The Innovation Arms Race

69 Pages Posted: 1 Oct 2020

See all articles by Muhammad Farooq Ahmad

Muhammad Farooq Ahmad

SKEMA Business School – Université Côte d'Azur

Eric de Bodt


Jarrad Harford

University of Washington; European Corporate Governance Institute (ECGI)

Date Written: September 24, 2020


Economists have long recognized that competition and innovation interact as key drivers of economic growth (Schumpeter, 1943; Arrow, 1962; Aghion and Howitt, 1992). Acknowledging this, regulators carefully scrutinize competitive behaviors that potentially affect innovation incentives, in particular in the field of M&A (Shapiro, 2012). Do acquisitions of innovative targets spur or stifle innovation? To address this question, we test the Innovation Arms Race hypothesis, providing a first large scale empirical investigation of M&A effects on acquirer rivals’ incentives to innovate and the equilibrium outcome resulting from this competitive process. Our results are consistent with the Innovation Arms Race hypothesis predictions: acquisitions of innovative targets push acquirer rivals to invest more in innovation, both internally through research and development (R&D) and externally through acquisition of innovative targets (the correlated investment prediction) and this increase in innovation investment under pressure of rivals leads to a decrease in firm market valuation (the value decrease prediction). These results are robust to endogeneity and are driven by High-Technology and (to some extent) Healthcare industries. This arms race process appears stronger for leaders and (to some extent) firms under strong competitive pressure (so-called neck-and-neck firms). Initial patents and patent citations based evidence shows no sign of innovation investment efficiency decline, suggesting that the Innovation Arms Race generates a transfer of economic rent favorable to consumers.

Keywords: Innovative Acquisitions, Innovation, Competition

JEL Classification: G34, O31, L41

Suggested Citation

Ahmad, Muhammad Farooq and de Bodt, Eric and Harford, Jarrad, The Innovation Arms Race (September 24, 2020). Available at SSRN: or

Muhammad Farooq Ahmad (Contact Author)

SKEMA Business School – Université Côte d'Azur ( email )

Campus de Lille, Avenue Willy Brandt,
Lille, 59777


Eric De Bodt

NHH-Caltech ( email )

Kraainem, 1950
+32 475 24 01 69 (Phone)

Jarrad Harford

University of Washington ( email )

Box 353226
Seattle, WA 98195-3226
United States
206-543-4796 (Phone)
206-543-7472 (Fax)


European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics