Can Mergers and Acquisitions Internalize Positive Externalities in Funding Innovation?

43 Pages Posted: 5 Mar 2020

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

Ang Li

University of Kentucky

Mark H. Liu

University of Kentucky - Gatton College of Business and Economics

Date Written: February 4, 2020

Abstract

Fundamental innovation usually involves huge upfront costs, but the benefits are spread across various sectors of the economy. Given the large costs and limited appropriability of the benefits associated with fundamental innovations, individual firms underinvest in these innovations relative to the socially optimal level. We find that mergers and acquisitions (M&As) can internalize the positive externalities by merging firms from both the user industries and the producer industries of an innovation. Using the US patent citation dataset, we define the user and producer relationship between each pair of industries and between each pair of industry and technological class. We then show that after a merger between an innovation user and an innovation producer, the quantity of innovation output increases, and the increase is driven by targeted technological classes.

Keywords: patents, innovation, mergers and acquisitions, synergy, technological class

JEL Classification: G34, O31

Suggested Citation

Chemmanur, Thomas J. and Li, Ang and Liu, Mark H., Can Mergers and Acquisitions Internalize Positive Externalities in Funding Innovation? (February 4, 2020). Available at SSRN: https://ssrn.com/abstract=3532157 or http://dx.doi.org/10.2139/ssrn.3532157

Thomas J. Chemmanur

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Ang Li (Contact Author)

University of Kentucky ( email )

Lexington, KY 40506
United States

Mark H. Liu

University of Kentucky - Gatton College of Business and Economics ( email )

550 South Limestone
Lexington, KY 40506
United States
859-257-9842 (Phone)
859-257-9688 (Fax)

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