Effects of Acquisitions on Product and Process Innovation and R&D Performance

Abstract

Using a game theoretical model on firms' simultaneous investments in product and process innovation, we deduct and empirically test hypotheses on the optimal R&D portfolio, investment, performance, and dynamic efficiency of R&D for acquisitions and in independently competing firms. We use Community Innovation Survey data on Italian manufacturing firms. Theoretical and empirical results show that firms involved in acquisitions invest in different R&D portfolios and invest at least as much in aggregate R&D as independent firms. The empirical results do not support our hypothesis on dynamic efficiency since acquisitions lead to inferior R&D performance.

The effect of mergers on the incentive to invest in cost-reducing innovations

“…We relax this assumption to allow for organizational problems of the merging R&D departments. Cefis et al (2005) show that firms involved in acquisitions have a lower efficiency in R&D than independently competing firms. They attribute this efficiency loss to post merger integration problems.…”

“…Cefis et al (2005) study the effect of mergers on the optimal mix of investments in product and process innovations. They find empirical support for their hypothesis that firms involved in mergers invest more in product than in process innovations.…”