Should RD Champions be Protected from Foreign Takeovers?

Katariina Nilsson Hakkala, Olivier Bertrand, Pehr-Johan Norbäck and Lars Persson

No 459, Discussion Papers from VATT Institute for Economic Research

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 acquisitioninvestment-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. JEL classification: F23, L10, L20, O30

Keywords: FDI; MA; RD; Multinational Firms; International comparisons; Kansainväliset vertailut; Labor market and policies promoting economic growth; Työmarkkinat ja kasvua tukeva politiikka (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-com, nep-ino, nep-ipr, nep-pr~, nep-mic and nep-tid
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Citations: View citations in EconPapers (2)

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