Repeating a familiar pattern in a new way: The effect of exploitation and exploration on knowledge leverage behaviors in technology acquisitions

Research Summary: We identify two types of knowledge leverage behaviors undertaken by acquiring firms: integrated and independent knowledge leverage. We address how the prior exploitation or exploration orientation of acquirers influence these two modes of knowledge leverage behaviors. The degree of exploitation of acquirers promotes integrating their existing knowledge with acquired knowledge in innovative actions. In contrast, the degree of exploration of acquirers increases the likelihood that new innovations will use acquired knowledge without integrating it with their prior knowledge. In addition, the firm's prior acquisition rate moderates the relationship between the acquiring firms’ previous exploitation or exploration orientation and their knowledge leverage mode. The findings of this article suggest that pre‐acquisition innovation capabilities are distinct from but influence the post‐acquisition innovation actions. Managerial Summary: Firms often undertake acquisitions to gain access to new knowledge, but they can differ dramatically in how they leverage acquired knowledge. We show that the firm's prior innovation patterns drive this choice. Firms that have previously focused on incremental innovations in their internal innovation efforts tend to integrate acquired knowledge with their own prior knowledge. In contrast, firms that have previously pursued bold innovations tend to leverage acquired knowledge alone in new innovations. Thus, we show that firms use acquisitions as a means to extend their internal innovation patterns—firms that have focused on incremental innovations extend that with acquisitions by linking new innovations to their prior knowledge while firms that have pursued bold initiatives use acquired knowledge to move in new technology directions.     

What they know vs. what they do: how acquirers leverage technology acquisitions

Existing research suggests that in acquisitions of small technology‐based firms by large established firms post‐merger integration both enables and hinders acquirers' efforts to leverage the technology of acquired firms. This apparent paradox can be resolved once we account for the qualitatively distinct ways in which acquirers leverage technology acquisitions. Integration helps acquirers use the acquired firm's existing knowledge as an input to their own innovation processes (leveraging what they know), but hinders their reliance on the acquired firm as an independent source of ongoing innovation (leveraging what they do). We also show that experienced acquirers are better able to mitigate the disruptive consequences of the loss of autonomy entailed by integration, though we find no evidence that they achieve greater coordination benefits from integration. Copyright © 2007 John Wiley & Sons, Ltd.     

The relevance of political affinity for the initial acquisition premium in cross‐border acquisitions

Research summary : In the context of economic nationalism, we investigate the relevance of political affinity between countries to the initial acquisition premium offered in cross‐border acquisitions. Political affinity is defined as the similarity of national interests in global affairs. We argue that political affinity affects how foreign acquirers anticipate their bargaining position in their negotiations with domestic target firms. With decreasing political affinity, the host government becomes increasingly likely to intervene against foreign firms in an acquisition deal. Consequently, foreign acquirers need to provide a more lucrative initial offer to dissuade target firms from leveraging government intervention to oppose the acquisition. Our prediction is supported by strong evidence that political affinity, as revealed by UN general assembly voting patterns, leads to lower initial acquisition premiums. Managerial summary : Media reports suggest that politics plays an important role in international business transactions. However, we still know very little about how bilateral political relations affect corporate decision‐making. In this article, we analyze the influence of the quality of bilateral political relations on the bidding behavior of foreign acquirers in cross‐border acquisitions. We argue that the host government is more likely to intervene against the foreign acquirer during deal negotiations if the quality of bilateral political relations is poor. A lower political affinity between countries therefore decreases the bargaining power of the acquirer and pushes up the initial bid premium the acquirer has to offer to the local target. Our empirical results confirm our argument. Copyright © 2015 John Wiley & Sons, Ltd.     

Choosing the right target: Relative preferences for resource similarity and complementarity in acquisition choice

Research summary : Corporate acquisition is a popular strategic option for firms seeking new resources. However, little research exists on the question of why one firm is chosen over another. We develop a model relating characteristics of similarity and complementarity between acquirers' and target firms' key resources, including their products and R&D pipelines, to the likelihood of the acquirers choosing a particular firm. We construct measures of similarity and complementarity between and across products and R&D pipelines, and test their effects using a novel application of the choice model. Findings reveal that acquirers view similarity and complementarity differently, based on the resource they are comparing. When making comparisons to their own R&D pipelines, acquirers prefer similarity over complementarity whereas when making comparisons to their product portfolios, they prefer complementarity over similarity. Managerial summary : Corporate acquisition is a popular way for firms to grow and obtain innovative resources. However, we know little about why acquirers choose one firm over another. We capture the influence of similarity and complementarity between acquirers' and target firms' products (current innovative value) and R&D pipelines (future innovative value) on whether a particular target firm is acquired. Insights from the pharmaceutical industry reveal that acquirers value similarity and complementarity in target firms differently, based on whether the comparison being made is with respect to their products or their R&D pipelines. Regarding their R&D pipelines, acquirers prefer that the target firm has similar, rather than complementary, resources. However, the opposite is true concerning their own products: acquirers prefer that the target firm has complementary, versus similar, resources. Copyright © 2015 John Wiley & Sons, Ltd.     

Virtuous or vicious cycles? The role of divestitures as a complementary Penrose effect within resource‐based theory

Research summary: Studies of how divestitures affect firm performance offer mixed results. This paper unpacks relationships between divestitures and subsequent performance, focusing first on the moderating role of prior performance and then on mechanisms through which divestitures by higher‐ and lower‐performing firms affect performance. The study suggests that divestitures can exacerbate weakness and reinforce strength: divestitures by lower performers improve profits but inhibit sales growth and tend to speed the firms’ exits as independent actors; by contrast, higher‐performing divesters invest in support of existing assets and gain new growth, while avoiding becoming acquisition targets. Most generally, divestitures help reduce constraints to changing a firm's resource base, which we refer to as a complementary Penrose effect. Managerial summary: Divestitures help both struggling firms and high performers free financial and managerial resources that they can reinvest in more productive uses. In doing so, divestitures reinforce the strength of high performers but may exacerbate weaknesses of struggling firms. Divestitures by lower performers improve their profits but inhibit their sales growth and increase the chances that the firms will be acquired. By contrast, higher‐performing divesters gain new growth by investing in support of existing and recently acquired assets and, by doing so, are less likely to become targets of acquirers who seek their productive assets. Thus, divestiture is part of a downward cycle for struggling firms but supports a virtuous cycle for superior firms.     

Cross‐border mergers and acquisitions: The role of private equity firms

Research summary: We show that private equity ownership (“PE backing”) of the acquirer is a signal of deal quality in cross‐border takeovers. As such, PE‐backed acquirers experience higher announcement returns in cross‐border takeovers, but only if targets are in poor information environments. We show that PE backing is a positive market signal because of PE firms' experience and networks that result from prior deals in target countries. We document that the market correctly anticipates that operating performance of PE‐backed acquirers increases as a result of cross‐border mergers and acquisitions (M&A). Managerial summary: We study cross‐border acquisitions by acquirers that are partially owned by private equity firms (“PE backing”). Cross‐border acquisitions are challenging as acquirers often have little information about targets. We document that investors react positively to cross‐border deals of PE‐backed acquirers—their stock prices increase upon deal announcements. However, this is only the case if targets are in countries with poor information environments. This is because PE backing allows acquirers to access PE firms' deal experience and networks. This makes it easier to identify and evaluate good targets, making it more (less) likely that a deal eventually creates (destroys) value. Consistent with this, we find that earnings of PE‐backed acquirers increase after buying targets in poor information environments. Copyright © 2016 John Wiley & Sons, Ltd.     

Which boundaries? How mobility networks across countries and status groups affect the creative performance of organizations

Research summary : Losing key employees to competitors allows an organization to engage in external boundary‐spanning activities. It may benefit the organization through access to external knowledge, but may also increase the risks of leaking knowledge to competitors. We propose that the destination of departed employees is a crucial contingency: benefits or risks only materialize when employees leave for competitors that differ from the focal organization along significant dimensions, such as country or status group. In the context of the global fashion industry, we find that key employees' moves to foreign competitors may increase (albeit at a diminishing rate) their former employers' creative performance. Furthermore, firms may suffer from losing key employees to higher‐ or same‐status competitors, but may benefit from losing them to lower‐status competitors. Managerial summary : Losing key employees to competitors can provide organizations with access to external knowledge, but increase risks of leaking knowledge to competitors. We find that an organization's access to external knowledge and its risks of knowledge leakage through employee mobility may be affected by whether its employees leave for competitors in a foreign country or in a different status group. In the context of the global fashion industry, we show that key employees' moves to foreign competitors increase (up to a point) their former employers' creative performance. Furthermore, firms may suffer from losing key employees to higher‐ or same‐status competitors, but benefit from losing them to lower‐status competitors. Hence, executives in creative industries and possibly beyond could welcome losing employees to competitors in foreign countries or to lower‐status competitors. Copyright © 2016 John Wiley & Sons, Ltd.     

Acquisitions of private vs. public firms: Private information,target selection,and acquirer returns

The acquisition of privately held firms is a prevalent phenomenon that has received little attention in mergers and acquisitions research. In this study, we examine three questions: (1) What drives the acquirer's choice between public and private targets? (2) Do acquisitions of private targets elicit a more positive stock market reaction than acquisitions of public targets, which, on average, destroy value for acquirers' shareholders? (3) Do acquirers gain when their selection of a public or private target fits the theory? In this paper, we argue that the lack of information on private targets limits the breadth of the acquirer's search and increases its risk of not evaluating properly the assets of private targets. At the same time, less information on private targets creates more value‐creating opportunities for exploiting private information, whereas the market of corporate control for public targets already serves as an information‐processing and asset valuation mechanism for all potential bidders. Using an event study and survey data, we find that: (1) acquirers favor private targets in familiar industries and turn to public targets to enter new business domains or industries with a high level of intangible assets; (2) acquirers of private targets perform better than acquirers of public targets on merger announcement, after controlling for endogeneity bias; (3) acquirers of private firms perform better than if they had acquired a public firm, and acquirers of public firms perform better than if they had acquired a private firm. These results support the expectation that acquirer returns from their target choice (private/public) are not universal but depend on the acquirer's type of search and on the merging firms' attributes. Copyright © 2007 John Wiley & Sons, Ltd.     

Building product diversification through contractual R&D agreements

Firms engage in contractual R&D agreements for several reasons, including product innovation motives, firm performance goals, and technological diversification. This article demonstrates that firms also might enter into external collaborations to penetrate new markets. This study therefore explores both the effects and the strategic risks of contractual R&D agreements and their related knowledge structures for a firm's capacity to diversify into new markets. Drawing on a novel panel data set obtained from 102 Fortune high‐tech firms, the authors demonstrate that strategic alliances enable knowledge‐integrated firms to penetrate new businesses; however, these organizations should be cautious about engaging in licensing‐in agreements, which have negative effects on product diversification.     

Do foreign entrepreneurs benefit their firms as managers?

Research summary: The entrepreneurship literature has extensively studied an individual's decision to found a new venture, but it has little to say about the individual's choice to operate this venture personally or hire an agent. This decision is particularly challenging for foreign entrepreneurs, who, in addition to traditional factors, such as agency costs and personal preferences, need to take into consideration the benefits and liabilities of foreignness. Using novel data on foreign entrepreneurial firms and instrumenting for the owner‐manager choice with a visa policy change, we find that managing foreign entrepreneurs significantly improve firm performance. Our results further suggest that foreign owner‐managers reduce operating costs but have no effect on the firm's productivity and growth. Managerial summary: Immigrants represent a significant part of the population in the United States and Europe and are often more entrepreneurial than local nationals. However, a person starting a firm in a foreign country faces unique challenges. One important choice that a foreign entrepreneur has to make is whether to operate the firm personally or hire a local agent. Foreign entrepreneurs are often believed to be worse managers because they have limited local knowledge and skills. However, our results point to the contrary: We find that managing foreign entrepreneurs significantly improve firm performance by decreasing firms' operating costs. This happens because foreign owner‐managers often have access to unique resources, higher work incentives, and superior management skills acquired at home. Copyright © 2016 John Wiley & Sons, Ltd.     

Firm heterogeneity in complex problem solving: A knowledge‐based look at invention

Research summary : The knowledge‐based view suggests that complex problems are best solved under hierarchical (within‐firm) governance. We examined why firms assumed to be in general alignment with this theory might nonetheless produce solutions of varying usefulness. We theorize that a firm's internal knowledge variety (IKV) is associated with its capacity to support cross‐domain knowledge flows during search, and its ability to identify and explore promising areas on the solution landscape. We further theorize that partner knowledge in familiar (unfamiliar) domains can offset specific weaknesses in searching rugged landscapes, inherent with low or high (moderate) IKV. We find support for these ideas in the context of drug discovery, extending KBV's focus on governance alignment to explain variation in problem‐solving effectiveness within hierarchy. Managerial summary : Firms that concentrate their inventive efforts in a few technological domains, but also dabble in several others, have problem‐solving advantages: they can better support knowledge transfer and recombination across domains. Firms that focus too narrowly or spread their inventive efforts thinly across many domains lose these advantages, but might compensate through alliance partnerships. Our study of drug discovery shows that while firms with very low or high knowledge variety tend to produce weaker solutions than firms in the moderate range, their inventive performance improves when alliance partners afford them access to additional knowledge in familiar domains. We explain how the combination of firm and partner knowledge enables firms to better identify, evaluate, and implement alternative solutions to complex problems. Copyright © 2016 John Wiley & Sons, Ltd.     

R&D investment dynamics in agglomerations under weak appropriability regimes: Evidence from Indian R&D labs

What are the dynamics of R&D investment when firms agglomerate in environments with weak intellectual property rights protection? Specifically, do foreign and domestic firms present equal opportunities for free riding by domestic firms in such environments? We examine the impact on local firms' R&D investment from knowledge spillovers originating from co‐located foreign and domestic firms within and across industries. Building on fieldwork in India, we predict free riding by local firms on nearby foreign and local firms. Furthermore, we expect local firms to free ride more from other local firms within their industry and from foreign firms across industries. Analyzing a sample of 3,475 R&D lab investment decisions during 2003–2010 in India, we find that local firms free ride from other local firms both within and across industries. Copyright © 2014 John Wiley & Sons, Ltd.     

Licensing Foreign Technology and the Moderating Role of Local R&D Collaboration: Extending the Relational View

The relational resource‐based view posits that performance differences among firms can be explained not only by the possession of internal resources but also by maintaining and developing relationships with external partners. However, studies in the extant literature usually address the separated roles of various external relationships of focal firms, but the literature has not addressed how relationships with different sets of knowledge partners are related to each other and influence focal firms' performance. Therefore, to fill this research gap, this study focuses on how technological resources acquired from one set of partners (licensing foreign technologies) may generate subsequent internal and relational rents in terms of technological innovation in the context of collaboration with an entirely different set of knowledge partners (local R&D partners). Specifically, we propose that local R&D collaborations need to be large in scale and broad in scope. The empirics are based on the analysis of a sample of 160 high‐tech Chinese firms observed from 2000 to 2011. Consistent with our predictions, our findings contribute to extending the relational view by addressing the relations among the relationships of focal firms.     

Performance of acquirers of divested assets: Evidence from the U.S. software industry

We provide a comparative analysis of acquirer returns in acquisitions of public firms, private firms, and divested assets. On the basis of a sample of 5,079 acquisitions by U.S. software industry companies during 1988–2008, we find that acquisitions of divested assets outperform acquisitions of privately held firms, which in turn outperform acquisitions of publicly held firms. While the higher returns for acquisitions of divested assets relative to stand‐alone acquisition targets can be explained by market efficiency arguments, seller distress and improved asset fit further enhance the positive returns of acquirers of divested assets consistent with the relative bargaining power explanation. Finally, we find that the effects of these buyer bargaining advantages are mutually strengthening and that they also hold for longer‐term acquirer performance Copyright © 2013 John Wiley & Sons, Ltd.     

Knowledge diversity and coordination: The effect of intrafirm inventor task networks on absorption speed

Research Summary: We combine the absorptive capacity and social network theory approaches to predict how intrafirm “whole” network characteristics affect the firm's speed of absorption of external knowledge to produce inventions. We start from the widely accepted view that distant, externally‐developed knowledge is difficult to absorb into the focal firm's own knowledge production. We suggest that high levels of intrafirm inventor task network diversity and task network density are essential for a diversity of knowledge inputs and coordinated actions regarding knowledge transfer, which in turn, reduces problems related to the absorption of knowledge—especially in the case of knowledge that is distant from the focal firm. The results of an event history study of 113 pharmaceutical firms that engaged in technology in‐licensing from 1986 to 2003 provide general support for our hypotheses. Managerial Summary: Firms keen to keep up with an uncertain and ever‐changing industry environment, can benefit from the speedy introduction of inventions. We examine how firms absorb licensed‐in technologies to nurture the rapid development of own related inventions. We show that a firm's absorption speed depends on the characteristics of the internal collaboration networks among the firm's inventor employees. More specifically, technologically diverse and well‐connected inventor networks improve the firm's ability to absorb external technologies quickly. This applies especially to externally acquired technologies that are unfamiliar to the firm. Depending on the distance of the acquired technology from the focal firm combined with speed‐inducing inventor network characteristics, our estimates suggest that firms can reduce the time needed for absorption by several months.     

The contingent effects of political strategies on firm performance: A political network perspective

Research Summary: We examine the performance impact of corporate political strategies by analyzing the relationships among firms and various government institutions. While a firm's political connections to a focal government with decision‐making authority enhance performance, connections to a rival government competing with the focal government harm performance, particularly when the rivalry is intense. Firms can neutralize the negative effect from this political rivalry by using direct or indirect connections to a constraining government with power over the focal government. We find support for our conjectures based on an analysis of interactions among Chinese steel firms and the central and provincial governments in acquisition decisions during the industry's consolidation period of 1999–2010. Managerial Summary: Firms invest in political capital in order to influence public policies in their favor. However, the government is a not a monolithic entity and the relationships among various government institutions can alter and even reverse the effects of a firm's political strategy. This research shows that a firm's political connections can be both an asset and a liability. That is, although firms benefit from their connections to governments with decision‐making authority, they can be caught in the crossfire when there is a rivalry between governments. Furthermore, our research suggests that firms can cope with the negative impact from political rivalry by taking advantage of the structural relationships within the political system and influencing governments that have constraining power.     

A path to value creation for foreign entrepreneurs

Research summary : Firms founded by foreign entrepreneurs constitute an influential and growing part of the world economy. Yet, the existing research has given little consideration to the strategies of foreign entrepreneurs beyond their decisions to start a firm. In this article, we address this gap by examining how foreign entrepreneurs may bring value to their firms as firm managers. We argue that foreign owner‐managers may benefit their firms by having access to home‐country resources. We demonstrate that, compared to hired local managers, foreign owner‐managers reduce firms' operating costs by disproportionately hiring home‐country labor when this labor is more cost‐efficient. This effect is larger for labor‐intensive industries and for entrepreneurs from less wealthy countries. Managerial summary : Foreign entrepreneurs represent an important part of the world economy. Yet, we know little of how foreign entrepreneurs manage their firms. In this article, we examine whether foreign entrepreneurs and domestic managers hire different employees. We find that when foreign entrepreneurs manage their firms personally, they hire a larger number of foreign workers, and such workers are cheaper and more productive than the local labor. Conversely, domestic managers tend to hire local employees, despite their higher relative wages. Foreign owner‐managers are particularly valuable in labor‐intensive industries and when their home‐country labor is inexpensive. Copyright © 2015 John Wiley & Sons, Ltd.     

A clash of governance logics: Foreign ownership and board monitoring

We ask whether and when shareholder‐oriented foreign owners are likely to change corporate governance logics in a stakeholder‐oriented setting by introducing shareholder‐oriented governance practices. We focus on board monitoring and claim that because the bundle of practices used in a stakeholder context does not protect shareholder‐oriented foreign owners' interests, they seek to introduce their own practices. Our results suggest that board monitoring is only activated when shareholder‐oriented foreign ownership is high and that the influence of foreign ownership is especially strong in firms without large domestic owners, with high levels of risk and poor performance. Our findings uncover the possibility of the co‐existence of different corporate governance logics within a given country, shaped by the nature and weight of foreign owners Copyright © 2014 John Wiley & Sons, Ltd.     

Postacquisition turnover among U.S. top management teams: an analysis of the effects of foreign vs. domestic acquisitions of U.S. targets

An analysis of postacquisition top management turnover among 168 cross-border and 102 purely domestic acquisitions, and a control group of 120 nonacquired U.S. firms, revealed that turnover rates in firms acquired by non-U.S. acquirers were significantly higher than in firms acquired by other U.S. firms or the control group. Further, the timing of postacquisition turnover differed in the foreign vs. domestic acquisitions. Finally, the nationality of the foreign acquirer was found to be an important predictor of turnover in certain acquisition categories. Theoretical and practical implications are discussed. © 1997 by John Wiley & Sons, Ltd.     

Resource complementarity and value capture in firm acquisitions: The role of intellectual property rights

Extant literature holds that firm acquisitions create value through innovation if the knowledge bases of the acquirer and the target complement each other. Little is known about the value that patents associated with a target's knowledge convey to the acquirer, i.e., their value in securing market exclusion and freedom to operate in R&D. We argue that such property rights hold preemptive power allowing firms to capture the value from combining complementary technologies and to realize gains from trade in strategic factor markets. Our results for a sample of 1,428 acquisitions indicate that—controlling for technological value—acquired preemptive power is an important determinant of the acquisition price, particularly when the acquirer is technology intensive and acquired patents are highly related to the acquirer's knowledge base. Copyright © 2013 John Wiley & Sons, Ltd.