15Do Mergers Promote Innovative Activities of Firms?
Evidence from Japanese Patent Data
Research Fellow: Isamu Yamauchi

The purpose of this study is to empirically analyze the impacts of merger on firms’ innovative
activities measured by the number of patent applications and the R&D expenses. Furthermore, we focus on
the changes in firms’ capability of using inventions, which is evaluated by the rate of the number of
examination requests to the number of applications filed before merger.
We find that the increase in the market share caused by merger has a positive effect on the number ofpatent applications and R&D expenses. On the other hand, the business streamlining or rationalization
associated with merger has a negative effect on them, and it also reduces firms’ capability of using
inventions. Moreover, various unobservable effects of merger, such as knowledge integration, shift of firms’
intellectual property strategy or business disruption, decreases the number of patent applications and R&D
expenses as a whole, with keeping the capability of using technology unchanged.
Our results also suggest that the technological similarity accelerates the rationalization of overlapping
businesses, and enhances the efficiency of firms’ patent application behaviors.

Ⅰ Introduction
The number of M&As (mergers andacquisitions) has greatly increased since the late
1990s in Japan. The purpose of this study is toempirically analyze the impacts of M&As on
firms’ innovative activities by using financial dataand patent data. This study focuses on mergers,which are considered to be more significant thanany other M&A procedures in terms of theirimpact on corporate activities, and analyzes theireffects on firms’ R&D activities and patentapplication activity.
R&D and patent application activity of firms
are affected by many factors such as the industry
characteristics, firm size, and the trend indemand. Therefore, a simple comparison between
pre- and post-merger would be insufficient todetermine whether any change in firms’ activities
is truly attributable to the merger.
This study controls the effects of thesefactors and evaluates the effects of businessreorganizations and an increase in the market
share caused by merger. This study also attempts
to analyze an overall effect of various
unobservable factors, such as knowledge andtechnological integration and shift of intellectual
property strategies. Furthermore, this study
examines whether the impact of merger varies
with the technical similarity between merged
companies.
Schumpeter and other scholars pointed out
the importance of innovation in the growth ofcompanies and countries. In recent years, the

IIP Bulletin 2009

importance of M&As for companies has increased
as a time-saving means to achieve such goals as
growing in size, acquiring new technologies, andentering new business fields.
Despite such importance, not many studies
have been conducted to directly analyze theeffects of merger on corporate innovation
activities. There have been almost no studies onpatent filing activity by Japanese companies basedon the interpretation that such activity is a formof innovation output.
Merger has negative and positive effects on
corporate R&D activities. For example, suchactivities could be impaired by reorganization andunification of overlapping research projects or
could be promoted thanks to the enhanced
economy of scale and scope as a result of merger.
Therefore, empirical analysis is necessary to
determine which effects, negative or positive, arestronger as a whole. There have been somestudies, though not many, that focus on
innovation input. However, these prior studies
have not reached a consensus as to the effects ofmerger (Cassiman et al., 2005).
Companies merge with other companies forvarious reasons such as market share growth andtechnology acquisition. The primary purpose ofmerger would differ depending on in whichcountry and when the merger was carried out.
Therefore, while there are a small number ofprior studies on mergers in the United States, itwould be simplistic to interpret the Japanesesituation based on the results of those studies. In
this sense, this study is meaningful because it● 110 ●

analyzes mergers among Japanese companies andtheir effects on innovation activities.
Corporate innovation activities can bemeasured from various perspectives including theperspective of input such as R&D costs, theperspective of outcome such as profit ratios andstock prices, and the perspective of output suchas patent applications. In this study, corporate
innovation activities are analyzed from theseperspectives with special emphasis on theperspective of output. This study analyzes
corporate exploitation of technologies as well. In
this sense, this study differs from other studies.
The results of this study may be roughlysummarized as follows. Market share growthcaused by merger increases the number of patentapplications and the costs of R&D. On the otherhand,businessreorganization
andthereprioritization and concentration of business
operations carried out in conjunction with merger
decrease them. Furthermore, merger introduces
new technologies and increases business assets,
presenting more opportunities to exploit
technologies. In the meantime, merger could leadto reorganization and unification of overlapping
business
operations,presenting
fewer
opportunities
toexploittechnologies.
Furthermore, various effects of merger that are
not reflected in data (synergy of knowledge,
modification of intellectual property strategies,
temporary internal confusion) could lower thenumber of patent applications and the costs for
R&D as a whole, while such effects do not
influence
corporateabilitytoexploittechnologies.

Ⅱ Data Sets
In this study, analyses are conducted basedon three types of data, i.e., merger case data,
financial data, and patent data. For data on
mergers among Japanese companies, we referredto the “M&A Data Book of Japanese Companies
1988-2002” (RECOF Corporation) and the“Qualified Stock Data (updated on June 20,2008)” (Tokyo Stock Exchange Inc.).
Furthermore, the company-specific data on
patent application and examination request wereextracted from the “IIP Patent Database (updatedon May 28, 2008)” (Institute of Intellectual
Property) and the “Patent Gazette Database”(Alife-laboratory).
This study analyzes mergers (1) carried out
during the period from 1988 to 2000 between
Japanese companies (2) whose financial data suchas sales, R&D costs, and tangible fixed assets are
fully available for the four years before and after
merger and (3) who filed at least one patentapplication during the period subject to analysis.
The beginning of the period mentioned in theabove-mentioned criterion (1) was set to be 1988
based on the recording period of the data source.
The end of the period was set to be 2000 because
this study analyzes trends in the number ofpatent applications filed for a period of four years
before and after each merger and the latest
patent application year fully covered by the IIP
Patent Database happens to be 2004. The
strictest criterion adopted in this study is theabove-mentioned criterion (2), which requires fullavailability of data on R&D costs. Due to thiscriterion, the number of mergers analyzed in thisstudy significantly dropped to a mere 24.
However, this criterion is necessary because thedata on R&D costs is indispensable in analyzing
corporate innovation activities. The number ofmergers eligible for our analysis would rise if thecriterion was relaxed in such a way that accepts
companies whose data on R&D costs for theyears subject to the analysis are partiallyunavailable. However, such a relaxed criterion
would make the interpretation of estimates moredifficult.
Ideally, the effect of a merger of a company
should be examined by making a comparison withanother company that has truly identicalattributes. In reality, however, it is difficult to finda company with truly identical attributes. Instead,for each merged company subject to the analysis
in this study, we have selected a set of companies
that “belong to the same industry and have
similar corporate size.” In this way, for each of
the 24 mergers, we have created a group ofcompanies consisting of the merged companies
and similar companies selected for comparison(such group is hereinafter referred to as “group”).
We have evaluated the effects of merger byconducting a regression analysis in which thedifferences in attributes within each group andthe differences among groups are controlled.
For the purpose of making a comparison, we
have selected companies that (i) belong to thesame industry and therefore have the same three
digit NEEDS industry code as the merged
companies, (ii) whose tangible fixed assets were
within plus/minus 50% of the merged companies
as of the day one year prior to the merger, and(iii) whose financial data such as sales, R&D
costs, and tangible fixed assets for the four years
before and after the merger are fully available.

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Based on these criteria, companies havebeen selected for comparison with the companies
involved in each of the 24 merger cases. Amongthe selected companies, three companies turned
out to have been nonexistent one year prior tothe merger, which is a point of time subject to thecomparison. These three companies are excluded
from subsequent analysis. In addition, one of theselected companies is also excluded from analysis
because its financial figures are considered to beabnormal. Consequently, the number of merged
companies and number of comparative companies
finally stand at 20 and 191, respectively.
A data set concerning merged companies andcomparative companies can be created bymatching patent data by using applicants’ names
as a key. The patent data used in this study isbasically extracted from the IIP Patent Database(hereinafter referred to as IIP-DB). The following
points must be taken into consideration whenusing this database.
First, IIP-DB allocates different applicant
codes to the same applicant in some cases due tovariation in the indication of his or her name. In
other cases, the database allocates the same
applicant code to different companies located indifferent places because they share the same
company name. Therefore, name identification isnecessary for accurate counting. In this study, we
identified names based on the result of nameidentification processes conducted by Oonishi andOkada (2005) and Yamauchi and Nagaoka (2008).
In general, the name of a right holder tends
to be replaced with that of another person due toa merger, etc. In the case of IIP-DB, thepre-merger name of the applicant was often
replaced with the post-merger name of theapplicant (for example, the name, Mitsubishi
Petrochemical Co., Ltd., was replaced with thepost-merger company name, Mitsubishi Chemical
Corporation.). In the case of a patent application
filed prior to the merger, in order to determine
which company actually filed a patent application,
it is necessary to refer to a database that contains
the name of the applicant as of the application
filing date. In this study, regarding the applicant’s
names contained in the patent application data
extracted from IIP-DB, we used the Patent
Gazette Database to identify their names as of
the application filing dates.
In some cases, IIP-DB indicates thepost-merger name of an applicant side-by-side
with its pre-merger name as if the post-merger
name were that of a joint applicant (for instance,
the post-merger company name, Mitsubishi

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Chemical Corporation, was additionally indicatedin a patent application filed by Mitsubishi
Petrochemical Co., Ltd., as if Mitsubishi
Chemical Corporation were a joint applicant.). In
this study, this problem was solved by counting
the number of patent applications proportionately
to the number of joint applicants (partial count).
This solution would not ensure accurate counting
if the post-merger company name has been
additionally indicated in a joint application filedwith a third party (for example, the post-merger
company name, Mitsubishi Chemical Corporation,
was additionally indicated in a joint application
filed by Mitsubishi Petrochemical Co., Ltd., andFutamura Chemical Co., Ltd.). Despite thislimitation, since the number of such joint
applications filed with a third party account for
only a fraction of the total, partial count is areliable means to reduce the margin of error
caused by double counting.

Ⅲ Outline of Data
While it is difficult to determine what thebest indicator of innovation activities is, we use
R&D costs as an indicator of input and thenumber of patent applications as an indicator of
output. It does not necessarily mean that all of
the R&D activities lead to innovation or that all of
the results of innovation lead to patentapplication. In this sense, these indicators havetheir own limitations. However, it would bepossible to grasp corporate innovation activities
with a certain level of accuracy by analyzing datafrom both perspectives of input and output.
The graphs created based on the data
reveal the following tendencies. Merged
companies have, in comparison with non-merged
companies, seen a significant reduction in thenumber of patent applications and R&D costs.
Even a greater reduction was caused by merger in
R&D concentration levels. These reductions
suggest the significance of the businessreorganization and reprioritization of patentapplications and R&D projects carried out inconjunction with merger.
This study also pays attention to the
exploitation of the results of innovation, analyzingchanges in exploitation based on the final ratio of
examination requests for patent applications filed
prior to merger. This is an indicator showing thefinal ratio of examination requests for patentapplications filed seven years prior to each pointof time (hereinafter referred to as the “ratio of● 112 ●

examination requests for prior inventions”).
Creation of this indicator is made possible by theexistence of an examination request system inJapan. This is one of the advantages of limiting
the subjects of this analysis to Japanesecompanies.
An examination of the ratio of examination
requests for prior inventions has revealed thatmerged companies have shown, though not soclearly, a greater reduction than non-merged
companies. An analysis of the effects of merger
on corporate ability to exploit inventions
suggests that, as a whole, negative effects
generated by business reorganization outweighpositive effects generated by an increase inbusiness assets.
Furthermore, merger greatly reduces
tangible fixed assets, while significantly
increasing market shares. This suggests thatmerger leads to drastic business reorganizationand greatly enhances market control power.

Ⅳ Empirical Analysis
In this chapter, we analyzed four aspects ofcorporate innovation activities, i.e., input, output,
exploitation, and performance, and identify theeffects of merger on each of those aspects
through regression analysis. We used the numberof patent application as an indicator of output, theratio of examination requests for prior inventions
as an indicator of exploitation, R&D costs as anindicator of input, and ROA (return on assets) andROS (return on sales) as indicators of
performance.
We used these five variables as explained
variables and made an estimate by attributingchanges in them to the fact that the company inquestion experienced or did not experience a
merger and also made a separate estimate byattributing those changes to the technicalsimilarity and the application ratio in particulartechnical fields (the application concentrationlevel).
In making an estimate to examine the effectsof merger or of the lack of merger, we took into
consideration such explaining variables as the
R&D concentration level, tangible fixed assets,share in the total sales of the industry, and crossterm between a merged company dummy and anage (elapsed years) dummy.
The higher the R&D concentration level of acompany, the more innovative the company isconsidered to be. The R&D concentration level ofa company plunges after merger. This variable

shows the restraining effect of merger on R&D
activities. The tangible fixed assets of a company,
which indicate the size of the company or its
business assets, significantly decrease after
merger. This variable shows the effect ofbusiness reorganization carried out in conjunction
with merger. The share in the total sales of theindustry, which is an indicator of market share,greatly increases after merger. In the meantime,
the cross term between a merged company
dummy and an age (elapsed years) dummyfunctions as a variable that reflects the difference
between merged companies and non-merged
companies. This variable shows complex effectsof merger that are not reflected in otherexplaining variables. In other words, this variable
shows comprehensive effects of various
consequences of merger such as synergy
between technology and knowledge, confusion in
the course of transformation into a neworganization and resolution of such confusion, andmodification of intellectual property strategies
caused by unification of patent application
policies.
By making an estimate of the effects oftechnical similarity, we examined whether thetechnical similarity between two companies
promotes synergy in technology development or
impairs corporate ability to develop technologies
as a result of rationalization of overlapping
business operations.
Furthermore, by making an estimate of theeffectofapplication
ratio(application
concentration level), we examined whether theeffects of merger on corporate innovation
activities are particularly great in key technicalfields.
These estimates have revealed as follows.
First, the coefficients of the R&D concentrationlevel, tangible fixed assets, and share in the total
sales of the industry had a positive and significant
effect on patent application filing activity.
Furthermore, the coefficient of the cross term
between a merged company dummy and an age(elapsed years) dummy consistently had anegative and significant effect, which suggeststhat the business reorganization and theunification of R&D projects in conjunction withmerger reduce the number of patent applications.
On the other hand, the growth of market share asa result of merger is considered to promote thefiling of patent applications. The comprehensive
effects of merger that are not reflected in thesevariables have a downward pressure on thenumber of patent applications as a whole. This● 113 ●IIP Bulletin 2009

suggests that negative effects such as
reprioritization of applications caused by themodification of intellectual property strategies isgreater than positive effects such as synergy
between knowledge and technology.
In the meantime, technical similarity has apositive and significant effect on the number ofpatent applications immediately after merger. In
other words, patent applications would decreasein number if two companies with different
technologies merge. This suggests that it isprimarily in new technical fields (non-overlapping
technical fields) that the filing of patentapplications is likely to be restrained immediately
after merger. The effect on the pre-merger
application ratio is clearly negative and significant
four years after merger. In other words, thepre-merger core technical fields (technical fields
with high application ratios) suffer a particularly
sharp decrease in the number of patentapplications as a result of merger. Such a
decrease is observed not immediately after
merger but a while after merger.
Insum,mergerwould
promotereprioritization and concentration of patentapplications in the fields where both companies
excel (the fields in which both companies have
filed patent applications). As a next step, the major
technical fields would undergo rationalization as awhole.
Second, the coefficients, i.e., the R&D
concentration level, tangible fixed assets, andshare in the applications pertaining to certain
technical fields have a positive and significant
effect on the ratio of examination requests forprior inventions, which shows corporate ability to
exploit technologies. This indicates that merger
leads to the reorganization of business and theunification of R&D projects, decreasing not only
the number of patent applications but also thecorporate ability to exploit technologies. The
effect of tangible fixed assets can be interpreted
to be reflecting the fact that an increase inbusiness assets after merger enhances the ability
to exploit technologies. Merged companies’
ability to exploit technologies increases in thetechnical fields where they have a greater
capacity for technological development than othercompanies. On the other hand, unlike in theestimates related to patent applications, the crossterm between a merged company dummy and anage (elapsed years) dummy has no significant
effect. In sum, the various effects of merger do
not change corporate ability to exploit
technologies as a whole because the positive

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effects and the negative effects set off each other.
In the meantime, technical similarity has anegative and significant effect on the ratio of
examination requests for prior inventions.
However, it has no effect on the application ratio.
In other words, the ability and opportunities to
exploit technologies are increased by merger
with a company that has different technologies
regardless of whether those technologies are in
main technical fields. This suggests that theacquisition of new technologies and assets
through merger has a synergistic effect on
corporate ability to exploit technologies and thatthe reorganization and unification of overlapping
business operations decrease opportunities to
exploit inventions made in the past.
Furthermore, the coefficients of tangible fixed
assets, cash flow, and share in the total sales of theindustry have a positive and significant effect on
R&D costs, while the coefficient of in-houseapplication concentration level has a negative andsignificant effect. The coefficient of the cross term
between a merged company dummy and an age(elapsed years) dummy has consistently had anegative and significant effect since immediately
after merger. This indicates that the businessreorganization
andrationalization
through
reprioritization and concentration carried out inconjunction with merger inhibit R&D activities.
On the other hand, an increase in market sharecaused by merger promotes R&D activities. Other
various effects of merger lower R&D costs as awhole.
Technical similarity has had a negative andsignificant effect on R&D costs since one year
prior to merger, whereas the application
concentration level has no significant effect. In
other words, regardless of the concentration level
prior to merger, the higher the technicalsimilarity, the greater the reduction in R&D costs
after merger. This suggests that a reduction in
R&D costs after merger may be attributable to
the reprioritization and unification of overlapping
research projects.
Finally, the coefficient of tangible fixed
assets has a negative and significant effect on the
ROA (return on assets) and ROS (return onsales), whereas the cross term between a merged
company dummy and an age (elapsed years)
dummy does not have any significant effect. This
indicates that business reorganization and market
share growth as a result of merger increase profit
ratio. This finding contradicts much of the priorresearch that did not recognize such effect ofmerger. On the other hand, other effects of● 114 ●

merger do not increase the profit ratio as a whole.
The effect of merger on profit ratio is notaffected by technical similarity and the application
concentration level prior to merger.
This suggests that profit ratio is affected
more by the market share growth andrationalization achieved after merger than by the
choice of the company to merge with.

effect on the capability of using technologies andthe R&D expenses. This suggests that merger
promotes the streamlining of overlapping
business lines and research projects, enhancing
the efficiency of firms’ patent application
behaviors.

Ⅴ Conclusion
In this study, we analyzed the effects ofmerger on firms’ innovative activities from four
perspectives, input (R&D costs), output (thenumber of patent applications), capability of using
technologies (the ratio of examination requests
for pre-merger applications), and performance(profit ratio).
An examination request system in Japan
enables us to analyze the capability of using
technologies. This is a great advantage of using
Japanese patent data, and this type of analysis
could not be conducted with U.S. patent data.
Merged companies compared to non-merged
companies, show lower patent applications andR&D
expenses.
Furthermore,mergersignificantly decreases the tangible fixed assets,
whereas it greatly increases market share. Thissuggests that the purpose of merger of Japanesefirms is survival, by increasing their market sharein existing markets and streamlining theirbusiness, rather than technological acquisition or
new business entry.
Our empirical analysis suggests that suchbusiness reorganization and concentration causedby merger not only decrease the number ofpatent applications and R&D costs but also
decrease the capability of using technologies.
In contrast, an increase in market power
assosiated with merger has a positive effect on
the number of patent applications, R&D expenses,
capability of using technologies, and profit ratio.
Furthermore, an overall effect of otherunobservable factors has a strong negative effecton the number of patent applications and the
R&D expenses. On the other hand, the overall
effect does not influence firms’ capability of using
technologies and profit ratio, since the positive
and negative effects of unobservable factores areoffset.
In this study, we also examine howtechnological similarity affects the impacts ofmerger. The analysis indicates that technologicalsimilarity has a positive effect on the number ofpatent applications, whereas it has a negative● 115 ●IIP Bulletin 2009