Make, Buy, or Ally? Choice of and Payoff to Alternate Strategies for Innovations

Abstract

Firms constantly grapple with the question of whether to make, buy, or ally for innovations. The literature has not analyzed the choice of and payoff to these alternate routes to innovation for the same firm. To address this issue, the authors collect, code, and analyze the choice of and payoff to 3522 announcements of make, buy, and ally innovation for 192 firms across 108 industries over 5 years.

The authors find that make and ally generate positive and higher payoff than buy, which generates a negative payoff. Nevertheless, firms continue to buy for two reasons. First, firms seem to have no memory for the payoff to buy even though they have a memory for the payoff to make. Second, firms tend to buy when they lack commercializations, even though the strategy seems not to pay off. These results suggest that firms see buys as a quick fix for what may be a deep strategic problem. Nevertheless, the negative returns to buy can be mitigated if the acquirer is experienced and the target is related and offers high customer benefit. The authors offer explanations for and implications of the results.

Keywords: Innovation, Announcements, Make, Buy, Ally, Payoff, Abnormal Returns, Content Analysis, Event Study

JEL Classification: C33, M31, M10