Exploitation or Exploration? Innovation Strategy in Response to Rivals' M&A

Abstract This paper investigates the impact of rivals' Mergers and Acquisitions (M&A) activities on the innovation orientation of firms that are not directly involved in these transactions, hereafter referred to as focal firms. Drawing on the Awareness‐Motivation‐Capability (AMC) framework, we find that rivals' M&A activities positively affect a focal firm's exploratory innovation, while negatively influencing its exploitative innovation, a dynamic that is predominantly driven by rival firms acting as acquirers. We further identify key boundary conditions that moderate this relationship and find that the influence of rival acquirers is amplified when their M&A deals are exploitative in nature, suggesting that focal firms respond strategically by differentiating through exploration. In addition, high levels of market competition intensify the positive effect of rival acquirers on focal firms' exploratory innovation. Finally, focal firms with greater financial slack are more likely to shift their innovation orientation towards exploration in response to rivals' M&A. Together, our findings reveal how external strategic moves by rivals can trigger forward‐looking innovation responses and highlight the importance of firm capabilities and market context in shaping these dynamics.