Business Groups and Knowledge Flows: Evidence from acquisition events

Business groups can provide access not only to internal capital markets but also to existing knowledge pools within the group, which can promote innovation. However, there is limited empirical evidence on intra-group knowledge flows that incorporated controls for selection effects. This study analyses the impact of business groups on inter-firm knowledge flows by using Japanese acquisition events that led to the establishment of subsidiaries. Leveraging acquisition events and panel data, we attempt to disentangle the selection effect of target firms acquired by business groups from the treatment effect of being internalized into the group. We combine patent data with detailed information on business group structures from the Basic Survey of Japanese Business Structure and Activities to capture factors influencing knowledge flows, such as the knowledge stocks of parent and acquired firms, their technological proximity, prior joint patent applications, and the post-acquisition governance structures of subsidiaries. Our main findings suggest that acquisitions resulting in the integration of independent firms into business groups tend to increase the level of, and accelerate the speed of, inter-firm knowledge flows. Moreover, this treatment effect is significantly positive for both wholly-owned and partly-owned subsidiaries.