In and Out of Balance: Industry Relatedness, Learning Capabilities and Post‐Acquisition Innovative Performance

• DOI: http://doi.org/10.1111/joms.12441
• Published date: 01 March 2020
• Author: Elena Cefis,Damiana Rigamonti,Orietta Marsili
• Date: 01 March 2020

© 2019 Society for the Adv ancement of Management Stud ies and John Wiley & Son s, Ltd.

In and Out of Balance: Industry Relatedness,

Learning Capabilities and Post-Acquisition Innovative

Performance

Elena Cefisa,b, Orietta Marsilic and Damiana Rigamontid

aUniversity of Be rgamo; bSant’Anna School of Advanced Studi es; cUniversity of Bath; dAarhus University

ABST RACT The existence of an inver ted U-shaped effect of the relatedness bet ween acquirer

and acquired f irm on the innovative performa nce subsequent to an acquisition i s normally

regarded as ind icative of the existence of a trade-of f between exploration and exploitation in

external in novation search. We argue that acquirers endowed w ith heterogeneous learning

capabilities ca n alter the shape of the trade-off to t heir favour. In particu lar, we focus on a

notion of industry rel atedness that capt ures the coherence between the domains of operation of

the acquirer and t he acquired firm. Using a long itudinal dataset of 1,736 domestic acquisitions

in the Netherlands, we show t hat the heterogeneous learning capabilit ies of the acquirers a lter

the shape of the inverted -U relationship, according to f irst- and second-order moderating

effects. Our re sults confirm that lea rning capabilities by interna l R&D and by acquisition

experience both improve what a cquirers can achieve in innovat ive performance when industry

relatedness is at the poi nt of balance between ex ploration and exploitation. In c ontrast, they

have opposite implications on t he potential losses in i nnovative performance when industry

relatedness is outside t he point of balance: internal R&D incre ases the tolerance of the

trade-off, smoothing out potentia l innovation losses, whereas acquisition ex perience reduces it.

Keywo rds: exploration and e xploitation, industr y relatedness, innov ation, learning

capabil ities, M&A

INTRODUCTION

While the success of related v is-à-vis unrelated acquisitions is a core topic in the Merger

& Acquisition (M& A) literature, little is known about under which conditions related and

unrelated acquisitions ca n lead to success in post-acquisition innovative performance.

Journal of Man agement Studi es 57:2 March 2020

doi:10. 1111/jo ms.1 2441

Address for re prints: Oriett a Marsili, School of M anagement, University of Bat h, Bath BA2 7AY, UK

(o.marsili@bath.ac.uk).

In and Out of Balance 211

© 2019 Society for the Adv ancement of Management Stud ies and John Wiley & Son s, Ltd.

Adopting a learning capabilities approach (Levitt and Ma rch, 1988; Zollo and Winter,

2002), we define these conditions i n terms of the interaction between industry related ness

and the heterogeneous learning capabilit ies of the acquiring fir ms, due to investments

in R&D and acquis ition experience, and we examine their effects on post-acquisit ion

innovative performance. Prior research focuses on the effect of technological related-

ness in the context of technology acquisitions, a nd finds that the effect is cur vilinear,

inverted U-shaped, when considering t he impact on patented inventions (Ahuja and

Katila, 20 01; Cloodt et al., 2006; Sears and Hoetker, 2014) and market value (Grimpe

and Hussinger, 2014) following an acquisition. Th is evidence is interpreted as indica-

tive of the existence of a trade- off between the ‘exploration of new possibilities and the

exploitation of old certainties’ ( March, 1991, p. 71), for firms pursing acquisit ions as part

of their explorative and exploitative search ( Phene et al., 2012; Van Deusen and Mueller,

1999). Related acquisitions reflect concerns for improvement, integration and eff iciency

(Capron and Mitchell, 2004; Ran ft and Lord, 2002), which are associated with ex ploita-

tion (March, 1991). Unrelated acquisitions display character istics of novelty, variation,

and uncertaint y (Barney, 1988; Graebner et al., 2010; Granstrand and Sjölander, 1990),

which are associated with exploration (March, 1991). This curv ilinear relationship sets

the boundaries with in which acquirers seek to balance exploration and exploitation in

resource config uration (Greve, 2007). From a capability perspective (Bos et al ., 2017;

Kaul and Wu, 2016), however, it is important to understand how these boundaries can

be modified by t he acquiring firm s because of their own specific abil ity to benefit from a

certain resource con figuration pattern, and to tr anslate such configurat ion into superior

innovative performance (Prabhu et al., 2005; Zollo and Singh, 2004).

To fill this gap, we propose that the heterogeneous learning capabilities of the acquir-

ers alter the shape of the inverted-U relationship, according to first- and second-order

moderating effects. In particular, we account for two kinds of capabilities: in active learn-

ing (or learning by search) as the outcome of in-house R&D, and in passive learning (or

learning by doing) as the outcome of acquisition experience (Levitt and March, 1988;

Zollo and Winter, 2002). By using data on 1,736 Dutch domestic acquisitions, we show

that capabilities in active and passive learning help acquirers to shift the coordinates of the

point of balance between exploration and exploitation to their favour, enhancing the

innovative performance attainable at the optimal industry relatedness (first-order effect

on the vertex of the inverted-U). We also find that capabilities in active and passive learn-

ing have opposite effects on the tolerance of the trade-off, as they decrease and increase,

respectively, the size of potential losses in innovative performance outside the optimal

level of industry relatedness (second-order effect on the focal length of the inverted-U).

By illustrating these moderating effects, we contribute to the understanding of the con-

ditions that shape the relationship between relatedness, capabilities and post-acquisition

innovative performance. Moreover, we investigate this relationship in a broader context

than earlier studies. In prior M&A research, relatedness is defined in terms of proximity

between the contents of the knowledge basis of the acquirer and the acquired firm, as

technological relatedness (Ahuja and Katila, 2001; Cloodt et al., 2006; Kapoor and Lim,

2007; Makri et al., 2010; Prabhu et al., 2005; Sears and Hoetker, 2014), or between

the domains of products and markets, as industry or market relatedness (Makri et al.,

2010). Proximity is measured along a pre-assigned hierarchical system of classification

212 E. Cefis et al.

© 2019 Society for the Adv ancement of Management Stud ies and John Wiley & Son s, Ltd.

of technologies or sectors (Silverman, 1999). Conversely, in our study, we measure the

degree of relatedness by applying Bryce and Winter’s (2009) definition of a general index

of industry relatedness, to M&As. This index is based on the notion of coherence (Teece

et al., 1994), as an expression of the fact that the resources basket of one industry matters

also in another industry, without having to specify the nature of the resource differences.

Hence, our index reveals whether an acquisition combines coherent domains of activity,

regardless of the proximity between the technological knowledge and/or markets involved.

Furthermore, earlier studies consider the effect of technological relatedness on the

patenting activity of acquiring firms in high-tech sectors, in which acquisitions are likely

to be motivated by access to technological knowledge (Ahuja and Katila, 2001; Cloodt

et al., 2006; Sears and Hoetker, 2014). Patented inventions are, however, inter mediate

outputs and imperfect indicators of innovative activities (Pavitt, 1985). In contrast, we

consider the direct impact of industry relatedness on the sales revenues from innovation,

recording innovative performance at the end of the entire commercialization process.

Our approach allows to capture acquisition synergies that originate from access to com-

plementary assets along the vertical chain (Puranam et al., 2006) and from diversification

in product markets (Cassiman et al., 2005), all affecting commercialization (Teece, 1986).

In this broader sense, acquisition synergies can influence innovation across a wider set of

industries, including those with a low propensity to patent.

THEORE TICAL FR AMEWORK

Exploration, E xploitation and the Inverted U -Shaped Relationship

The critical source of va lue creation in acquisitions lays in the opportunity to c reate

synergies between the par ties (Larsson and Finkelstein, 1999); these synergies can be

achieved in both related and unrelated acquisitions (Seth, 1990). Relatedness increases

the ‘integration potentia l’ of an acquisition (Larsson and Fin kelstein, 1999). Related

acquisitions facil itate the transfer of resources of one company to another, which is nec-

essary to real ize ‘efficiency synergies’ th rough the exploitation of economies of scale

and scope in the merged organi zation (Harrison et al., 1991). As for innovation out-

comes, efficiency synergies originate from both technologica l and market relatedness

(Cassiman et al., 2005). Technologically related acquisitions, in which t he parties share

similar a nd complementary knowledge bases, produce economies of scale and scope

in the R&D process, t hrough operational improvements and elimination of duplicated

efforts (Cloodt et al., 2006; Hag edoorn and Duysters, 2002; Makri et a l., 2010). Market

related acquisitions can generate both economies of sca le in the production and distri-

bution of innovative products (Cassiman et al., 2005), and economies of scope in R&D

and in other activities, such a s marketing and production, which are functional to t he

commercialization of innovation (Lar sson and Finkelstein, 1999).

Conversely, un-relatedness increases the ‘novelty potential’ of an acquisition. Unrelated

acquisitions generate ‘unique synergies’ through the recombination of resource pro-

files that are distant and idiosyncratic; their benefits are specific to the companies in-

volved or are known only to few companies (Harrison et al., 1991). Hence, they have the