Theoretical framework
Absorptive capacity is the theoretical framework of choice in most studies analyzing the acquirer’s post-acquisition innovation performance (e.g., Ahuja and Katila 2001; Cloodt et al. 2006; Kotabe et al. 2011). Absorptive capacity describes a company’s ability to value, assimilate, and apply new knowledge to commercial ends. A higher absorptive capacity thus enables a company to better understand and subsequently capture the value of external information (Cohen and Levinthal 1990) leading to a higher innovation output. Sun and Anderson (2010) describe absorptive capacity as an example of organizational learning that concerns how an organization integrates and makes use of new external knowledge.
Within the absorptive capacity literature, research on knowledge transfer between organizations has gained substantial momentum in recent years (e.g., Hitt et al. 2000; Argote 2013). This research stream analyzes whether an organization can benefit from the experience of other organizations in order to realize productivity gains and increase its innovation output. Investigated determinants and drivers that facilitate knowledge transfer between organizations include characteristics of the acquired knowledge base, cultural proximity, or previous acquisition experience (e.g., Ahuja and Katila 2001; Muehlfeld et al. 2012).
Our study builds on absorptive capacity theory. We use the theory to describe under which circumstances we expect acquisitions to have an effect on the acquirer’s post acquisition innovation performance. Specifically, we assume that acquisitions have an impact on the acquirer’s absorptive capacity (a stock variable), which in turn determines whether the acquirer can realize gains in post-acquisition patent output (a flow variable).
Previous research indicates that the effect of acquisitions on the acquirer’s subsequent innovation performance fundamentally depends on multiple characteristics of the acquisitions (e.g., Ahuja and Katila 2001; Cloodt et al. 2006). Our study can be considered as an extended replication study in this context. Table 6 (Appendix) provides a comparison between the works of Ahuja and Katila (2001), Cloodt et al. (2006) (which is an extended replication study of Ahuja and Katila (2001)), and this study. While the concepts and variables used in our study closely relate to those used in previous studies, we extend previous findings to the context of China, where their applicability is unclear. In particular, while H1 as our baseline hypothesis assumes an overall positive effect of acquisitions on innovation performance in the catch-up process of Chinese acquirers, we also explore several deal- and company-specific characteristics that shape this outcome. Specifically, we assume that the effect of an acquisition on the acquirer’s post-acquisition patent output depends on the size of the acquired knowledge base, the relatedness of the acquired knowledge base, and on several firm characteristics of the acquirer.
Hypotheses
Overall effect of acquisitions on Chinese acquirers’ post-acquisition patent output
Acquisitions constitute a very prominent way for firms to access external knowledge (Ahuja and Katila 2001). Generally, firms try to increase their absorptive capacity and subsequent innovation performance by acquiring and utilizing the experiences of others (Cloodt et al. 2006). Specifically, it is assumed that firms can enhance their absorptive capacity by acquiring other firms and their knowledge bases (Ahuja and Katila 2001; Anderson et al. 2015). The acquisition of new knowledge bases can lead to potential economies of scale and scope, which may benefit an acquirer’s capacity to produce (valuable) innovation output (Henderson and Cockburn 1996; Ahuja and Katila 2001).
The external acquisition of knowledge through acquisitions is particularly attractive for companies with limited capabilities that are looking to expand their absorptive capacity and knowledge base quickly (Hitt et al. 2000; Zhao et al. 2011). China is a prominent example of a transition economy that still suffers from the rigidities of a planned, closed market economy in which innovation was often neglected and is trying to extend its innovation-related capabilities quickly (Peng 2003; Zhao et al. 2011).
Our baseline hypothesis is that acquisitions help Chinese firms to increase their absorptive capacity and shall have a positive effect on the innovation output. The following hypothesis applies:
H1
Chinese acquirer’s patent output will increase following an acquisition.
Size of the acquired knowledge base
Characteristics of the information being transferred are likely to affect the acquirer’s post-acquisition patent output. In particular, the absolute and relative size of the acquired knowledge base have been shown to influence the post-acquisition innovation performance (e.g., Lubatkin 1983; Ahuja and Katila 2001).
Absolute size of the acquired knowledge base Firms can enhance their absorptive capacity by acquiring knowledge bases, hence enabling initially limited Chinese firms to increase their innovation outputs. This effect is assumed to be larger with a large size of the acquired knowledge base. This is because the integration of a knowledge base leads to potential economies of scale and scope (Henderson and Cockburn 1996; Ahuja and Katila 2001). Following Schumpeterian logic, innovations are often a result of the recombination of existing elements of knowledge (Ahuja and Katila 2001; Cloodt et al. 2006). Thus, the number of potential recombinations increases with an increasing knowledge base. If an acquired company has a very small or non-existent knowledge base, this suggests that access to technology was not a major motive for the acquisition and should thus not positively influence post-acquisition patent output (Ahuja and Katila 2001).
Previous research has assumed the post-acquisition innovation performance to increase linearly with the acquisition of knowledge bases with a larger absolute size (e.g., Ahuja and Katila 2001; Cloodt et al. 2006). However, the degree to which a company can integrate acquired knowledge and thereby increase its absorptive capacity and benefit from it is likely to suffer from diminishing returns. This is because the integration of very large knowledge bases demands considerable efforts and resources on the part of an acquirer. Indeed, previous research has indicated an inverted U-shaped relationship between increases in absorptive capacity and resulting innovation performance (Stock et al. 2001; Nooteboom et al. 2007). Therefore, we expect the relation between the absolute size of the acquired knowledge base and innovation output to be non-linear and follow a curvilinear form, in that it will be positive but with diminishing returns:
H2a
The absolute size of the acquired knowledge base will be positively related to a Chinese acquirer’s post-acquisition patent output, but with diminishing returns.
Relative size of the acquired knowledge base Before recombination benefits can be achieved, the acquired information and knowledge needs to be processed by the acquiring company. This process, however, depends crucially on the acquirer’s own knowledge base. A large relative size of the acquired knowledge base indicates that the firm acquires more patents in the acquisition than it currently has. This is the case, for example, when a company that owns ten patents acquires a company that has 1000 patents.
If the acquirer has little or no own knowledge, the acquisition of external knowledge and the integration of this knowledge into the acquirer’s organization and process will be complex and (in the short run) not necessarily lead to increases in innovation output. Thus, it is not only the absolute size of the acquired knowledge base that matters but also its relative size compared to the acquirer’s existing knowledge base. If the relative size of the acquired knowledge base is too large, the acquiring firm will have to devote a comparatively large amount of resources to integrate the acquired knowledge base, leading to fewer resources being available to perform actual innovation activities. Additionally, disruption of existing routines is likely because the acquiring company is faced with a comparatively large amount of new information and routines, which require substantial adaption on the part of the acquiring firm (Ahuja and Katila 2001; Cloodt et al. 2006). We thus hypothesize the following negative effect:
H2b
The relative size of the acquired knowledge base will be negatively related to a Chinese acquirer’s post-acquisition patent output.
Relatedness of the acquired knowledge base
In addition to the size of the acquired knowledge base, previous research underlines that the relatedness of the acquired knowledge base is crucial for the post-acquisition innovation performance (Ahuja and Katila 2001; Cloodt et al. 2006; Muehlfeld et al. 2012). Knowledge bases can be related in multiple ways. To grasp this diversity, we measure the technological relatedness of the acquired knowledge base, whether the acquired firm operated in a similar or unfamiliar industry to the acquirer, and whether the acquisition was a cross-border acquisition or a domestic acquisition. We expect technological and industry relatedness to have a positive effect on innovation output. Also, we expect cross-border acquisitions to have a positive effect because they enable Chinese acquirers to access knowledge that is often further advanced.
Technological relatedness of the acquired knowledge base The relatedness of the acquired knowledge base reflects the content of the acquired knowledge. Based on absorptive capacity theory, we shall argue that related knowledge enables Chinese firms to more easily apply new information to new environments, thus facilitating integration of the acquired knowledge base (Cohen and Levinthal 1990; Makri et al. 2010). With regard to innovation, relatedness leads to common skills and a shared technical language. In contrast, innovation routines tend to be different if they originate from unrelated technological fields, thus rendering the integration of the knowledge bases more difficult and resource consuming (Cohen and Levinthal 1989; Cloodt et al. 2006). However, unrelated knowledge can benefit the organization by providing new approaches to solve old problems or by allowing it to better process external information.
Because both arguments are valid, previous research has shown that the combination of knowledge bases with a moderate degree of relatedness provides benefits of increasing variety, while still providing enough common ground to build upon (Ahuja and Katila 2001; Cloodt et al. 2006). For example, Ahuja and Katila (2001) find evidence for a non-monotonic and U-shaped relationship. The authors argue that performance will increase with increasing relatedness, but will decrease beyond a certain point. This effect has been confirmed by Cloodt et al. (2006). Applying a more fine-grained approach to measuring technological relatedness and complementarity, Makri et al. (2010) show that technological complementarity is an important factor in stimulating innovation output, while they also find knowledge similarities to have no effect on innovation quantity or quality. The authors argue that while integration is facilitated, these similarities are not enough to spark innovation performance. Similar results are obtained by Cassiman et al. (2008). Thus, we expect a non-linear relationship that is positive, but with diminishing returns:
H3a
Technological relatedness will be positively related to a Chinese acquirer’s post-acquisition patent output, but with diminishing returns.
Acquisition in a similar industry The industrial context is an important factor that may influence an acquisition’s outcome. Barkema and Vermeulen (1998) argue that a firm operating in multiple industries might profit from the increased diversity in terms of knowledge. For example, the firm will be able to gain more experience because it has to deal with a more diverse set of demands, rivals, and partners than a firm only operating in one industry. Also, a firm that is active in multiple industries may be able to realize economies of scale and scope and may thus profit more from its innovations.
However, most prior studies show that firms pursuing related, intra-industry acquisitions outperform unrelated, inter-industry acquisitions (e.g., Muehlfeld et al. 2012; Haleblian and Finkelstein 1999). This is because of larger synergies: Firms can more likely build on existing practices and routines if the new industrial environment is similar to the environment in which prior knowledge was obtained and developed. In contrast, a transfer of routines may be impossible if knowledge is predominantly novel and characterized by different dominant logics which have to be learned. Companies can thus generalize their experience more easily if there is a greater similarity (Cohen and Bacdayan 1994; Barkema and Vermeulen 1998; Finkelstein and Haleblian 2002; Desyllas and Hughes 2010). Conceptually, the argumentation follows Huff (1982), who argues that “shared concepts”, for example on how a firm successfully operates, are developed within an industry and are not accessible for outsiders. Empirical evidence on how the industrial context guides strategic thinking was initially put forward by Spender (1987). Also, Barkema and Vermeulen (1998) describe that high levels of diversification force a firm to adapt a more fragmented organizational structure that will prevent learning when knowledge is acquired.
With particular regard to the post-acquisition innovation performance, previous research indicates that R&D synergies are harder when two firms operate in different industries and that more diversified firms tend to be less innovative (Hoskisson and Hitt 1988; Ahuja and Katila 2001; Hagedoorn and Duysters 2002). We thus presume that Chinese acquirers tend to benefit more from related acquisitions in which the acquirer operates in a similar industry:
H3b
An acquisition in a related versus unrelated industry will be positively related to a Chinese acquirer’s post-acquisition patent output.
Cross-border acquisition The geographic context is an important factor shaping acquisition outcomes. Previous studies have often highlighted that cross-border acquisitions pose several obstacles to the acquiring firm that hinder post-acquisition performance. In contrast to domestic acquisitions, cross-border acquisitions often involve different legal systems, different national cultures, and higher transportation costs which can be major obstacles to achieving integration benefits (Olie 1994; Vaara 2003; Björkman et al. 2007; Dikova et al. 2010). Also, differences in languages are a common source of friction (e.g., Muehlfeld et al. 2012). Cultural similarity, which is assumed to be greater in domestic than cross-border acquisitions, eliminates a common source of friction by facilitating negotiations (Adair and Brett 2005) and the integration of the acquired company (Björkman et al. 2007). Another factor is the regulatory framework (Clougherty 2005), which is also more similar in a domestic acquisition, thus reducing the complexity of an acquisition. All these factors limit the transfer of knowledge in an acquisition. We could therefore assume a domestic acquisition will be more beneficial than a cross-border acquisition because of a greater relatedness.
However, cross-border acquisitions provide opportunities. With particular regard to innovation performance, Barkema and Vermeulen (1998) argue that an exposure to geographical diversity may lead to higher innovation levels because it exposes a firm to different environments, enabling it to profit from different experiences by getting access to new sources of knowledge. This information leads to a richer knowledge structure and stronger technological capabilities (Ghoshal 1987; Barkema and Vermeulen 1998). A similar argument is put forward by Ahuja and Katila (2004), who find that firms expanding beyond national markets develop unique innovation search paths as a response to the changing environment. While a performance enhancing effect of domestic acquisitions is shown in some studies (e.g., Muehlfeld et al. 2012), other studies find negative or no effects (e.g., Ahuja and Katila 2001; Desyllas and Hughes 2010), prompting Björkman et al. (2007) to describe the empirical evidence as inconclusive.
Companies from emerging markets such as China frequently lag behind companies from developed countries in terms of strong intangible resources (e.g., technological know-how). Thus, Chinese firms might particularly benefit from cross-border acquisitions instead of domestic acquisitions to address this comparative disadvantage and access further developed knowledge. This access to knowledge from developed countries has frequently been described as one of the more important motivations for Chinese acquisitions (e.g., Deng 2004; Morck et al. 2008; Buckley et al. 2014). Therefore, we suggest that cross-border acquisitions positively influence a Chinese acquirer’s patent output.
H3c
A cross-border versus a domestic acquisition will be positively related to a Chinese acquirer’s post-acquisition patent output.
Characteristics of the acquirer
Finally, previous research has shown that several characteristics of the acquirer influence the acquirer’s post-acquisition innovation performance (Haleblian and Finkelstein 1999; Ahuja and Katila 2001; Muehlfeld et al. 2012). Here, we focus on the acquirer’s previous acquisition experience as well as a characteristic that is unique to the Chinese context, namely whether the acquiring company is state-owned or not.
Previous acquisition experience Previous acquisition experience should positively influence the outcome of an acquisition (Lubatkin 1983; Haleblian and Finkelstein 1999). This is because it is often assumed that an organization’s acquisitions are similar to each other. Therefore, past acquisition experience can be applied to following acquisitions. The rationale behind this widespread assumption is based on the learning curve, which rests on the assumption of positive effects by learning through repetition. In this regard, positive returns through the accumulation experience are a robust finding in organizational learning research (Muehlfeld et al. 2012).
Following this argumentation, it is likely that previous acquisitions will also facilitate the integration of acquired knowledge. Even though the effects of previous acquisition experience have been studied extensively in acquisition studies it is surprisingly rarely investigated regarding its effect on innovation performance. Following the learning arguments posited above, we assume a positive influence of previous acquisitions on the acquirer’s post-acquisition performance. We hypothesize:
H4a
Previous acquisition experience will be positively related to a Chinese acquirer’s post-acquisition patent output.
State-owned vs. private acquirers In transition economies, the institutional environment is often characterized by strong governmental interference. This is particularly true for China, where governmental constraints and incentives influence M&A decisions in a major way (Deng 2009). Often, corporate strategic decisions are influenced by political motives (Tsui et al. 2004). For example, the Chinese government has been stimulating Chinese companies to become competitive MNCs by formulating a series of policies for the acquisition of foreign knowledge (e.g., value-added taxes, favorable financing) (Deng 2004, 2009). By this, various firms have become international players through aggressive international expansion. While this referred to strong manufacturing firms in the past, China now specifically encourages investment in R&D to enhance innovation capability and by focusing more on acquisition of intangible assets such as technology and managerial capabilities from global giants (Deng 2009).
The Chinese corporate landscape is very different from Western countries because the Chinese economy has been dominated by state-owned enterprises (Wang et al. 2007; Boeing et al. 2016). In contrast to other former socialist countries, China never underwent a mass privatization. Thus, the share of enterprises directly or indirectly owned by the state is still large (albeit decreasing) (Wang et al. 2007; Boeing et al. 2016).
The boundaries separating these companies from the state are often blurred (Tsui et al. 2004). Chinese state-owned enterprises are typically large, resourceful, and heavily subsidized corporations. Previous research has characterized them as lacking dynamism, passive, less learning-, and not performance-oriented (White 2000; Peng 2003; Wang et al. 2007; Boeing et al. 2016). Traditionally, state-owned enterprises relied on innovations that were administratively directed to them (White 2000). Overall, these attributes indicate lower levels of absorptive capacity and lesser capabilities to incorporate knowledge, compared to private firms. State ownership should thus lead to a negative effect on the acquirers’ patent output. In contrast, a private organization should possess a larger absorptive capacity and should be able to profit from acquisitions to a larger extent.
H4b
Compared to private acquirers, state-owned acquirers will profit less from acquisitions with regard to their post-acquisition patent output.