Merger as a form of investment

A firm can make investments in tangible and intangible capital by buying components in the market and assembling them itself, or it can buy assembled components, that is, it can purchase another firm or a portion of its assets. This straightforward approach to merger is consistent with the theory of the firm, especially the emphasis on monitoring and incentives, and it provides a unified framework in terms of supply and demand. It also explains a number of empirical regularities, in particular the cross-section correlation of merger intensity with industry growth, R&D, and productivity increases. Additional new evidence shows a positive relationship between mergers and investment in both the U.S. and Germany, and between joint ventures and investment in Germany.