Research examines firms’ preferences for technological acquisition

Wednesday, July 14, 2021

Why do some firms routinely acquire more technology than others?

That’s the central question addressed in a recent study by Luis Rios, an assistant professor in the strategic management area at Purdue University’s Krannert School of Management. The paper, “On the origin of technological acquisition strategy: The interaction between organizational plasticity and environmental munificence,” was recently published in Strategic Management Journal.

“There is evidence to suggest that mature, innovative firms tend to have a preferred mode for accessing new technology: either by making it internally or buying it from other firms,” Rios says. “For example, Cisco Systems, Google, and Johnson & Johnson have a reputation for getting much of their technology externally, while Nvidia and Netflix favor internal innovation.”

To explore a possible demarcation point for why some technology firms become more acquisitive than others, Rios examines the interaction between organizational plasticity and environmental munificence. Plasticity is conceptualized as an organization’s ability to adapt to its environment and move beyond it. Environmental munificence is defined as the magnitude of opportunity available for a company to exploit.

The core argument of the paper is that firms that can more easily adapt during times when acquisitions are easier will be more likely to make technological acquisition a part of their regular repertoire in the long run. Using a novel dataset on 1,201 firms that went public between 1983 and 2007, Rios finds evidence of a persistent divergence even twenty years after a firm’s initial public offering (IPO).

“I investigate how financial market conditions affect young firms around the time of going public, and show that recently IPO’d firms that experience depressed mergers and acquisitions markets go on to rely less on acquisitions when they mature,” Rios says. “Importantly, these firms seem to develop more technologies in-house, suggesting that some early events in their life may have long-lasting consequences that may be difficult to change.”

Conversely, firms that go public further away from the next M&A recession engage in more technological acquisitions well into maturity. “This effect actually strengthens over time, rather than attenuate as one might expect if it were a simple elastic response to a temporary shock,” Rios says.

The findings are informative to managers and highlight a novel factor that firms might consider in assessing their constraints to change.

“For example, firms that grow up in times of depressed acquisition markets may have tougher internal obstacles to overcome along the way of adopting an acquisition strategy, such as entrenched roles and compensation structures that reward internal development,” Rios says. “These may not be as responsive to a top-down decree for different strategy, which may partially explain why some firms seem to struggle with acquisitions despite great efforts and repeated attempts.”

Go to https://doi.org/10.1002/smj.3255 to read the full version of the paper.