Domestic and Cross-Border Mergers, R&D and Profitability with Asymmetric R&D Spillovers

Abstract

Mergers can make merged companies more profitable and competitive. Meanwhile, R&D has become a crucial factor for firm survival and growth. In various industries, such as the high-tech industries, mergers are considered as paths toward more R&D and higher profitability. The connections between mergers, R&D and profitability have become more important in recent years. In this paper, we develop a theoretical model with R&D and domestic/cross-border merger. In this two-stage model with homogenous product, firms choose R&D in the first stage and outputs in the second stage, and then the equilibriums are computed, analyzed and compared. Also, asymmetric R&D spillovers help to explain the process of cost-reducing innovation. Finally, this paper finds that mergers help increase R&D and profitability, but that cross-border mergers are not always a better option than domestic mergers.