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Working Paper No. 772

Should R&D Champions be Protected from Foreign Takeovers?

Working Paper
Reference
Bertrand, Olivier, Katariina Nilsson Hakkala, Pehr-Johan Norbäck and Lars Persson (2008). “Should R&D Champions be Protected from Foreign Takeovers?”. IFN Working Paper No. 772. Stockholm: Research Institute of Industrial Economics (IFN).

Authors
Olivier Bertrand, Katariina Nilsson Hakkala, Pehr-Johan Norbäck, Lars Persson

We analyze how the entry mode of Foreign Direct Investments (FDI) affects affiliate R&D activities. Using unique affiliate level data for Swedish multinational firms, we first present empirical evidence that acquired affiliates have a higher level of R&D intensity than greenfield (start-up) affiliates. This gap persists over time and with the age of the affiliates, as well as for different firm types and industries. To explain this finding, we develop an acquisition-investment-oligopoly model where we show that for a foreign acquisition to take place in equilibrium, the acquiring MNE must invest sufficiently in sequential R&D in the affiliate. Otherwise, rivals will expand their business, thus making the acquisition unprofitable. Two additional predictions of the model – that foreign firms acquire high-quality domestic firms and that the gap in R&D between acquired and greenfield affiliates decreases in acquisition transaction costs – are consistent with the data.
 

 

Pehr-Johan Norbäck

+46 (0)8 665 4522
+46 (0)73 574 3379
pehr-johan.norback@ifn.se