The Development and Renewal of Strategic Capabilities

This dissertation examines the development and renewal of capabilities through acquisitions by drawing from absorptive capacity literature (Cohen and Levinthal, 1990; Zahra and George, 2002). This dissertation examines four interrelated questions concerning (1) the impact of acquisition experience on a firm’s absorptive capacity, (2) the role of absorptive capacity in the renewal of capabilities through acquisition, (3) the impact of capabilities renewal through acquisition on a firm’s choice of future growth mode, and (4) the impact of capabilities renewal through acquisition on post-acquisition performance. These questions are examined using FDIC data and surveys administered to top managers of banks that conducted acquisitions between October 2004 and October 2006. Results of this study suggest that a firm’s past experience with internal development and acquisition impacts the development of its absorptive capacity. Furthermore, results suggest that absorptive capacity has multiple dimensions and that the respective absorptive capacity dimensions have unique independent and joint effects on a firm’s ability to renew its capabilities through acquisition. Results also suggest that the impact of the change in capabilities on the firm’s choice of future growth mechanism largely depends on the nature of capability that changed through acquisition. When firms experience an improvement or decline in important revenue-generating capabilities that are fundamental to firm performance, the firm is more likely to pursue future acquisition to either compensate for its inability to grow by its own internal means or to exploit its improved capability in a new setting. However, when management capabilities or operational capabilities experience an improvement or a decline, the firms is less likely to pursue future acquisition in order to avoid taxing the already strained capability or to take time to fully internalize the improved capability. Results also suggest that the change in capabilities through acquisition is positively associated with a change in post-acquisition performance