Working Paper: NBER ID: w18346
Authors: Gordon M. Phillips; Alexei Zhdanov
Abstract: We provide a model and empirical tests showing how an active acquisition market affects firm incentives to innovate and conduct R&D. Our model shows that small firms optimally may decide to innovate more when they can sell out to larger firms. Large firms may find it disadvantageous to engage in an "R&D race" with small firms, as they can obtain access to innovation through acquisition. Our model and evidence show that the R&D responsiveness of firms increases with demand, competition and industry merger and acquisition activity. All of these effects are stronger for smaller firms than for larger firms.
Keywords: No keywords provided
JEL Codes: G20; G3; G34; L11; L22; L25; O31; O34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Active acquisition market (G34) | Increased R&D efforts of small firms (O31) |
| Potential for acquisition (G34) | Increased motivation for R&D investment among small firms (O31) |
| Larger firm size (L25) | Decreased R&D responsiveness (O39) |
| Acquisition potential (G34) | More aggressive innovation efforts of small firms (O31) |
| Demand competition and industry acquisition activity (L13) | Increased intensity of R&D investment among small firms (O32) |
| Bargaining power of small firms (L25) | More aggressive R&D investments (O39) |