International acquisitions and their effect on the
target subsidiaries’ product innovation
By Jeannette Itta
University of Groningen Faculty of Economics and Business Master Thesis IB&M (EBM719A20)
June 21st 2017
First supervisor: Dr. M. H. F. Ridder de van der Schueren Co-assessor: P. J. Marques Morgado
Word count: 11.469
Gratamastraat 21a 9714 HN Groningen E-Mail: j.f.itta@student.rug.nl
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Abstract
This paper contributes to the international business literature by focusing on post-acquisition product innovation at the subsidiary level. In addition, the effect of different factors, such as the cultural diversity, previous experience of the acquirer and target firm and the development of organizational aspects in the acquired subsidiary. The bases of the research are two contradicting theories, the organizational adaptation view and the organizational disruption view.
The sample consist of acquisition from 2013 with acquirer firms located in the EU and North America and operating in the FMCG, high-tech, pharmacy or medical device supply industry. The sample data is secondary data and collected via the Zephyr and Orbis databases. For the hypotheses testing a t-test and regression analyses are performed.
Key words: Multinational enterprises, subsidiary management, international
acquisitions, product innovation
Research theme: International acquisitions and their influence on the target subsidiaries’
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List of Contents
1. Introduction ... 6
2. Literature Review ... 10
2.1 (Product) Innovation ... 10
2.2 Organizational adaptation and organizational disruption view ... 11
2.3 Moderating factors on the post-acquisition product innovation performance ... 13
2.3.1 Cultural diversity effects ... 13
2.3.2 Previous experience ... 14
2.3.3 Organizational development ... 16
2.4 Conceptual model ... 18
3. Methodology ... 20
3.1 Sample and data collection ... 20
3.2 Variables ... 21 3.2.1 Dependent variable ... 21 3.2.1 Independent variable ... 22 3.2.1 Control variable ... 23 3.3 Research methods ... 23 4. Results ... 26 4.1 Descriptive statistics ... 26
4.2 Paired sample T-test ... 27
4.3 Pearson correlation ... 28
4.4 Regression analysis ... 30
5. Discussion ... 36
5.1 Theoretical implications ... 36
5.2 Practical implications ... 38
5.3 Strengths, limitations and future research ... 38
6. Conclusion ... 40
Acknowledgement ... 41
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List of tables
Table 1: Descriptive statistics analysis results ... 27
Table 2: Paired sample t-test analysis results H1a and b ... 28
Table 3: Pearson correlation analysis results ... 30
Table 4: Linear regression analysis results H2 ... 31
Table 5: Linear regression analysis results H3 ... 32
Table 6: Linear regression analysis results H4 ... 33
Table 7: Linear regression analysis results H5 ... 34
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List of abbreviations
EU European Union
FMCG Fast moving consumer goods M&A Merger and acquisition MNC Multinational corporation R&D Research and Development
ROA Return on assets
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1. Introduction
“The heart and soul of a company is creativity and innovation.” - Bob Iger (CEO of Disney) -
This above citation of Bob Iger, the current CEO of Disney, highlights the importance and essentialness of creativity and innovation within an organization by comparing them to the heart and soul of a human. The heart, or the business’ profitability and growth, is the company’s engine to survive. The soul, or the business’ brand image and impression, is the company’s expression to its (potential) customers. Innovation, including creativity as a prerequisite of it, is a main factor driving a company’s success. Thus, it is a highly discussed topic in the current academic and practical business management literature. However, as there are always new business trends and environments, the context in which innovation is taking place is also constantly changing.
Innovation is a broadly used term, which can be applied to different contexts. One of the most discussed and familiar contexts is probably the product innovation, nevertheless of new or existing product development (Khazanchi, Lewis and Boyer, 2007). Especially, on the global market, product innovation is an essential part of the MNC’s success. If a product does not fit to the markets demands, the product launch and, consequently, the market extension are a failure and lead to a negative development of the MNC’s performance. Hence, the market knowledge of the different countries or regions a MNC is operating in a crucial resource for a business’s success or even survival (Salomo, Weise and Gemünden, 2007).
M&As are a common method for MNCs to acquirer or access external knowledge of a new market or technology and, ergo, enhance its innovation (Bauer, Matzler and Wolf, 2016). Besides for product innovation purposes, the gained knowledge is used for adapting strategies and routines to the local market. Thereby, the MNC must combine the MNC’s and local M&A firm’s knowledge, needs and standards to make the M&A successful and competitive on the local market as well as within the MNC’s network. Nevertheless, the expected positive effect of an M&A can only be reached with a successful integration of the target firm into the MNC (Bauer et al., 2016).
7 the R&D department can more easily access and observe the local market trends and needs. Possible misunderstandings between the local subsidiary and the headquarter and inefficient and ineffective communication exchange are decreased or even avoided. Consequently, the MNC can quicker react to local market needs and quicker introduce the localized products. (Bauer et al., 2016) Hence, it is important to understand if the acquisition of a subsidiary influences the subsidiary’s innovation level.
An acquisition is a massive event for the involved organization, as it comes with a lot of changes and challenges. Therefore, this study, is based on the contradicting organizational adaptation and disruption theories. The earlier highlights the positive effects of external events, while the latter highlights the negative effects of them. (Pfeffer and Salancik, 1978) In other words, the organizational adaptation view expects a positive effect of the acquisition on the subsidiary’s innovation. Due to the acquisition the subsidiary has access to new knowledge from the acquirer MNC. Further, the target firm has to adopt its processes and routines to the ones of the MNC, which bears chances for improvements in effectives and efficiency and innovation. (Feldman, 2000) Due to the new knowledge exchange and routines, the target’s innovation is expected to increase. On the other side, the organizational disruption view expects a negative effect of the acquisition on the subsidiary’s innovation. The existing management and employees might show a conscious or subconscious negative reaction to the acquisition and its consequences. This might be based on missing target firm-specific knowledge from the acquirer firm (Bailey and Helfat, 2003), which could result in misunderstandings and bad information transfer (Grossman, 2007) and, thus, the cooperation and integration might fail.
8 Moreover, previous international experience of the acquirer firm could influence the target firm’s innovation as well. Due to the gained knowledge and experience, the acquirer firm is likely to have better integration routines in place, as well as to adopt these to the specific acquisition conditions. Thus, the overall integration of the target firm into the acquirer MNC is smoother and less distracting for the acquirer and especially the target firm’s employees. (Feldman and Pentland, 2003) At the same time, previous experience of the target firm as operating as a subsidiary, especially as an international subsidiary, should increase the success of the integration as well. With previous experience, the target firm is not confronted with the new situation of being managed from another firm, which makes the transition easier and the disruption smaller. Also, it is more likely to know how to operate as a subsidiary, including, for example, the communication and cooperation as well as decision-making processes within a MNC.
The employees’ perception of certain events can be an important factor for the post-event outcome, as the employees are the ones who have to be cope and manage the post-event or with the event. If they experience negative feelings, such as angst of losing their employment (Cavanaugh, Boswell, Roehling and Boudreau, 2000) or a decrease in job satisfaction and company loyalty (Podsakoff, LePine and LePine, 2007), the company’s performance will suffer, including its innovation. Thus, it is worth investigating the target firm’s organizational circumstances. One factor to focus on is the workforce development during the acquisition, as a workforce downsizing might have different signals depending on its degree (Brauer and Laamanen, 2014). In addition, a decrease of financial resources might provoke such negative feelings as well, while, at the same time, it could increase efficiency.
For shortly outlined reasons, the research focuses on the effect of an international acquisition on the innovation level of the target firm. Additionally, different factors expected to influence the effect of an international acquisition are included. Hence, the main research question of this study is as followed.
What influence does an international acquisition has on the product innovation of the target firm and how is it affected by cultural diversity, previous experience and the development of organizational factors?
9 Roumani (2015), for example, researched prior experience and its influence on the acquirer firm’s innovation, based on the resource theory and the exploration and exploitation capabilities of the cooperation. Later research highlighted the importance of shared mental models of the target and acquirer firm’s tasks and teams for a successful exploitation after M&As (Dao, Strobl, Bauer and Tarba, 2017). Also, frameworks for an outside-in assessment of a company’s possible innovation due to M&As (Aminova, 2016). Additionally, most studies found in this research area are focusing on the high-tech industry.
This study adds to the existing innovation and M&A literature by focusing on the target firm’s perspective instead of the acquirer. This supports a better understanding of the complexity and diversity of relationships between target and acquirer firms as well as subsidiary and parent companies, along with insights on the acquired subsidiary itself. This is done by applying theories from different research areas on the international acquisition and innovation context. Further, this study does not focus on one specific industry and, thus, provides more generally applicable insights on post-acquisition innovation of target subsidiaries than previous researches.
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2. Literature Review
This section gives an overview of the current literature of the research context, which includes an overview of the organizational adaptation and organizational disruption theory as well as different factors expected to influence product innovation after an acquisition in the acquired subsidiary. Based on the discussed literature, hypotheses are created and a conceptual model is introduced.
2.1 (Product) Innovation
It is well known that innovation is an essential part of a business’ success or even survival especially in highly competitive and fast-paced industries (Adams, Bessant and Phelps, 2006; Anderson, Potočnik and Zhou, 2014), as it is an important aspect of the firms’ competitive advantage and influence of its performance (Salomo et al., 2007). However, innovation is a broad term and includes different kinds of innovation, like, for example, process, business model or product innovation. (Khazanchi et al., 2007) Thus, there are many different definitions of innovation available for the different kinds of innovation, covering different aspects and characteristics of innovation (Adams et al., 2006). However, Baregheh, Rowley and Sambrook (2009) combined all common characteristics of innovation into one broadly applicable definition. They defined innovation as “the multi-stage process whereby organizations transform ideas into new/improved products, services or processes, in order to advance, compete and differentiate themselves successfully in their marketplace” (Baregheh et al., 2009, p. 1334). This definition highlights that innovation is a process which leads to certain outcomes. Further, it gives innovation the aim to make organizations (more) competitive on the market as well as it is stresses that innovation can, for example, be the creation of a completely new product as well as it can be an existing product with improved or new features.
11 Jakobsen, 2011). The different influences on a company’s innovation are split into bottom-up emergent and top-down processes. The latter describes the contextual influences from the company’s industry environment, also referred to as institutional pressures. The bottom-up emergent processes illustrate the individual and team innovation behaviour and characteristics influencing the organization’s innovation process and outcome. (Gupta et al., 2007) The concept of the bottom-up emergent processes lays the basic understanding for this study on innovation and the theoretical concept of influencing factors on a company’s product innovation after an acquisition.
All kinds of innovation help an organization to improve and compete on the market, directly and indirectly. Product innovation is an important part when expanding as well as defending a company’s market share (Sharma, Davcik and Pillai, 2016), nevertheless, if an existing product is improved, new features are added or a completely new product is created. Therefore, this research focuses on the innovation of products.
2.2 Organizational adaptation and organizational disruption view
In general, the organizational adaptation view suggests that organizations are adapting to external events and the changing environment (Pfeffer and Salancik, 1978), by for example being acquired by another company. Acquisitions often lead to changes in the top management team (TMT) by introducing management team members from the acquirer’s firm. These new managers have positive effects on the acquired organization, such as new information flow routines between the management, which, consequently, has a positive influence on the organization’s innovation and information processing (Menon and Pfeffer, 2003). Additionally, to the change in information flow, the external manager has a different knowledge than the internal managers and, thus, can increases the knowledge resources of the organization (Tushman and Rosenkopf, 1996). In other words, an external manager can enhance the organization’s knowledge and learning as well as it gives the organization a different and new perspective on things. Consequently, assuming that managers from the acquirer are transferred to the target firm, an acquisition should increase the information flow between the acquirer and the target firm, which supports the learning effect and processing of information in the subsidiary.
12 and creative actions by the employees. (Feldman, 2000) Routines build a stable basis and instruction guideline for employees on how to approach and manage certain tasks, nevertheless, these routines are not fixed and can be adapted to changing needs (Feldman, 2000). Thus, it is suggested that a disruptions cause employees to adapt or change current routines in order to adapt to the new situation (Feldman, 2000). Adopting Baird, Chaffin and Wrathall’s (2017) findings to an organizational context, the intensity of the disruption is a crucial factor for the following degree and success of adaptation. The organization and its employees are more likely to adjust successfully to the new situation, when the disruption has a low or high intensity. In such situations, routines have to be either slightly adapted or completely re-created, which are two distinct actions as well as it is easy for the employees to identify which action has to be taken to cope with the disruption. In contrast, when confronted with a middle-level disruption, it is harder to find the right fit of adaptation and recreation of the routines. Subsequently, the organization’s performance and innovation suffers, due to inadequate routines and structures. Hence, the intensity of the disruption decides on the organization’s post-success and innovation level.
On the other side, the organizational disruption view proposes that an external manager has a negative influence on the organizations performance (Vancil, 1987). One explanation for this is that external managers do not have the needed firm-specific skills when entering the new organization (Bailey and Helfat, 2003). Thus, it is likely that team members interrupt the organizations’ routines and performance (Grossman, 2007). Moreover, interpersonal issues between the managers of the acquirer and the target firm can arise. Previous research found that the already existing management team might have issues adapting to the managers as well as to their ideas and practices (Friedman and Singh, 1989), due to misunderstandings, bad communication and dysfunctional information transfer (Grossman, 2007). This suggests, that the missing firm-specific knowledge and the different knowledge and practices of the different managers can hinder the organizations’ success.
13 Hypothesis 1a. The product innovation level of a subsidiary increases in the short-term after being acquired by an organization based in a different country.
Hypothesis 1b. The product innovation level of a subsidiary increases in the long-term after being acquired by an organization based in a different country.
2.3 Moderating factors on the post-acquisition product innovation performance Nevertheless, which variable looked at, there are always different factors influencing it and its effects different outcomes. As a consequence, possible influencing variables on the product innovation development are discussed.
2.3.1 Cultural diversity effects
From previous research on cultural diverse (management) teams it is known, that “outsiders” can enhance organizational performance. Especially organizations with a focus on innovation or growth seem to profit from diversity. (Guillaume, Dawson, Otaye-Ebede, Woods and West, 2017) This supports the organizational adaptation view. Homogeneous teams tend to criticize each other less and, hence, might overlook details of importance when making decisions (Jehn, 1995). On the contrary, decision-making in divers teams prevents group-thinking and decision bias (Milliken and Martins, 1996) by considering more and divers options when making decisions. In other words, divers teams gain from the different experiences and mindsets of their members (van Knippenberg, De Dreu and Homan, 2004) and this diversity of backgrounds establishes ground for new ways of thinking and combining information and practices (Page, 2007). Some researchers state that team diversity is even more important than the skills of an individual in the group (Hong and Page, 2004). Specifically cultural diversity is stressed to increase creativity and, consequently, supports innovation (De Dreu and West, 2001). This suggests that, indirectly, an international acquisition has a positive effect on the organizational innovation, due to the improved decision making and increase in creativity within the teams.
14 diversity can cause such issues, due to possible mistrust or angst (Janssen et al., 2004) and the fact that people are more likely to interact with similar people in terms of personality and preferences (Williams and O’Reilly, 1998). This can lead to creation of sub-groups within the firm. Furthermore, previous research suggests, employee motivation and unity with the organization are higher, when the management diversity represents the diversity within the organization (Daily and Schwenk, 1996). This might cause issues in subsidiaries, where most of the employees are from the host country and have to report to a non-subsidiary national. On the other hand, diversity can increase commitment of the individual team members (Goodstein, Gautam and Boeke, 1994).
Furthermore, one striking characteristic of a culture is its language. If employees do not share the same language, they are unable to communicate, share knowledge and built relationships, which are important factors for innovation and organizational performance. (Ahmad and Widén, 2015) This can also lead to sub-groups within the workforce. Also, the implementation of a corporate language can lead to resistance within the subsidiary’ employees, due to difficulties or insecurity with the language. This can lead to changes in the tasks of employees (Brannen, Piekari and Tietze, 2014) as well as isolation or building of sub-groups in the workforce (Ahmad and Widén, 2015).
Considering the previous arguments, it is assumed that if the target firm had a cultural divers management team before the acquisition, the target’s innovation level is increasing after its acquisition. The management team is expected to cope better with the differences and possible conflicts between the acquirer and the target firm due to cultural differences, due as it was already previously confronted with these. In other words, the previous experience of the target firm reduces the cultural shock caused by the acquisition to the target’s management team. Consequently, following hypothesis is drawn.
Hypothesis 2. The subsidiary’s product innovation development due to an acquisition is positively influenced by the cultural diversity of its management team before the acquisition.
2.3.2 Previous experience
15 learning theory is one of them. It describes the capability of an organization to create and transfer knowledge in the most efficient and effective way. This knowledge, explicit or tacit, is based on previous experience of the organization (Argote, 2013), such as previous acquisitions or relationships to other firms. This knowledge gained from previous experience helps to create processes that help to integrate the target firm into the acquirer firm or to operate within an international corporation network. By adopting its existing knowledge and routines to the individual acquisition context, the company can create the needed flexibility for a successful integration (Feldman and Pentland, 2003). Moreover, acquirer firms with previous (international) acquisition knowledge identify quicker possible issues and conflicts than acquirers with no or only little experience (Reuer and Ragozzino, 2008). Consequently, arising issues can be solved before they are getting serious and could harm the acquisition’s success.
The similar the previous acquisition experiences are to the one in focus, the better the knowledge can be adjusted to the current acquisitions (Hayward, 2002). Experience-based knowledge does not only have to include best practices, also negative experiences can contribute to a firm’s knowledge (Chatterjee, 2009). This implies that, if the acquirer firm has had international acquisition experience before the acquisition in focus, the acquisition is expected to be more successful. On the other hand, if the acquirer firm only collected national acquisition experience or even no experience in acquiring another firm, the acquisition is expected to be less successful.
Previous experience is not only important when managing a subsidiary, it is also of importance during the planning and the integration phase (Barkema and Schijven, 2008) as the success of an acquisition is highly dependent its process management (Zollo and Singh, 2004). Especially the integration of the target firm into the acquirer’s corporation network requires a high level of communication and knowledge sharing between the two firms. Thus, previous experience helps both companies to create an effective and efficient knowledge and information exchange.
16 After evaluation of the discussion on previous experience, it is assumed that previous experience, especially international experience, supports the positive effect of the acquisition on the target’s innovation level. The earlier gained knowledge on how to manage and integrate the acquired firm after its acquisition can reduce possible problems between the firms. The same is expected for earlier experience of the target firm, as it already knows the expectations and general procedures of how to operate as a subsidiary. Additionally, international experience gained before the acquisition is expected to support the acquisition’s effect even more, than only experience on a national level. These assumptions lead to following hypotheses.
Hypothesis 3. The subsidiary’s product innovation development after an acquisition is positively influenced by previous international acquisition experience of the acquirer firm.
Hypothesis 4. The subsidiary’s product innovation development after an acquisition is positively influenced by previous international subsidiary experience of the target firm.
2.3.3 Organizational development
Managers’ innovation can be decreased by increasing pressures to exceed previous successes and to meet strict financial targets. (Benner and Ranganathan, 2012) In addition to this, managers with high pressures on achieving high on the capital market are less likely to make long-term investments (Holmstrom, 1989). In other words, teams with a high priority on financial performance indicators are less likely to have a high innovation level than teams with less strict or different performance indicators. The expectation that important resources, like, for example, financial resources or employees, could be reduced as a consequence of bad financial performance, leads to less risk-taking and experimentation and, thus, to less entrepreneurial and innovative behaviour of the employees and managers (Rajan, 2012).
17 Another interesting aspect of the pre-acquisition performance of the subsidiary, is its employee development. Employees are an important aspect when it comes to innovation, as it is a knowledge-intensive action and requires a high level of mental knowledge (Argote and Ingram, 2000). Therefore, it can has negative indirect impacts on innovation, if employees experience negative stress due to role ambiguity, high unnecessary bureaucracy, organizational politics or feelings of job insecurity. (Cavanaugh et al., 2000) This kind of stress is limiting the growth and success of the individual employee. Additionally, it reduces the employees’ job satisfaction, job performance and commitment to the organization (Podsakoff et al., 2007). Subsequently, the creativeness of the individual employee is decreasing (Byron, Khazanchi and Nazarian, 2010) and the organization’s idea generation (Ren and Zhang, 2015). Put differently, due to massive workforce reduction, what is often an generally known side effect of acquisitions, employees might experience stress due to feelings of job insecurity and their creativity and performance is decreasing. This can indirectly influence the innovation level of an organization.
Brauer and Laamanen (2014) argue that downsizing can have a negative as well as a positive effect on a firm’s performance depending on the degree of the downsizing. Medium-scale downsizing seems to have no significant effect on a firm’s performance, whereas, small- and large-scale downsizing influence a firm’s performance. Due to large-scale downsizing employees are forced to rethink and reorganize existing structures and routines, while small-scale downsizing lead to an efficiency increase of the existing routines. Additionally, firms that experience downsizing while also experiencing a decrease in financial performance, are more likely to have less time to adopt to the new situation, and, thus, are less capable of adapting to it, which decreases the actual positive effects of downsizing (Ginsberg and Baum, 1994).
On the other hand, workforce reduction can be counterproductive, as the remaining employees interpret it as a negative action which influences their perspective and loyalty on the organization (Powell and Yawson, 2012).
18 (Hammond, Neff, Farr, Schwall and Zhao, 2011). However, also sufficient resources, such as enough budget, equipment and human resources, add to a positive organizational innovative climate, to be able to fulfil the innovation implementation (Witt and Carlson, 2006). Therefore, the company’s performance also influences the innovative work behaviour of the company’s workforce (Shanker, Bhanugopan, van der Heijden and Farrell, 2017). In environment where employees experience motivation and open participation (Brown and Leigh, 1996) as well as freedom in their tasks, they are more likely to take initiative and control (Si and Wei, 2012).
Based on the above reasoning, the workforce and financial development of the target firms during the acquisition has an influence on the acquisition’s effect on the firm’s product innovation. A decrease in financial resources is expected to decrease the positive effect of the acquisition, while an increase is expected to push the acquisition’s positive effect additionally. Apart from that, the workforce development is assumed to have a similar influence on the acquisition’s effect. Hence, following hypotheses are constructed.
Hypothesis 5. The subsidiary’s product innovation development after an acquisition is negatively influenced by a negative financial development.
Hypothesis 6. The subsidiary’s product innovation development after an acquisition is positively influenced by a negative development of the size of its workforce.
2.4 Conceptual model
19 The expected positive effect of the acquisition by an international acquirer on the target firm’s product innovation (H1a and b) builds the bases of the conceptual model. Based on this effect, the different expected influential factors explaining the product innovation development after the international acquisition are displayed. More precisely, the positive effect of cultural diversity of the target’s firm management (H2), the acquirer firm’s (international) acquisition experience (H3) and the target firm’s (international) experience of operating as a subsidiary (H4) on the product innovation development of the target firm is highlighted on the upper part of the model. On the lower part of the model, the negative influence of a negative financial development of the target firm (H5) as well as the positive effect of a negative workforce development of the target firm (H6) are pointed out.
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3. Methodology
This section illustrates the collection of the sample and gives insights about the independent, dependent and control variables. Subsequently, the research methods used for analysing the sample data are described.
3.1 Sample and data collection
Previous analysis was conducted to identify the most convenient sample for this research. First, an analysis to identify the countries with the highest number of acquirer firms was conducted. The data was gathered from Zephyr and included all countries from for the year 2008-2016. The output showed that 2014 was the year with the most acquisitions. A second analysis was done to determine the industry with the highest level of innovation, based on the number of patents. The dataset was collected from Orbis. The outcome showed the FMCG, high-tech, pharmacy and medical device supply industries as the most innovative industries. Finally, based on Zephyr data an analysis of the countries with the most acquirer firms was conducted. The output showed that mainly countries in Europe and in North America had with the most acquirer firms.
21 Due to time limitations, it was not possible to contact the firms directly, therefore, the data had to be secondary. Thus, the company data of the sample was acquired via the Orbis database (Dao et al., 2017). The sample data included data on the acquirer and target company and was collected for the period from 2010 until 2016.
The data was matched based on the companies BvD ID number. This was the best option as Zephyr and Orbis both provide this identification number and it has the highest frequency compared to other identification systems in this dataset. However, after matching the acquirer and target companies with the acquisitions, only 335 acquisitions could have been matched with both of its acquirer and target company. Moreover, after checking data availability of patents per acquisition, again, the sample had to be reduced to the size of 101 acquisition. This sample size was used to conduct hypotheses 1a and 1b, to increase significance. Later, the data availability of the control variables and the innovation development variable were checked and let to a further reduction. The remaining independent variables strongly differ in their sample size, however, there will be no reductions based on their availability, to keep the sample size has big as possible for each individual analysis of the different variables and, consequently, receive more significant results. Thus, the final sample size consists of 51 acquisitions. This sample size was used for hypotheses 2 till 6.
3.2 Variables
3.2.1 Dependent variable
22 patents are at the end of an innovation process, they only represent the final stage or outcome of product innovation and representing only a small part of a company’s product innovation. Consequently, as an indication for product innovation in this study, only published patents of the subsidiaries are used as there is no sufficient data on the target’s R&D spending available.
To analyse the first part of this research, the effect of an international acquisition on the target’s innovation level, the total numbers of patents for the long-term and short-term are used. The patents are assigned to the corresponding time frame they were published, before and after the acquisition, which allows a comparison between the two periods. Only patents that were registered three years before (2010-2012) and after (2014-2016) the acquisition are included in the analysis for the long-term effect. For the short-term effect only patents that were registered one year before (2012) and after (2014) the acquisition are included.
For the second part, to analyse the effect of different factor on the target’s patent development due to the acquisition, the development of the total number of patents is used. Contrary to the first part of the study, the second part will focus only on the long-term development of the target’s patents. The development is calculated by the relational difference from the earlier time frame to the later time frame and is indicated in percent. The time frames are as aforementioned for the first dependent variable.
3.2.1 Independent variable
The first independent variable for this study is the cultural diversity of the subsidiary’s
management team, which is measured by the amount of different nationalities per
management team before the acquisition. In this case, the time after the acquisition is defined as three years (2010-2012).
The second independent variable describes the previous experience of the target firm
with a parent company It indicates if the target firm was operating independently before the
23 international experience = 1, rest = 0). This variable indicates if the acquirer had previous experience of acquisitions and if so, if it had only national or also international experience of acquiring other firms.
Additionally, the subsidiary’s financial development is indicated with the change of the subsidiary’s return of assets (ROA). By measuring the financial development in ROA, a relational comparison of the companies can be guaranteed. Moreover, ROA is the most commonly used indicator for financial business performance. (Guthrie and Datta, 2008) It is calculated by the dividing the net income by the total assets of the specific year. In this study, it is calculated for the years 2012 and 2013. The development is expressed by the percentage points of the difference between the years.
The last independent variable in this research is the subsidiary’s workforce
development. It indicates the development of employees during the acquisition. The
calculation procedure equals the calculation of the aforementioned variable. It is indicated by the percentage change of the subsidiary’s number of employees from 2012 to 2013.
3.2.1 Control variable
To check for further factors influencing the degree of innovation of an international subsidiary after its acquisition apart from the ones focused on in this study following control variables are included in the analysis. Two organizational describing variables per firm are used.
The first control variables are the target’s and the acquirer’s age, which are calculated by the number of years the target or acquirer firm were established in the year of the acquisition. Another control variable is the target’s firm size and the acquirer’s firm size during the year of the acquisition, both indicated by their total number of employees.
3.3 Research methods
24 For the hypotheses testing of H1a and H1b, a comparison of the two different sub-samples needs to be done. By doing so, it is analysed if there is the assumed short-term (H1a) and long-term (H1b) increase in innovation when a foreign firm acquires a subsidiary. An appropriate analysis method, in this case, is the paired sample T-test. This means, first, the correlation between the two samples is check based on a two-tailed significance and the Cronbach’s Alpha test. Subsequently, the actual t-test is performed, including the F-test for the variance analysis of the samples. (Keller, 2009)
For the second part, including hypotheses 2 to 6, a multi regression analysis would be a preferred analysis method for this study, as the effect of more than one independent variable on the dependent variable is analysed. It is a common method to prove the relationship between multiple variables and to predict an independent variable’s effect on a dependent variable. Additionally, it also indicated the degree of a dependent variable can be explained by the independent variables. (Keller, 2009). In this case it could also make sense to group certain independent variables from a theoretical perspective, such as the target firm’s financial and workforce development. However, in this case, the independent variables data sets have different sizes, which is not suitable for a multi regression analysis. The data must be available for all sample cases, otherwise, it will calculate the false results. Ergo, multiple linear regression analyses are performed to avoid the diversity in sample data availability of the independent variables.
Prior to the regression analyses, the dependent and independent variables are tested for correlation, as a pre-test to all regression analyses. This is done by using the Pearson correlation analysis. Thereby, first indications of the relationships between the variables can be drawn. (Keller, 2009) The general equation for a linear regression analysis is as followed.
Υ = α + βΧ + ε
Υ = dependent variable Χ = independent variable
25 ε = error terms, residual
Hence, the equations for the different regression analyses based on the individual hypotheses are as followed.
Hypothesis 2:
Target’s patent development = α + β1 target’s board diversity + β6 target firm age +
β7 acquirer firm age + β9 target’s firm size + β10 acquirer’s firm size + ε
Hypothesis 3:
Target’s patent development = α + β3 previous acquisition experience of acquirer +
β6 target firm age + β7 acquirer firm age + β9 target’s firm size + β10 acquirer’s firm size + ε
Hypothesis 4:
Target’s patent development = α + β2 previous subsidiary experience of target + β6
target firm age + β7 acquirer firm age + β9 target’s firm size + β10 acquirer’s firm size + ε
Hypothesis 5:
Target’s patent development = α + β4 target’s financial development of + β6 target
firm age + β7 acquirer firm age + β9 target’s firm size + β10 acquirer’s firm size + ε
Hypothesis 6:
Target’s patent development = α + β5 target’s workforce development + β6 target firm
26
4. Results
In this section, the hypotheses are tested and the results are stated and interpreted. First, the descriptive statistics as well as the Pearson correlation are interpreted to give an overview of the data and sample. Later, the hypotheses are tested and interpreted by using a paired sample t-test and a regression analysis.
4.1 Descriptive statistics
The descriptive statistics give a first overview of the main variables. The results for all variables can be seen in table 1. The variables from the first part of the study (H1a and H1b), total number of patents for the years before and after the acquisition, have a relatively big sample size with 101 acquisitions. Also, a first indication for the hypotheses can be done, as the samples mean for both time periods before the acquisition shows a lower mean with 4.32 in the long-term and 1.8 in the short-term than the period after the acquisition with 6.35 in the long-term and 2.15 in the short-term.
The variables of the second part of this study have only a sample size of 50 acquisitions. The small size is due to the elimination of sample cases with missing variables. Moreover, the different sample sizes of the other independent variable are depicted. The long-term patent development has a mean of 23 % which supports the statistics mentioned above, that an increase in patents after the acquisition is clearly visible.
27 Descriptive Statistics
N Range Minimum Maximum Mean SD
Target’s patents before acquisition (long-term)
101 51 0 51 4.32 9.081
Target’s patents after acquisition (long-term)
101 100 0 100 6.35 14.463
Target’s patents before acquisition (short-term)
101 31 0 31 1.80 3.758
Target’s patents after acquisition (short-term) 101 21 0 21 2.15 4.834 Subsidiary’s patent development 50 700.00% -100.00% 600.00% 23.19% 155.81% Target’s management
team diversity before the acquisition 50 3 1 4 2.20 1.14 Acquirer’s international acquisition experience (dummy) 10 1.00 .00 1.00 .82 .38 Acquirer’s national acquisition experience (dummy) 50 1.00 .00 1.00 .08 .27 Target’s international subsidiary experience (dummy) 50 1.00 .00 1.00 .18 .39 Target’s national subsidiary experience (dummy) 50 1.00 .00 1.00 .28 .45 Target’s ROA development 50 274.30% -134.13% 140.16% -1.9% 42.86% Target’s workforce development 24 700.00% -600.000% 100.00% -7.44% 123.00% Target’s age 30 90.0 1.0 91.0 20.22 20.19 Acquirer’s age 50 118.0 4.0 122.0 48.46 36.93 Target’s size 27 143.28% -83.97% 59.31% 6.28% 27.52% Acquirer’s size 49 53.48% -35.59% 17.89% 4.88% 1.27%
Table 1: Descriptive statistics analysis results
4.2 Paired sample T-test
28 sample t-test is performed. To measure the product innovation the total number of patent for each period are used. The results are stated in table 2.
The correlation between the short- and long-term periods before and after are significant (p = .000). However, the t-test itself is not significant for both comparisons, t(100) = -.91, p = .367 (short-term comparison) and t(100) = -1.54, p = .126 (long-term comparison). Thus, the average number of patents after the acquisition of the subsidiary in the short-term (M = 2.15, SD = 4.83) and long-term analysis (M = 6.35, SD = 14.46) does not significantly differ from the average short-term (M = 1.80, SD = 3.76) and long-term (M = 4.32, SD = 9.08) number of patents before the subsidiary’s acquisition.
Hence, hypotheses 1a and 1b are rejected, due to missing significance. This means that there is no difference in product innovation between the two periods, neither in the short- or long-term. The international acquisition does not have a significant effect on the target’s product innovation.
Mean values of patents pre-and post-acquisition
Short-term perspective Long-term perspective Pre-acquisition Post-acquisition Pre-acquisition Post-acquisition
t-statistic t-statistic
Patent development 1.80 2.15 4.32 6.35
-.91 -1.54
Table 2: Paired sample t-test analyses results H1a and b
4.3 Pearson correlation
As part of the regression analysis as well as in addition to the descriptive statistics, the Pearson correlation indicates if variables are highly correlated with each other. The correlation is indicated on a scale from -1 to 1. A negative value indicated a negative correlation, while a positive value indicates a negative correlation between two variables. (Keller, 2009) The results can be seen in table 3.
29 acquisition experience (r = .421, p = .021). This suggests an increase of workforce, when the acquirer has previous international experience. Moreover, previous international experience shows to correlate with the acquirers age (r = .282, p = .047). Both correlations make sense, as the older a company is, the more experience it has, thus, chances are high that this experience is international.
Moreover, previous experience with a national headquarter of the subsidiary has a negative correlation with its workforce development during the acquisition (r = -.470,
p = .009), but a positive correlation with its actual workforce size (r = .295, p = .083). This
proposes that experience of the target firm regarding previous international connections to headquarters increases the likelihood that it has more employees, but also has a higher downturn of workforce. Additionally, an increase in the targets ROA increases the size of its workforce simultaneously, or vice versa. This is proposed by the positive correlation of the two variables (r = .819, p = .000).
Furthermore, the target’s firm size, used as a control variable, correlates positively with the target’s (r = .309, p = .002) as well as with its acquirer’s workforce size (r = .433,
p = .009) and the age of the acquirer firm (r = 350, p = .013). This indicates that the bigger the
30 Pearson Correlation Variables 1 2 3 4 5 6 7 8 9 10 11 1 Subsidiary’s patent development - 2 Target’s management
team diversity before the acquisition .036 - 3 Acquirer’s international acquisition experience (dummy) .151 .093 - 4 Acquirer’s national acquisition experience (dummy) -.090 .248 -.629** - 5 Target’s international subsidiary experience (dummy) .211 -.152 -.051 -.138 - 6 Target’s national subsidiary experience (dummy) -.028 -.371 .292* -.184 -.292* - 7 Target’s ROA development .054 - .221 .024 .014 -.020 - 8 Target’s workforce development .133 .405 .421* .032 -.470** .236 .819** - 9 Target’s age -.096 .233 .096 -.073 -.117 -.058 -.026 .204 - 10 Acquirer’s age .078 .317 .282* -.213 -.202 -.061 .001 .209 .350* - 11 Target’s size -.005 -.289 .056 -.105 .295* -.094 -.095 .087 .309* .150 - 12 Acquirer’s size .030 .365 .238 -.144 .065 .054 -.043 .035 .433** .255 .138 Table 3: Pearson correlation analysis results
4.4 Regression analysis
For the analysis of the second part of this study, including hypotheses 2 to 6, regression analyses are done, due to the continuous data characteristics. This analysis method can identify which independent variables are influencing the dependent variable and to which extent the dependent variable can be explained with by the different independent variables.
31 negative influence indicated, however, this is not significate. The insignificant results can be assigned to the very small sample size for this analysis. Neither have the control variables a significant influence on the patent development. Hence, hypothesis 2 is not supported.
Regression results H2
Model 1 Model 2
Steps and variables β SE β SE
Intercept -91.320 343.608 -89.569 384.997 Control Target age 7.068 29.563 7.986 36.152 Acquirer age 1.596 2.367 1.651 2.789 Target size .014 .209 .009 .247 Acquirer size -.001 .002 -.001 .002 Main effects Cultural diversity -6.661 106.492 R Square .120 .121 Δ R Square -.978
Table 4: Linear regression analysis results H2
32 Regression results H3
Model 1 Model 2
Steps and variables Β SE β SE
Intercept 19.111 39.946 -19.334 77.417 Control Target age -1.359 1.355 -1.270 1.379 Acquirer age .496 .668 .356 .700 Target size .009 .067 .009 .068 Acquirer size .000 .001 .000 .001 Main effects
Previous international acquisition experience (Dummy)
55.227 79.752 Previous national acquisition
experience (Dummy)
6.369 109.700
R Square .028 .043
Δ R Square -.090
Table 5: Linear regression analysis results H3
Also, hypothesis 4 is not supported by the results of this study. There is no significance of the relationship between previous (international) relationships to a headquarter by the target firm and the target’s patent development (R2
33 Regression results H4
Model 1 Model 2
Steps and variables Β SE β SE
Intercept 19.111 39.946 -16.824 50.106
Control
Target age -1.359 1.355 -.865 1.388
Acquirer age .496 .668 .758 .687
Target size .009 .067 -.033 .072
Acquirer size .000 .001 9.788E-5 .001
Main effects
Previous international subsidiary experience (Dummy)
107.779 69.197 Previous national subsidiary
experience (Dummy)
16.129 53.735
R Square .028 .081
Δ R Square -.047
Table 6: Linear regression analysis results H4
34 Regression results H5
Model 1 Model 2
Steps and variables β SE β SE
Intercept -44.638 48.373 -44.135 49.634 Control Target age .698 2.194 .669 2.252 Acquirer age .313 .587 .307 .602 Target size .030 .047 .031 .048 Acquirer size -.001 .001 -.001 .001 Main effects ROA development .142 .525 R Square .046 .050 Δ R Square -.213
Table 7: Linear regression analysis results H5
Hypothesis 6 argued that a target’s product innovation is positively influenced by its workforce development. Like fore the hypotheses before, no significant relationship between the target’s workforce development and its patent development can be found (R2
35 Regression results H6
Model 1 Model 2
Steps and variables β SE β SE
Intercept 8.778 45.376 15.359 47.340 Control Target age -1.133 1.513 -1.258 1.548 Acquirer age .981 .739 .915 .757 Target size .002 .066 .002 .067 Acquirer size .000 .001 .000 .001 Main effects Workforce development .132 .226 R Square .074 .087 Δ R Square -.103
36
5. Discussion
This section discusses the findings of the executed statistical tests from the previous section. This is done by elaborating the theoretical and practical implications of this study. Moreover, the limitations and recommendations for further research of the study are examined.
5.1 Theoretical implications
No evidence was found for the influence of an international acquisition on the target firm’s product innovation. This finding does not correlate with the organizational adaptation view as well as with the organizational disruption view. Thus, the interruption effect of an acquisition might not be strong or weak enough to influence the innovation process for new product development significantly, like the Baird et al. (2017) suggests. To see restructuring of processes within an organization, the interruption must be of low or high level. While interruption with a medium degree are more likely to evoke negative emotions and actions within the organization. Moreover, it might be that the positive effects associated with an interruption or event are neutralized by its negative effects. For instance, this would mean that managers transferring from the acquirer firm to the target firm do bring the new knowledge into the subsidiary (Tushman and Rosenkopf, 1996) and could lead to an increase in the subsidiary’s innovation level. However, the “external” manager might lack the target firm-specific skills to transfer his or her knowledge effectively (Bailey and Helfat, 2003) or there might be interpersonal issues within the team (Friedman and Singh, 1989), that cause a dysfunctional information transfer (Grossman, 2007). Thus, the target firm is unable to make use of the knowledge, or not as quickly as it is expected.
37 other words, the positive effects of team diversity have been already exploited so that an increase in diversity has no considerable impact anymore. Contradicting to this, the diversity level of the target firm might have reached the optimal degree of diversity within a team, so that the disadvantages exceed the advantages. Hence, sub-groups might emerge due to mistrust or angst within the team (Williams and O’Reilly, 1998; Janssen et al., 2004).
Previous (international) acquisition experience of the acquirer firm was predicted to increase the innovation level of the target firm, as it is expected to have a higher level of explicit and tacit knowledge regarding the integration and management of an (international) subsidiary (Argote, 2013; Barkema and Schijven, 2008). Moreover, the higher the level of experience, the more routinized the acquisition is expected to be. This would also mean that there are less conflicts and a quicker integration process of the acquisition. (Feldman and Pentland, 2003; Reuer and Ragozzino, 2008) However, the analysis showed that there is no statistically significant influence of previous acquisition experience. Also contradicting to the hypothesis made, previous (international) experience of the target firm as operating as a subsidiary also has no statistically significant influence on the target firm’s product innovation. Although, studies showed that previous experience helps organizations to overcome team and company barriers as well as with sharing and merging knowledge between the firms and, consequently, boosts innovation (Lin and Sanders, 2017). A theoretical reasoning might be the established routines and standardization of processes of the acquisition process and subsidiary integration. These tools might help to improve the process regarding efficiency and effectiveness for other factors (Feldman and Pentland, 2003), but for the innovativeness of the target firm it might have a negative influence. The target’s flexibility decreases and, thus, the organization’s creativity and innovation (De Dreu and West, 2001).
38 (Cavanaugh et al., 2000), instead of creating re-thinking and reorganization (Brauer and Laamanen, 2014). Mental stress decreases the employees’ creativity and mental flexibility, which is needed to re-think and restructure old routines and processes. Additionally, it causes the employees’ job satisfaction to decrease, which reduces the commitment to the organization (Podsakoff et al., 2007). This indirectly affects the organizational environment negatively and reduces the organizational innovative climate within the organization (De Jong and Den Hartog, 2010).
5.2 Practical implications
Acquisitions became a common practice for knowledge acquisition as well as more MNC are shifting or splitting the R&D locations to different locations worldwide. Thus, this research analyses a relevant topic in practice. By doing so, it gives managers an overview of the different organizational factors influencing a target’s innovation.
Based on the results of the analysis, no practical recommendations can be done. Nevertheless, it can be suggested to consider also organizational factors, that might not be obvious to influence innovation at first, but in relation with other factors they might be powerful.
5.3 Strengths, limitations and future research
The strength of this research is the collection of divers aspects that are taken into account of possible influences for the change in product development from before and after the acquisition. Thereby, the it gives a broad overview of organizational factors, that can influence innovation in a subsidiary as well as are influenced by an acquisition.
39 company or subsidiary level. Thus, it is recommended to collect primary data if possible to get a sufficient sample size as well as to use more suitable variables or a wider collection of variables to measure one factor more preciously. An example, would be the product innovation, which is only measured by patents in this study, due to data availability, but it would be recommended to also include the subsidiaries’ R&D spending. Thereby, the input and output of product innovation can be measured and the whole product innovation funnel is analysed.
Another limitation is the acquisition selection. This study only focuses on the manufacturing part in the global value chain in four specific industries, the FMCG, high-tech, pharmacy and medical device supply. However, future studies could also include different parts of the global value chain or focus on another part more specifically. This might lead to a bigger sample size and, thus, to more significate results.
Further, the study looks at acquirer companies from North America and the EU, but otherwise has no regional restrictions. It might be helpful to focus only on a specific country or a smaller group of countries. A explicit recommendation could be to focus only on acquisitions in emerging or developed countries, as well as a comparison of those could contribute to an improved theoretical understanding, perhaps be even more attractive for businesses and its managers. On the other side, it might be interesting to make specifications to the target’s country as well.
40
6. Conclusion
No support for the stated hypotheses has been found. This implies that an international acquisition has no effect on the target firm’s product innovation. Neither, is the change in product development from before to after the acquisition influenced by organizational context factors prior to the acquisition, such as the management team’s cultural diversity, the acquirer’s (international) acquisition experience, the target’s (international) experience in operating as a subsidiary as well as the financial and workforce development of the target firm.
Nevertheless, the post-acquisition innovation and performance in general is an interesting and promising field to study. Especially, the practical implications can support businesses and managers dealing with acquisitions or innovation on a subsidiary level. For this reason, this study serves the purpose to be used as a bases for further research in this field.
41
Acknowledgement
At the end of this study, I want to thank my supervisor, Mr. dr. Ridder de van der Schueren, for his feedback and remarks. Without his comments and support I would not have been able to present my research this way.
42
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