Innovation and the Formation of Business Groups

• Applicants: Professorin Dr. Karin Hoisl; Professor Dr. Ernst Maug; Professor Dr. Christoph Schneider; Ahmet Ali Taskin, Ph.D.
• Subject Area: Accounting and Finance
• Term: since 2024
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 550193790

This application is for research on the question of how corporate transactions, such as mergers, acquisitions, and divestitures, create or dissolve business groups, and the implications this has for innovation and labor market outcomes. As such, this research is at the interface of corporate finance, labor economics, and organizational economics. In the first project, we investigate the formation and dissolution of business groups (or conglomerates) through mergers and acquisitions (M&As), and divestitures. We study how business groups choose locations and how they choose their industry portfolio. The other three projects study how business groups affect labor market outcomes, specifically those for inventors. The second project investigates the implications of M&As for concentration in local labor markets, since M&As can not only reduce competition in product markets but also in labor markets. Such an increase in monopsony power has been associated with adverse consequences for employees’ wages, and for their incentives to build human capital and to innovate. The third project analyzes the incentives and turnover of inventors. Corporate transactions such as M&As lead to large employee turnover, and US-based research suggests that this turnover specifically affects inventors. The reasons for this phenomenon are unknown, yet it arguably reduces firms’ post-merger innovative capabilities. We plan to address this issue and investigate new explanations based on recent theoretical work. The fourth project examines the impact of M&As on the careers of employees, especially those of inventors. We focus on changes in their salaries, promotions, changes in their specialization, and in their medium-term turnover and how this affects innovation performance. An important part and prerequisite of our research is to build a new database combining inventor, patent, employee, and firm data. This data set is not available for Germany and would later be made available for other researchers. Understanding the bidirectional causal relationship between the formation of business groups and labor markets is important to properly disentangle treatment effects (business groups affect innovation and labor market outcomes) from selection effects (labor market conditions affect business group formation). Thus, the four projects in this proposal complement each other.

• DFG Programme: Research Grants
• Co-Investigator: Professor Dr. Dietmar Harhoff