The energy transition depends crucially on firms’ incentives and abilities to develop new, cleaner technologies. Our research shows that mergers and acquisitions can help carbon-intensive, “dirty” firms break with established innovation trajectories by acquiring and building on clean technologies, offering new insights into how corporate strategy can support the transition to a greener economy.
Why is it difficult for firms to break away from established innovation paths?
Technological innovation tends to be path dependent: the direction in which firms innovate is shaped by the choices they have made in the past. Paths dependencies evolve over time and relate to, for example, established expertise, networks, and economies of scale that favour the status quo, and technological lock-in which makes alternative innovation paths costly to pursue. A well-documented example is the automotive industry: carmakers with a history of patenting in internal combustion engine technology have tended to keep innovating in combustion rather than switching to electric vehicles, because decades of accumulated knowledge make the established path cheaper to pursue.
Path dependencies present a major challenge for the energy transition: Companies with expertise in carbon-intensive, “dirty” technologies often face significant barriers related to technological lock-in and network effects when attempting to redirect R&D toward cleaner alternatives. While climate policy typically focuses on incentives such as carbon pricing, subsidies, and regulation, we know far less about how firms actually obtain the capabilities, such as technical know-how, skilled researchers and engineers, and patents, needed to respond to these incentives.
Beyond developing capabilities internally from the ground up, companies can acquire them through mergers and acquisitions (M&As). In recent decades, both the number and share of M&As involving target firms with clean patents have increased substantially (see Figure 1). We refer to these transactions as clean deals. By acquiring firms that possess clean technologies and related intellectual property, established companies may gain access to capabilities that would otherwise take years to develop internally. Such M&As can therefore help firms break with established innovation trajectories and accelerate their transition toward cleaner technologies.
But do clean deals actually promote clean innovation?
At the same time, many observers view acquisitions of clean-tech firms by carbon-intensive incumbents with scepticism. Critics worry that dirty firms may acquire clean technology companies primarily to improve their environmental image, rather than meaningfully integrating and building on the acquired technology. There is also concern that some firms may use M&As to suppress future competition by acquiring potential rivals and shelving the target’s ongoing research (so-called “killer acquisitions”).
Our new research examines whether and when M&As can help firms overcome path dependencies in innovation. We use a large dataset of completed U.S. M&A transactions, announced between 1988 and 2015, matched to detailed patent records. Combining patent classification schemes that distinguish between clean and dirty patents with semantic information contained in patent texts allows us to track how firms’ innovation activities evolve over time. Applying a staggered difference-in-differences design, we compare changes in innovation among acquiring firms before and after a deal to similar firms that did not make an acquisition, allowing us to isolate the effect of the transaction.
We find meaningful shifts towards clean innovation post-deal on average.
One of the most striking findings of our study is that firms with historically dirty innovation portfolios do not merely acquire clean technologies; on average, they subsequently shift their innovation activity toward those technologies, increase their use of the acquired knowledge, and file more clean patent applications of their own. It is worth noting that this is an average effect: individual deals vary, and for some the impact may be negligible or even negative — but across deals, the effect is clearly positive.
The increase we observe is not simply the target’s pre-existing clean patents being relabelled, but rather new clean patents filed by the acquirer after the deal, alongside an increase in citations to the target’s clean patents. This points to genuine follow-on innovation rather than a bookkeeping effect.
While patent data alone cannot tell us whether and how these innovations are ultimately implemented, or what their effect on emissions may be, the evidence does suggest that many clean deals involve a genuine shift in technological direction by the acquirer, rather than serving as purely symbolic green investments or even “killer acquisitions”.
Implications for the energy transition: Policymakers should pay more attention to corporate acquisitions.
When we discuss the energy transition, we tend to focus on regulation, subsidies, and investment. Our findings suggest that acquisitions can complement traditional climate-policy instruments by helping firms acquire the capabilities needed to respond to them. By enabling firms to access new knowledge and capabilities, M&As can reshape innovation trajectories and help move firms, especially those with a track-record in dirty technologies, towards cleaner technologies.
At the same time, innovation often originates within smaller firms, yet these firms frequently lack the scale or market access needed to further develop and commercialize their technologies. While clean-tech acquisitions offer incumbents a fast-track route to gain new knowledge and capabilities, they may also facilitate the scale-up and diffusion of innovations developed by smaller firms. This highlights the value of policies that proactively support the pool of acquirable clean-tech firms (e.g., US federal energy loan programs and the EU Innovation Fund) to expand incumbents’ strategic options for the green transition.
We should note that our evidence on dirty acquirers reorienting toward clean technologies comes from a relatively small subsample of deals, and patent filings reflect innovative activity rather than realized emissions reductions. Our analysis also does not directly address the competition and antitrust implications of M&A, for example, whether concentrating clean technologies in the hands of a few large companies could reduce competition and ultimately lead to higher prices. Whereas historically the focus of merger review has been on market concentration, our results show that policymakers need to consider both the effects of M&A on market concentration and its effects on innovation when evaluating proposed transactions.
That said, our findings are very encouraging when contemplating the energy transition. Our findings point to a concrete mechanism through which the energy transition can accelerate: the transfer of knowledge and technology through corporate M&As. For firms seeking to move beyond established technological trajectories, we show that M&As can provide an effective pathway to acquire new capabilities and redirect innovation toward cleaner technologies.
