Firm Boundaries Matter: Evidence from Conglomerates and R&D Activity

55 Pages Posted: 19 Mar 2007 Last revised: 28 Jul 2014

Date Written: August 1, 2010


This paper examines the impact of the conglomerate form on the scale and novelty of corporate R&D activity. I exploit a quasi-experiment involving failed mergers to generate exogenous variation in acquisition outcomes of target firms. A difference-in-difference estimation reveals that, relative to failed targets, firms acquired in a diversifying mergers produce both a smaller number of innovations and also less novel innovations, where innovations are measured using patent-based metrics. The treatment effect is amplified if the acquiring conglomerate operates a more active internal capital market and is largely driven by inventors becoming less productive after the merger rather than inventor exits. Concurrently, acquirers move R&D activity outside the boundary of the firm via the use of strategic alliances and joint-ventures. There is complementary evidence that conglomerates with more novel R&D tend to operate with decentralized R&D budgets. These findings suggests that conglomerate organizational form affects the allocation and productivity of resources.

Keywords: Conglomerates, Theory of Firm, Innovation, R&D, Mergers, Incentives

JEL Classification: G34, L22, L25, L26, O31, O32

Suggested Citation

Seru, Amit, Firm Boundaries Matter: Evidence from Conglomerates and R&D Activity (August 1, 2010). AFA 2008 New Orleans Meetings Paper, Available at SSRN: or

Amit Seru (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

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