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Effect of cross-border mergers and acquisitions on technological innovations

1. Introduction

1.1. Background

A desire to obtain know how or new technological innovations is often suggested to be one of the main reasons behind merger activities (Jovanovic and Rousseau, 2002). Similar to shocks that shake and heal the economic environment, technological shocks are able to reallocate market factors optimally, and mergers and acquisitions (M&As) act as an effective instrument to settle the new equilibrium (Hall, 1988; Jovanovic and Rousseau, 2002). In such reorganisation periods, companies undertake M&As to attain growth, to get the economies of scale, to mitigate industry competition and implement internal organisational rebuilding. The significance of M&As as a means for fostering and reorganising research and development (R&D) activities was underlined by Cassiman et al. (2005).

M&As can act as a productive channel for technological innovations, or for reinforcing technological core competencies. An acquisition deal may allow the firm to attain the research vanguard in their sphere of competence (Kamien, 1992). Moreover, overlapping research spheres can compel the owners of patents to intensify research efforts (O’Donoghue et al., 1998) and M&As can be undertaken to get access to the patent portfolio of a rival company. Thus, companies can consolidate their technological competencies and reinforce their market power in particular technological spheres via M&As.

Conversely, companies can deem M&As as a means to capture new markets since diversification mitigates risk (Frey and Hussinger, 2006). In addition to this, a certain level of technological diversification is needed to keep pace with fast technological innovations in different spheres (Cantwell et al., 2004).

Technological knowledge in auxiliary spheres on top of key competencies allows companies to implement and integrate technologies developed by rivals. Expertise in non-core technologies enables companies to comprehend nascent technological opportunities and promptly switch to perspective innovative trends (Prabhu et al. 2005). Given a growing significance of timing in innovation process and severe technology rivalry, firms are not always able to accumulate own competencies in proper time. Thus, M&As, in overall, appear to be an effective instrument for both, technological reorganisation and a reinforcement of extant technological competencies. Moreover, M&As allow for optimising the costs of R&D by eliminating duplicate functions.

However, Yoon and Lee (2016) emphasise that empirical evidence on incentives of cross-border mergers connected with R&D motives is rather scarce. Some papers explored the influence of the R&D intensity on the probability of participating in the M&A market in any role (Hall, 1990, Puranam et al., 2006). The common standpoint of these papers seems to be that R&D is a comparatively weak indicator of being a target of acquisition (Hall, 1988). Several papers, both theoretical and empirical, underlined the significance of characteristics of merged companies and their interaction for the success of post-merger innovations (Seth, 1990; Capron, 1999; Banal-Estanol and Seldeslachts, 2005).

Cassiman et al. (2005) explored 31 merger cases regarding the changes in R&D performance in post-merger period to indicate that merger partners with substitutive and complementary technologies exhibited different post-acquisition R&D activities. In particular, merger for companies with complementary technologies tended to stimulate R&D activities while M&A deals for the case of firms with substitutive technologies hindered R&D efforts after the merger. Hussinger (2005) examined the role of technological affinity between the merger partners and concluded that M&As were likely to be preferred by firms from the same industry and with similar technological profile. In this case, M&As were shown to enhance core competencies of the acquirer. Confirming these findings, Stiebale (2013) revealed that after a cross-border acquisition, German companies tender to intensify domestic R&D activities and increase spending in this sphere. In addition, Zhang et al. (2018) made several significant findings on the topic. First, the authors revealed for a sample of Chinese firms, that cross-border M&A deals substantially enhanced the acquirers’ innovation performance. Second, industrial policies were shown to negatively influence the association between cross-border M&As and the acquirers’ R&D activities. Third, the mediating influence of intellectual property protection was exhibited to be unstable. Fourth, the impact of state-owned equity on the linkage between cross-border acquisitions and the acquirers’ innovation efforts appeared to be negative. Finally, Ojanen et al. (2008) indicated that the key goals of most cross-border acquisitions were to expand the market or product portfolio, which were not necessarily related to R&D activities.

1.2. Motivation of Research

Given comparatively scarce empirical evidence on the topic and diversity of reported results, the motivation of the research is the following. It is important not only to estimate the relationship between M&A activities and further innovation performance in cross-border acquisitions, but also to clarify the specific effects and channels through which M&As influence R&D efforts. It is also interesting to understand what particular characteristics of the acquiring companies stimulate post-merger R&D performance. The outcomes of this analysis will be interesting for companies operating on the global scale and firms that are planning to participate in M&A deals for achieving better results.

1.3. Aim and Objectives

The main purpose of the study is to assess the relationship between cross-border M&A activities and further technological innovations of consolidated companies. To attain this aim, the following objectives are pursued:

– To identify the main channels through which M&As affect post-merger R&D activities;

– To estimate the relationship between M&A deals and further acquirers’ performance in the sphere of technological innovations;

– To determine which characteristics of the acquiring companies have a significant impact on the success of R&A efforts in the post-merger period;

– To make recommendations on how to stimulate technological innovations in merged companies.

1.4. Outline

The structure of the thesis is the following. Literature review covers the main theories on which the research is based and reports the most significant findings on the relationship between cross-border M&A activities and R&D performance. The methodology chapter reveals how the research has been conducted. The chapter on results and findings outlines what outcomes of the research have been obtained and how they are interpreted. Finally, conclusions chapter summarises the thesis, outlines limitations and makes recommendations to companies and future researchers.

References

Banal-Estanol, A. and Seldeslachts, S. (2005) Merger Failures, WZB Discussion Paper No. SPII2005-09, Berlin.

Cantwell, J., A. Gambardella and O. Granstrand (2004) The Economics and Management of Technological Diversification, London: Routledge.

Capron, L. (1999) The Long-Term Performance of Horizontal Acquisitions, Strategic Management Journal, 20, pp. 987–1018.

Cassiman, B., M. Colombo, P. Garrone and R. Veugelers (2005) The Impact of M&A on the R&D Process: An Empirical Analysis of the Role of Technological and Market Relatedness, Research Policy, 34(2), pp. 195-220.

Frey, R. and Hussinger, K. (2006) The Role of Technology in M&As: A Firm Level Comparison of Cross-Border and Domestic Deals, Centre for European Economic Research, Discussion Paper No. 06-069

Hall, B.H. (1988). The Effect of Takeover Activity on Corporate Research and Development. In: Auerbach, A. (ed.). The Economic Effects of Takeover Activity, Chicago: University of Chicago Press.

Hussinger, K. (2005) Did Concentration on Core Competencies Drive Merger and Acquisition Activities in the 1990s? ZEW Discussion Paper No. 5-41.

Jovanovic, B. and P.L. Rousseau (2002). The Q-Theory of Mergers. AEA Papers and Proceedings 92(2), pp. 198-204.

Kamien, M. (1992) Patent licensing, In Handbook of Game Theory (Eds) R. Aumann and S. Hart, North Holland, Amsterdam, pp. 331–354.

O’Donoghue, T., S. Scotchmer, and J.-F. Thisse (1998) Patent breadth, patent life and the pace of technological progress, Journal of Economics and Management Strategy, 7, pp. 1–32.

Ojanen, V., Salmi, P. and Torkkeli, M. (2008) Cross-border acquisitions in technical engineering sector: Motives, trends and effects in Finnish consultancies, International Journal of Management Science and Engineering Management, 3 (2), pp. 151-160.

Prabhu, J. C., Chandy, R.K. and Ellis, M. E. (2005) The impact of acquisitions on innovation: Poison pill, placebo, or tonic? Journal of Marketing, 69, pp. 114–130.

Puranam, P., Singh, H. and Zollo, M. (2006) Organising for innovation: Managing the coordination-autonomy dilemma in technology acquisitions, Academic Management Journal, 49, pp. 263–280.

Seth, A. (1990) Sources of Value Creation in Acquisition: An Empirical Investigation, Strategic Management Journal, 11(6), pp. 431-446.

Stiebale, J. (2013) The impact of cross-border mergers and acquisitions on the acquirers’ R&D Firm-level evidence, International Journal of Industrial Organization, 31(4), pp. 307-321.

Yoon, H. and Lee, J. J. (2016) Technology-acquiring cross-border M&As by emerging market firms: role of bilateral trade openness, Technology Analysis and Strategic Management, 28 (3), pp. 251-265.

Zhang, Y., Wu, X., Zhang, H. and Lyu, C. (2018) Cross-Border M&A and the Acquirers’ Innovation Performance: An Empirical Study in China, Sustainability, 10, pp. 1796-1820.

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