The Effects of Startup Acquisitions on Innovation and Economic Growth
50 Pages Posted: 12 Mar 2021 Last revised: 13 May 2022
Date Written: February 14, 2021
Acquisitions of startups by large incumbents have conflicting effects on aggregate innovation and growth. On the one hand, acquisitions provide an incentive for startup creation, and are a way to transfer ideas to more efficient users. On the other hand, incumbents might acquire some startups just to "kill" their ideas, and acquisitions can erode incumbents' innovation incentives. Our paper aims to assess the net effect of these forces. To do so, we build an endogenous growth model with heterogeneous firms and acquisitions, and calibrate its parameters by matching micro-level evidence on startup acquisitions and patenting. Our calibrated model implies that acquisitions raise the startup rate, but lower incumbents' own innovation as well as the percentage of implemented startup ideas. Quantitatively, the negative forces are slightly stronger: a startup acquisition ban would increase growth by 0.03 percentage points per year.
Keywords: Acquisitions, Innovation, Productivity growth, Firm dynamics
JEL Classification: O30, O41, E22
Suggested Citation: Suggested Citation