The Effects of Startup Acquisitions on Innovation and Economic Growth

50 Pages Posted: 12 Mar 2021 Last revised: 13 May 2022

See all articles by Christian Fons-Rosen

Christian Fons-Rosen

University of California, Merced

Pau Roldan-Blanco

Banco de España

Tom Schmitz

Bocconi University - Department of Economics

Date Written: February 14, 2021

Abstract

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

Fons-Rosen, Christian and Roldan-Blanco, Pau and Schmitz, Tom, The Effects of Startup Acquisitions on Innovation and Economic Growth (February 14, 2021). Available at SSRN: https://ssrn.com/abstract=3785485 or http://dx.doi.org/10.2139/ssrn.3785485

Christian Fons-Rosen

University of California, Merced ( email )

P.O. Box 2039
Merced, CA 95344
United States

Pau Roldan-Blanco (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Tom Schmitz

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

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