| Defining and measuring relatedness between or within firms is a central issue in strategic management research because of its equivocal effect on firm performance. While some studies suggest that relatedness leads to higher profitability, others suggest the opposite. These conflicting results arise from two interconnected problems: most studies have assessed relatedness in terms of the similarity of the units' or partners' products or markets, and most prior research has equated relatedness with similarity and overlooked complementarity. These problems can be traced back to Rumelt's (1974) original definition of relatedness which identifies three areas of potential similarity: (1) markets, (2) products and production, and (3) technology and science. Complementarity is not explicitly discussed, and the first two areas of potential relatedness are emphasized over the third.; The theoretical portion of this dissertation extends Rumelt's (1974) definition in two ways. First, it argues that similarity and complementarity are two independent forms of relatedness which must both be evaluated. Second, it argues that Rumelt's third dimension should be partitioned because science and technology are two different forms of knowledge which influence firm innovation, and subsequently performance, differently but interactively. It is advanced that the interplay between science and technology relatedness affects the types of innovations produced.; The insights from this theory were tested using a sample of 100 high-technology mergers and acquisitions completed in 1996, in the drugs, chemicals and electronics industries. Patent data was used to assess the degree of similarity and complementarity between the acquiring and acquired firms. The effect of science and technology relatedness on financial and innovation performance was tested via multivariate regression. Overall, the results highlight the impact of knowledge complementarities on both innovation quantity and innovation quality. Knowledge similarity, while it has a positive effect on short term financial performance, it has a negative effect on a firm's ability to produce novel innovations. High-technology firms evaluating potential targets should consider potential complementarities in both science and technology domains since the two assist each other in the innovation process. |
