The relationship between cross-border acquisitions and R&D investments by Indian firms – substituting or complementing

Ajay Kumar Singal and Faisal Mohammad Ahsan

International Journal of Emerging Markets, 2021, vol. 18, issue 9, 2680-2697

Abstract: Purpose - Emerging economy firms seek strategic assets through cross-border acquisitions (CBAs) to upgrade their capabilities. The paper explores the relation between emerging economy firms' investments in CBAs and subsequent investments in domestic R&D. It investigates the underlying mechanism that links a firm's decision to pursue CBAs and the outcomes from the CBAs. The main idea behind the study is that firms have higher possibility of creating value from cross-border acquisitions when they simultaneously invest in domestic R&D though both investments are constrained by financial and managerial resources. Design/methodology/approach - The hypotheses are tested on a panel data set of 296 Indian firms over a period of 13 years (2003–2015). The authors use a two-stage Heckman procedure for testing their hypotheses. In the first stage, a probit model predicts the probability of a firm being a cross-border acquirer. The second stage model is estimated by a pooled-data GLS (generalized least squares) regression technique. Findings - The authors find a nonlinear (invertedU-shaped) relationship between firm's investments in CBAs and domestic R&D. This suggests a complementary relation between investments in CBAs and a firm's domestic R&D at lower levels of investments in CBAs. At higher levels of investments in CBAs, CBA investments begin to substitute for firm's domestic R&D investments. For firms with higher international product-market experience and those operating in the hi-tech industry, the relationship between investments in CBAs and domestic R&D is complementary even at higher levels of CBA investments. Originality/value - The study highlights the role of an emerging market firm's investment in domestic R&D as a link between the decision to invest in CBAs and related outcomes thereof. Emerging market firms face resource constraints while pursuing simultaneous investments in CBAs and R&D, but investment in R&D is essential for realizing the acquisition objectives. The authors also establish the significance of industry context and experiential learning in deciding the allocation of resources between CBAs and internal R&D.

Keywords: Acquisitions; R&D investment linkage; International product market experience; Emerging economy; Internationalization; F23; G34; L25; O30 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijoemp:ijoem-08-2020-0913

DOI: 10.1108/IJOEM-08-2020-0913

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