A Simple Model of Mergers and Innovation
Report

A Simple Model of Mergers and Innovation

Giulio Federico, Gregor Langus and Tommaso Valletti
CESifo Group Munich, 2017
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Recommendation

The worldwide corporate buzzword is “innovation.” Firms looking to drive their creative capacities can pursue organic avenues, or alternatively, consider mergers and acquisitions to spur productivity. But the M&A path to innovation may not be the panacea that business leaders anticipate. Economists Giulio Federico, Gregor Langus and Tommaso Valletti employ various models to determine the overall efficacy of corporate combinations on innovation. getAbstract suggests this technically rigorous report to economists, analysts and policy experts.

Summary

Innovation is the corporate elixir for driving profitability and gaining market share. It seems logical to suppose that mergers between companies would increase opportunities for innovation, but that isn’t necessarily the case. Research shows that two rival companies entering a merger will influence the marketplace by altering the trajectory of “incentives to innovate.”

Organizations with competing R&D centers will, upon unification, realize “decreasing returns to effort” relative to innovation activity in both firms’ research groups. ...

About the Authors

Giulio Federico and Gregor Langus are economists at the European Commission in Brussels. Tommaso Valletti is an economics professor at Imperial College Business School, London.

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