Make, Buy, or Ally? Choice of and Payoff from Announcements of Alternate Strategies for Innovations

Firms constantly grapple with the question of whether to make, buy, or ally for innovations. The literature has not, to our knowledge, analyzed the choice of and payoff from these alternate routes to innovation for the same firm. To address this issue, we collect, code, and analyze the choice of and payoff from 3,522 announcements of make, buy, and ally for 192 firms across 108 industries over five years. We find that announcements to make or ally generate positive and higher payoffs than announcements to buy, which generate negative payoffs. Nevertheless, firms continue to buy for two reasons. First, firms seem to have no memory of the payoff from buy, even though they have a memory of the payoff from make. Second, firms tend to buy when they lack commercializations, even though this strategy does not always seem to pay off. These results suggest that firms see buy as a signal to investors that they have a solution for what may be a deep strategic problem. Nevertheless, the negative returns to a buy can be mitigated if the acquirer is experienced, and the target is related and offers high customer benefit. We offer explanations for and implications of the results.