Mergers and Inventors' Productivity in the Pharmaceutical Industry

Productivity is a main driver of economic growth and a key indicator of a country's competitiveness. At the launch of the ESRC Productivity Insights Network, Lord Jim O'Neill, chair of the International Advisory Board, said that "raising productivity is arguably the central economic challenge in the UK, but to achieve this we need to better understand the drivers and inhibitors of productivity." Although not all the factors that influence productivity are well understood, there is consensus among economists that innovation is one of its main determinants. Understanding how changes in market structure and in firms' organization affect innovation is then vital to unlock an important piece of the productivity conundrum.

One question that has recently gained central stage in the economic debate on innovation is how Mergers and Acquisitions (M&As) affect firms' research efforts and output. The view taken by the European Commission in recent merger cases is that M&As involving highly innovative companies in concentrated industries are likely to decrease R&D effort and innovation. However, recent theoretical studies show that M&As may spur or stifle innovation depending on the assumption made about the R&D technology, the synergies arising from the merger and changes in the appropriability of the innovation. The question whether M&As have a positive or a negative impact on innovation is therefore, ultimately, an empirical one. Unfortunately, the available evidence does not seem to be conclusive either. The aim of this project is then to provide fresh evidence on this relevant policy issue. While most of the existing literature has looked at the effect of M&As on innovation using firm-level data, the main novelty of this project is that we will investigate how M&As influence the productivity of individual inventors, using patent data in the Pharmaceutical Industry.

The use of data at inventor level presents at least two important advantages compared to firm-level analysis. First, inventor-level data will allow us to identify the causal effect of M&As on innovation in a more rigorous way. In this study, we will compare the productivity of inventors that work for companies that merge to that of an unusually large pool of inventors that work for firms not involved in a merger and have very similar research output up to the year of the merger. Moreover, changes in productivity at inventor level are easier to measure because individuals, differently from firms, do not physically merge into a new entity. Second, inventor-level data will allow us to explore the mechanisms through which M&As affect inventors' productivity and whether they can truly favour knowledge synergies between teams of scientists, as their proponents often claim. One specific objective of this project is to investigate whether inventors' productivity varies systematically with changes in their research team or with the degree of overlapping in their research programs.

The choice of the pharma industry to investigate these questions presents also several advantages. First, this is a highly innovative industry, employing more than 70,000 people in UK only. Second, most of the largest pharma companies currently active on the market have been involved in one or more M&As over the last three decades. Third, patents provide an accurate measure of the research output of pharma companies because they are the only effective way to protect innovation in this industry, whereas other sectors can rely on other strategies, such as trade secrecy.

By studying how M&As affect scientists' job departure and network of collaborators and, in turn, their innovative output, this research will provide vital evidence to inform on-going debates in competition policy as well as to improve our understanding of "Business Environment" and "People", two of the five pillars identified by the UK government as necessary to increasing productivity.

Who will benefit from this research?

Beyond its direct impact on the academic community, there are three groups of beneficiaries of this research: (i) competition authorities (ii) policy advisors working on innovation andproductivity, in particular economists and civil servants of the Department of Business, Energy and Industrial Strategy (BEIS) and (iii) professionals of the pharma industry.
We believe that involving non-academic users at early stages of the research process is fundamental for validating our research concept, building trust and later disseminating of finding and influencing policy.

How will they benefit from this research?

This research is particularly relevant for antitrust authorities, given the increasing frequency with which innovation effects are mentioned as a reason to challenge a merger, most notably in the Dow/Du Pont merger of 2017. This project will provide fresh evidence on whether past mergers in the pharmaceutical industry have had significant effects on the innovative output of scientist working in these companies. In particular, if the findings of the paper show the existence of significant decrease in scientists' productivity, competition authorities may be induced to reshape their merger policy by asking the defendants more rigorous proofs on the efficiency effects that the merger can deliver. Over the last couple of years, Carmine Ornaghi has developed a close collaboration with the Chief Economist Team of the EC. Carmine Ornaghi has already discussed his research strategy with Dr Hendrik Meder, a member of the Chief Economist Team, and we plan to present preliminary results and more advanced version of our work to the group of economists working in Brussels. At the same time, we plan to disseminate the findings of our research to the Competition and Markets Authority (CMA), the UK institution responsible for carrying out investigations into mergers, through our connection with Prof. Thenassoulis, a member of the CMA Panel.

Boosting productivity and strengthening the foundations that support a skilled and innovative economy is at the core of the UK Industrial Strategy set out by BEIS. Productivity is also one of the ESRC's current research priorities. Although not all the factors that influence productivity are well understood, there is consensus among economists that innovation is one of its main determinants. By studying how M&As affect job departure, network of collaborators and the innovative output of scientists working in the Pharmaceutical Industry, this research project can address both the Business Environment and People pillars identified by the UK government as necessary to increasing productivity. "PublicPolicy | Southampton" will assist the PI to identify, establish and maintain a dialogue with economists and policy advisors within BEIS, HM Treasury and British Investment Bank.

Finally, this project will also of interests to experts and professionals working in the Pharmaceutical industry. Managers have looked at M&As as an effective strategy to improve productivity by avoiding useless duplication of some research costs and favouring knowledge synergies among the experts of the two companies. The results of this paper will provide fresh evidence on whether mergers have led to an increase or decrease in innovators' productivity and, more importantly, what mechanisms can favour or hamper productivity advances in the research labs of pharma companies.