid might be chosen. So the first, the easiest thing which comes to mind is just to check the performance, goal, governance, etc. of the new supplier; if it is indeed better? This just the brief remark. And for sure, if the state supporting media would extensively cover such cases, the “hospitality” towards MNEs and FDIs might drop. And the final, general remark – the cursory research on SOE suggest, in my opinion, that the attitude towards SOEs is particularly critical and loaded with suspicion in CEE countries and transformation economies with a history of inefficient public sector and dominant abusive position of state monopolies; the approach towards SOEs seems, though, much more positive in western Europe where national champions (very often state-controlled, or-owned or -invested) enjoy much better image are are credited with more deeds.

Indeed, your topic is very interesting and as it seems it offers many avenues for more specific research along various research proposals / hypotheses.

good luck!