Mergers & acquisitions and innovation performance in the telecommunications equipment industry

In response to global market forces such as deregulation and globalization, technological change and digital convergence, the telecommunications in the 1990s witnessed an enormous worldwide round of Mergers & Acquisitions (M&A). Given both M&A and Innovation a major means of today's competitive strategy development, this paper examines the innovation determinants of M&A activity and the consequences of M&A transactions on the technological potential and the innovation performance. We examine the telecommunications equipment industry over the period 1988-2002 using a newly constructed data set with firm-level data on M&A and innovation activity as well as financial characteristics. By implementing a counterfactual technique based on a matching propensity score procedure, the analysis not only controls for merger endogeneity and ex-ante observable firms characteristics but also takes account of unobserved heterogeneity. The study provides evidence that M&A realize significantly positive changes to the firm's post-merger innovation performance. The effects of M&A on innovation performance are in turn driven by both the success in Research and Development (R&D) activity and the deterioration in internal technological capabilities at acquiring firms prior to a merger.