Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 772: Should R&D Champions be Protected from Foreign Takeovers?

Olivier Bertrand , Katariina Nilsson Hakkala , Pehr-Johan Norbäck () and Lars Persson ()
Additional contact information
Olivier Bertrand: Graduate School of Management of St Petersburg State University and Toulouse School of Economics
Katariina Nilsson Hakkala: Helsinki School of Economics and Government Institute for Economic Research (VATT)
Pehr-Johan Norbäck: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Lars Persson: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden

Abstract: 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; Multinational firms; R&D

JEL-codes: F23; L10; L20; O30

48 pages, October 17, 2008

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