Foreign acquisition and R&D activities: evidence from a small open economy

ABSTRACT

This paper examines the effect of the foreign acquisition on domestic firms’ R&D activities using a firm-level dataset. We exploit a rich dataset of South Korea, which is a representative small open economy. We find that foreign takeover leads to increased R&D expenditures, which are more outsourced. The effect stood out after the global financial crisis, for listed companies and companies that rely on trade.

KEYWORDS:

• Foreign acquisition
• R&D
• difference-in-differences
• firm-level
• small open economy
• South Korea

JEL CLASSIFICATION:

• F21
• O33

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ It approximately corresponds to 252 hundred USD as of January 2020.

² A region consists of 16 metropolitan districts. There are 17 industries based on the Korean Standard Industrial Classification. Employment is the number of permanent and temporary employees. The unit of exports, imports, sales, purchases, assets, liabilities, and R&D expense is one-million KRW. Foreign acquisition is measured as foreigners’ share in total equity.

³ It is the sum of patents, utility model rights, design rights, and trademark rights.

⁴ The pattern limits the concerns of endogeneity that foreign investors only acquire shares in those firms that are more productive in the current context, in which foreign takeover is transformed as a dummy variable at the 50% cut-off (Guadalupe, Kuzmina, and Thomas 2012).

⁵ This empirical design enables to establish a causal relationship as it can control for observable and unobservable non-random aspects of the acquisition decision that are time-invariant at the firm level. By doing, so we can avoid omitted-variable bias.

⁶ In the appendix (Table A1), by using both minority-ownership cut-offs and majority-ownership cut-offs for foreign ownership, we find that the effect is generally largest and significant only at the 50% cut-off. The result confirms that foreign ownership via meaningful shares of acquisition can affect the major decision of firm management.

⁷ The regression is as follows: ${\mathrm{Y}}_{\mathrm{i}\mathrm{t}}=\alpha +\beta \left(\mathrm{T}\mathrm{r}\mathrm{e}\mathrm{a}{\mathrm{t}}_{\mathrm{i}\mathrm{t}}\times \mathrm{A}\mathrm{l}\mathrm{l}\mathrm{i}\mathrm{a}\mathrm{n}\mathrm{c}{\mathrm{e}}_{\mathrm{i}\mathrm{t}}\right)+\gamma {\mathrm{X}}_{\mathrm{i}\mathrm{t}}+{\delta }_{\mathrm{i}}+{\rho }_{\mathrm{j}}+{\lambda }_{\mathrm{t}}+{\in }_{\mathrm{i}\mathrm{j}\mathrm{t}}$, where $\mathrm{A}\mathrm{l}\mathrm{l}\mathrm{i}\mathrm{a}\mathrm{n}\mathrm{c}{\mathrm{e}}_{\mathrm{i}\mathrm{t}}$ is the dummy variable equal to 1 if the firm establishes a strategic alliance with domestic enterprises, 2 with foreign enterprises, and 0 otherwise.

⁸ The dependent variable is two-year-lagged for intellectual properties, since the average period of patent examinations and conversions takes more than 18 months.