Is acquisition‐related foreign direct investment during an economic crisis detrimental for domestic innovation?

We study how acquisition‐related foreign direct investment during economic crises affects R&D investments and the direction of innovation of target firms, compared with acquisitions made during periods of strong economic growth. Using a panel of Spanish firms, we find that foreign multinationals cherry‐pick the best domestic firms, irrespective of the timing of acquisition. Using matching and difference‐in‐differences regressions, we find that firms acquired during economic crises experience smaller declines in R&D than those acquired during boom periods. Our results are consistent with the opportunity cost theory of R&D over the business cycle: during recessions, the relative cost of R&D falls, incentivizing innovation, particularly in new product development. However, only firms with sufficient access to finance can capitalize on these conditions. Our results suggest that acquisitions can ease financial constraints at a critical time, enabling target firms to sustain or redirect innovation efforts when incentives are most favorable.