The Innovation Arms Race

90 Pages Posted: 1 Oct 2020 Last revised: 26 Jan 2024

See all articles by Muhammad Farooq Ahmad

Muhammad Farooq Ahmad

SKEMA Business School – Université Côte d'Azur

Eric de Bodt

NHH

Jarrad Harford

University of Washington; European Corporate Governance Institute (ECGI)

Date Written: September 24, 2020

Abstract

Regulators worry that acquisitions of innovative targets stifle innovation. We provide 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 an innovation arms race: 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, and this increase in innovation investment necessary to maintain competitive position leads to a decrease in firm valuation. Investment efficiency does not decline, suggesting a transfer of economic rents 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: https://ssrn.com/abstract=3698936 or http://dx.doi.org/10.2139/ssrn.3698936

Muhammad Farooq Ahmad (Contact Author)

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

Campus de Lille, Avenue Willy Brandt,
Lille, 59777
France

HOME PAGE: http://sites.google.com/site/mfarooqahmad85

Eric De Bodt

NHH ( email )

Helleveien 30
Bergen, NO-5045
Norway

Jarrad Harford

University of Washington ( email )

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

HOME PAGE: http://faculty.washington.edu/jarrad/

European Corporate Governance Institute (ECGI) ( email )

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

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