Technological Substitution, Complementarity, and Mergers and Acquisitions

Abstract

We provide both theoretical and empirical evidence on how technological substitution and complementarity affect mergers and acquisitions. Specifically, we propose a model that illustrates the negative technological substitution effect and the positive complementary effect on firms’ M&A. In addition, we construct a novel firm-level technological similarity dataset from 1979 to 2020 using a text-based method. We then use these data to construct the firm-level and bidirectional technological substitution and complementarity to test our theory. Our empirical findings are consistent with our model and reveal a positive effect of technological complementarity as well as a negative effect of technological substitution for firms on M&A. We conclude that synergies created by combining innovation capabilities play a significant role in M&A.

Keywords: Text analysis, Innovation, Mergers and Acquisitions