Innovate or Merge? The Role of Corporate Social Responsibility in the Relationship Between R&D and Mergers and Acquisitions

Abstract

Innovation can be obtained internally by investing in research and development (R&D) and externally by merger and acquisition (M&A). A fundamental question is whether the relationship between R&D investment and M&A is substitutable or complimentary, and the opinions and evidences are mixed. In this research, we examine how recent developments in corporate social responsibility (CSR) impacts the relationship between R&D investment and M&A. Using a data set over the period 2005-2015, we find that CSR scores positively moderate the relationship. For firms with high CSR scores, higher R&D investment intensity is associated with a higher likelihood of M&A, but for firms with sufficiently low CSR scores, higher R&D intensity is associated with a lower likelihood of M&A. This suggests that CSR may create an insurance-like buffer that mitigates risks, and may improve knowledge sharing and absorption capabilities that ease the integration process during M&A. We also find that the moderating role of CSR remains positive but becomes weaker when the target firms are in the emerging markets. This finding provides useful insight for multinational firms active in both R&D and CSR. We further examine these effects by replacing R&D investment with R&D output and find that the moderating effect of CSR remains positive, which suggests that a firm efficient in converting R&D investment into R&D output is more likely to engage in M&A. This is contrary to the literature based on R&D investment, where M&A can be considered a “replacement” for R&D for firms with low R&D investment and low CSR, and therefore improves our understanding of the dynamics behind the R&D and M&A relationship.