Crossing the innovation threshold through mergers and acquisitions

Firms are resorting more and more to mergers and acquisitions (M&A) to bridge the gap between where they are and where they would like to be in relation to innovation and performance. This paper investigates whether involvement in M&A triggers distinct patterns of innovative behaviour across firms, and whether this effect is conditional on firm size. The analysis combines data from four waves of the Community Innovation Survey (CIS) and the Business Register of Dutch manufacturing firms. We observe that M&As influence the probability that firms will begin innovation activities or persist with them, and these effects vary at different points in the firm size distribution. In particular, by using M&A firms are able to persist with the innovation efforts and output over time, and this effect is especially strong for large firms. For small firms, M&A help them to cross the ‘innovation threshold’, increasing the probability of the transition from a non-innovator to an active innovator. However, the M&A effect does not mitigate the tendency of small firms to be occasional innovators.