The Role of Firm Innovation on M&A Behavior and Outcomes

Lars Tonn & Philipp Swegmark

Student thesis: Master thesis


Our thesis is a multi-industry empirical analysis on the relationship between innovation and acquisition activity. As R&D is a fundamental for economic growth, research has explored it under several perspectives, typically using patents or R&D intensity as a proxy for firm-specific innovation. Two empirical observations were made: 1) increased R&D spending has generated less returns over time and 2) M&A activity has increased, both in terms of volume and number of annual transactions. Drawing on these two trends, our paper uses the output elasticity of R&D (Research Quotient) as a proxy for innovation to examine two aspects: the influence of innovation on the motivation to pursue acquisitions and the ex-post M&A impact on innovation. Using a sample of 5.123 firms from 1981- 2015, we find a significant positive relationship between R&D productivity and a firm’s propensity to acquire. This result suggests that these two strategies are not substitutes, but rather complements. Ranking firms according to their R&D productivity, we find innovative firms spend ~35 million USD more on acquisitions than less innovative firms. Using acquisition count, this corresponds to an average difference of ~0.08 acquisitions per annum. Second, we find that these acquisitions are geared towards smaller transactions, instead of larger transformational ones, supporting the systems vs. components theory of innovation. Finally, we identified a negative impact of M&A on innovation over a three-year post-acquisition timeframe, resulting in an accumulated drop in the output elasticity of R&D of 19.6%. This indicates that the acquirer does not realize any synergies to innovation, thereby raising the question on why firms engage in innovation-motivated acquisitions to begin with.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2021
Number of pages96
SupervisorsMax von Zedtwitz