Promoting Growth and Innovation Through Acquisition: A Choice Modeling Approach

Abstract

While innovation and growth can be promoted internally through focus on research and development (R&D), many firms find acquisition from external sources to be a fast and attractive alternative. Despite the numerous theories of merger and acquisition in the literature, no empirical study has tackled the problem of target selection in an acquisition. This paper is the first to study the target selection criteria in an empirical setting. It quantifies the elusive concept of synergy by developing novel measures of similarity and complementarily between the acquirer and the target that are more comprehensive than the existing measures in the literature. Using an innovative application of the discrete choice model, the authors find that firms use acquisition to promote growth and innovation in areas of strategic interest. Specifically, acquirers choose targets whose product markets match their own R&D projects, and targets whose R&D projects match their own product markets. These findings provide support for the knowledge based view of the firm and lay the foundation for future research in this area.

Keywords: acquisition, choice modeling, synergy, growth, innovation and pharmaceuticals

JEL Classification: C35, C8, G34, O31