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Mergers and acquisitions undermine innovation: IIM-Ahmedabad study
February, 26th 2013

Innovation suffers when mergers and acquisitions of companies take place. A study by the Indian Institute of Management, Ahmedabad (IIM-A) has found that the firms in industries with greater research and development (R&D) efforts in the past, larger participation of multinational companies, higher capital intensity and greater penetration in the international market through exports invest more in innovation. On the other hand, in-house R&D efforts of the firms are less in the industries with larger incidence of mergers and acquisitions and greater imports intensity.

The study, 'Concentration and Other Determinants of Innovative Efforts in Indian Manufacturing Sector: A Dynamic Panel Data Analysis' has been conducted by Rakesh Basant, professor of Economics at IIM-A and Pulak Mishra, associate professor, Department of Humanities and Social Sciences, Indian Institute of Technology, Kharagpur.

The study says that in an industry with greater market competition, the firms may have the need to spend more on R&D to raise their competitiveness. On the other hand, greater market competition may reduce firms' expected return from in-house R&D, especially when they assume competition to increase further and hence their willingness to invest for innovation. Secondly, it is observed that the industries with large number of mergers and acquisitions experience low in-house R&D intensity of the firms in the industry. "In other words, mergers and acquisitions undermine firms' innovative efforts in an industry," says the study.

The study says that overall, the state of R&D efforts by the Indian firms is not very encouraging, particularly in comparison with many of the industrialized and newly industrializing economies, despite the fact that the process of liberalization has exposed the manufacturing sector to greater market competition.

The industry sector constitutes only 23% of the national R&D expenditure and the bulk comes from public funded institutions. Real R&D expenditure by the firms has declined in 12 out of 28 broad industries in the 1990s. However, while the government still accounts for over 63% of total in-house R&D performed in the country, expenditure by the business enterprises in this regard has increased in recent years.

Further, while most of the industries have reduced their expenditure on foreign technology purchase, the domestic firms still rely largely on trade, foreign direct investment, licensing, joint ventures, mergers, acquisitions and various other alliances to source technology.

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