R&D and Patenting Activity and the Propensity to Acquire in High Technology Industries

In this paper we investigate the incidence of high technology acquisitions using a large international sample of acquisitions by public high technology firms. Controlling for firms’ financial characteristics, we examine the impact of the following innovation-related factors on the propensity to acquire: R&D-intensity as a proxy for R&D inputs; the citation-weighted patent-intensity as a proxy for R&D output; the stock of citation-weighted patents as a proxy for the accumulated stock of knowledge generated by past R&D efforts. The following conclusions can be drawn with respect to the characteristics of acquirers of non-public targets - mainly private firms and former subsidiaries. First, we find support for the view that the propensity to acquire new knowledge-related assets through acquisitions is driven by declining returns from the exploitation of a firm’s existing knowledge base. Second, we find evidence in favour of the make-or-buy theory that acquisitions are a substitute for in-house R&D activity. Third, our results are in accordance with the theoretical argument that a large stock of accumulated knowledge enhances a firm’s ability to absorb external knowledge through acquisitions. These results suggest that smaller acquisitions can be seen as part of an innovation strategy by acquiring firms with relatively low levels of internal R&D which seek to offset low R&D productivity by exploring a range of potential innovation trajectories in new and smaller business units. Interestingly, we find that these interpretations cannot be made for acquirers of the larger public companies.