Should R&D Champions Be Protected from Foreign Takeovers?
IFN Working Paper No. 772
49 Pages Posted: 30 Nov 2008 Last revised: 2 Jul 2020
Date Written: November 28, 2008
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.
Keywords: FDI, M&A, R&D, Multinational Firms
JEL Classification: F23, L10, L20, O30
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