Promoting Growth and Innovation Through Acquisition: A Choice Modeling Approach

53 Pages Posted: 24 Jun 2009 Last revised: 21 Jan 2016

See all articles by Yu Yu

Yu Yu

AIG

Vithala R. Rao

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: April 9, 2009

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

Suggested Citation

Yu, Yu and Rao, Vithala R., Promoting Growth and Innovation Through Acquisition: A Choice Modeling Approach (April 9, 2009). Johnson School Research Paper Series No. #31-09, Available at SSRN: https://ssrn.com/abstract=1423943 or http://dx.doi.org/10.2139/ssrn.1423943

Yu Yu (Contact Author)

AIG ( email )

175 Water Street
New York, NY 10038
United States
8625961551 (Phone)

Vithala R. Rao

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

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