With fewer than 1,000 Initial Public Offerings in any year, the most common exit strategy for investors in early-stage innovation firms is to find an acquisition opportunity. For the broader economic goal of encouraging innovation because it drives growth and societal progress, when large firms acquire smaller, innovative companies, does it promote innovation, or does it primarily help dominant players thwart possible competition and consolidate market power? This is the central question of a recent research paper by Maria Martinez Cillero, Lorenzo Napolitano, Francesco Rentocchini, Cecilia Seri, and Elena Zaurino published by the European Commission's Joint Research Centre. The paper, M&As, Innovation and Superstar Firms, addresses the rise in market concentration and the dominance of superstar firms globally. This trend has sparked concerns over a resulting decline in competition and innovation. While macro forces like technological change and globalization are known contributors, the researchers investigate the specific role of technological mergers and acquisitions (M&As), namely, the acquisition of innovative subsidiaries primarily for their patent portfolios. The study provides evidence linking this corporate behavior to increased market power.
The authors analyzed data from 2008- 2020 for 8,314 publicly listed firms, comparing changes in markups for firms that made an acquisition to those for similar firms that did not. This method isolates the impact attributable to the M&A itself, controlling for general economic trends, and accounts for the fact that these acquisitions occurred at different times for different firms across the 13 years. They found that technological acquisitions are associated with an average 2% increase in the acquiring firms' markups, a direct measure of enhanced market power. The authors caution that while the analysis controls for confounding factors, it does not prove definitive causation. The effect was strongest among top R&D investors, U.S.-based firms, and high-tech manufacturers, suggesting that the strategy is most effective for already dominant players in cutting-edge sectors. They identified the primary mechanism as the acquiring firm achieving greater insulation from competitors via the acquired patents. They state that this strategic patent ownership limits knowledge spillovers that would otherwise benefit rivals and simultaneously raises entry barriers for new firms, thereby sustaining higher markups.
The authors argue that their findings point to a need for antitrust policies that better distinguish between technological M&As that genuinely support innovation and those that amount to anti-competitive consolidation. Recognizing that regulators face the dilemma of balancing the positive potential of M&As with the risks of growing market power to the point of oversized dominance by few firms, they suggest that public policy should avoid discouraging genuinely pro-competitive deals while discouraging those aimed primarily at neutralizing competition by not using acquired patents and limiting the diffusion of knowledge.
More broadly, the study suggests that existing antitrust frameworks, which often focus on consumer prices, may be insufficient for the digital and innovation economy. Rather than the government bearing the burden of proof to show that a merger is anti-competitive, perhaps dominant platform companies should be required to prove that an acquisition will enhance competition and innovation before the deal is approved. And regulators should be encouraged to analyze whether the patents were acquired to be used for genuine innovation or merely to be shelved to eliminate a potential future competitor's core technology. As technological M&As continue to shape market structure in advanced industries, the authors argue that careful, forward-looking scrutiny is essential to maintaining healthy innovation ecosystems.
SSTI Note: Increasing the competitiveness of larger firms in any community through innovation is vitally important for retaining and expanding the health of the entire regional economy. Encouraging innovation-centered entrepreneurship and startup activity in sectors related to the larger firms in a region should be one element of a complete TBED growth strategy.
This page was prepared by SSTI using Federal funds under award ED22HDQ3070129 from the Economic Development Administration, U.S. Department of Commerce. The statements, findings, conclusions, and recommendations are those of the author(s) and do not necessarily reflect the views of the Economic Development Administration or the U.S. Department of Commerce.