Project overview
Productivity is a main driver of economic growth and a key indicator of a country's competitiveness. At the launch of the ESRC Productivity Insights Network, Lord Jim O'Neill, chair of the International Advisory Board, said that raising productivity is arguably the central economic challenge in the UK, but to achieve this we need to better understand the drivers and inhibitors of productivity. Although not all the factors that influence productivity are well understood, there is consensus among economists that innovation is one of its main determinants. Understanding how changes in market structure and in firms' organization affect innovation is then vital to unlock an important piece of the productivity conundrum. One question that has recently gained central stage in the economic debate on innovation is how Mergers and Acquisitions (M&As) affect firms' research efforts and output. The view taken by the European Commission in recent merger cases is that M&As involving highly innovative companies in concentrated industries are likely to decrease R&D effort and innovation. However, recent theoretical studies show that M&As may spur or stifle innovation depending on the assumption made about the R&D technology, the synergies arising from the merger and changes in the appropriability of the innovation. The question whether M&As have a positive or a negative impact on innovation is therefore, ultimately, an empirical one. Unfortunately, the available evidence does not seem to be conclusive either. The aim of this project is then to provide fresh evidence on this relevant policy issue. While most of the existing literature has looked at the effect of M&As on innovation using firm-level data, the main novelty of this project is that we will investigate how M&As influence the productivity of individual inventors, using patent data in the Pharmaceutical Industry. The use of data at inventor level presents at least two important advantages compared to firm-level analysis. First, inventor-level data will allow us to identify the causal effect of M&As on innovation in a more rigorous way. In this study, we will compare the productivity of inventors that work for companies that merge to that of an unusually large pool of inventors that work for firms not involved in a merger and have very similar research output up to the year of the merger. Moreover, changes in productivity at inventor level are easier to measure because individuals, differently from firms, do not physically merge into a new entity. Second, inventor-level data will allow us to explore the mechanisms through which M&As affect inventors' productivity and whether they can truly favour knowledge synergies between teams of scientists, as their proponents often claim. One specific objective of this project is to investigate whether inventors' productivity varies systematically with changes in their research team or with the degree of overlapping in their research programs. The choice of the pharma industry to investigate these questions presents also several advantages. First, this is a highly innovative industry, employing more than 70,000 people in UK only. Second, most of the largest pharma companies currently active on the market have been involved in one or more M&As over the last three decades. Third, patents provide an accurate measure of the research output of pharma companies because they are the only effective way to protect innovation in this industry, whereas other sectors can rely on other strategies, such as trade secrecy. By studying how M&As affect scientists' job departure and network of collaborators and, in turn, their innovative output, this research will provide vital evidence to inform on-going debates in competition policy as well as to improve our understanding of Business Environment and People, two of the five pillars identified by the UK government as necessary to increasing productivity.
