CEF.UP - FIN Seminar | Webinar

Thursday, October 13th 2022 | 1:00 pm | room 305 | online

“The Innovation Arms’ Race”

Farooq Ahmad - SKEMA Business School

“Economists have long recognized that competition and innovation interact as key drivers of economic growth (Schumpeter, 1943; Arrow, 1962; Aghion and Howitt, 1992). Acknowledging this, regulators carefully scrutinize competitive behaviors that potentially affect innovation incentives, in particular in the field of M&A (Shapiro, 2012). Do acquisitions of innovative targets spur or stifle innovation? To address this question, we test the Innovation Arms Race hypothesis, providing a first large scale empirical investigation of M&A effects on acquirer rivals’ incentives to innovate and the equilibrium outcome resulting from this competitive process. Our results are consistent with the Innovation Arms Race hypothesis predictions: acquisitions of innovative targets push acquirer rivals to invest more in innovation, both internally through research and development (R&D) and externally through acquisition of innovative targets (the correlated investment prediction) and this increase in innovation investment under pressure of rivals leads to a decrease in firm market valuation (the value decrease prediction). These results are robust to endogeneity and are driven by High-Technology and (to some extent) Healthcare industries. This arms race process appears stronger for leaders and (to some extent) firms under strong competitive pressure (so-called neck-and-neck firms). Initial patents and patent citations based evidence shows no sign of innovation investment efficiency decline, suggesting that the Innovation Arms Race generates a transfer of economic rent favorable to consumers.”


Any questions please contact cefup.sec@fep.up.pt.


“Cef.up is financed by Portuguese public funds through FCT - Fundação para a Ciência e Tecnologia, I.P., in the framework of the project with reference UIDB/04105/2020”