india going global.indd - The IIPM Think Tank

MERGERS & ACQUISITIONS
capital and labour on the other is relatively small indicating
some degree of complementarity. Table-6 provides
the estimates of own and cross price elasticities.
Table 7 summarises the estimates of own and cross
price elasticities of conditional input demands. All price
Table 5
Test of Restrictions Using Pindyck’s Coefficient
Degrees of
Freedom
Total
Sample
elasticities are negative, with all input demands except for
profit being highly price elastic. The cross price elasticities
contain much of the same information contained
in the elasticities of substitution and indicate substitutability
among all inputs. Increases in cost of materials
induce increased profit but very slight response in labour
and capital utilization. Profit use also responds relatively
highly for increases in wages and capital costs. Increases
in capital costs cause a modest increase in labour use.
Overall, Tables 5 and 6 provide additional assurance that
our representation of the technology is reasonable and
methodology adopted in this study is appropriate.
Economies of scale and technological innovations:
Finally, let us examine the results relating to economies
of scale as well as technological change as a result of M
& A. Table 8 presents the results relating to returns to
scale measuring responsiveness of cost due to change in
output after merger holding input prices constant. These
estimates of scale elasticities are measured as per equation
(12). In respect of the total sample it can be seen that the
coefficient of scale elasticity is 1.29. The coefficient is
India Brazil Malaysia Chi Sq
at.001
Homotheticity 4 2.15 4.12 3.11 9.23 18.47
Homogeneity 5 3.11 6.35 6.44 11.23 20.52
Cobb-Douglous 12 12.054 22.36 9.25 25.36 36.12
Table 6
Allen Elasticitiess
Materials Labour Capital Profit
Materials -0.36244
(-3.09333)
Labour 0.03251 -1.0354
(-4.01214) (-6.98)
Capital 0.05761 1.1423 -2.3959
(-4.00946) (-15.32) (-4.702)
Profit 1.0258 1.24.331 1.0549 -9.475
(-4.823) (-11.104) (-7.25) (-14.24)
Figures in parentheses are t values
greater than 1. It implies that an equi-proportional rise
in all the inputs is leading to more than proportional
increase in output. Thus the sample data of the present
study shows that M & A activity results in economies of
scale. Table 8 also shows that coefficient of scale elasticity
is greater than
1 in respect of individual
countries also.
Thus the merged firms
tend to operate on declining
portion of the
average cost function
when costs are plotted
against output. One
can examine how scale
economies change over a period of time. In the context of
M & A, we are interested in knowing whether the output
level at which minimum average cost can be achieved
increases overtime. That is to say, we need to examine
whether M & A activity leads to rise in the range of output
over which average cost can be reduced further due
to economies of scale. To investigate the occurrence of
economies of scale over time, we can define economies
Table 7
Direct Elasticities
Materials Labour Capital Profit
Materials -0.2185 0.02746 0.0025 1.15725
(-3.15) -3.26 -3.21 -5.68
Lobour 0.0658 -0.45879 0.1958 0.3154
(4.25) (-9.254) -5.26 -7.36
Capital 4.69 0.3154 -0.5891 0.1654
(12.825) (6.25) (8.256) (5.25)
Profit 1.1153 0.5421 0.2014 -1.123
(8.25) (7.256) (7.23) (14.25)
Figures in parantheses are t values
or diseconomies of scale in terms of cost elasticity. If
cost elasticity is greater than 1, it implies existence of
scale economies. If it is less than 1 it implies existence
of diseconomies of scale.
The first derivative of cost elasticity (defined as reciprocal
of scale elasticity) with respect to time T (βC/βT) is
given by βQt in equation 8. A βQt less than zero indicate
that the percentage increase in cost due to 1% increase
in output falls over time. This suggests an increase in
the degree of scale economies over time. In other words
a βQt less than zero will indicate that the output level
at which the long run cost is at minimum has increased
over time. That is the size of the firm at which all the
July-October - 2007 Need the Dough
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