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