The Effects of Startup Acquisitions on Innovation and Economic Growth

68 Pages Posted: 12 Mar 2021 Last revised: 8 Mar 2023

See all articles by Christian Fons-Rosen

Christian Fons-Rosen

University of California, Merced

Pau Roldan-Blanco

Banco de España

Tom Schmitz

Queen Mary University of London

Date Written: February 14, 2021

Abstract

Innovative startups are frequently acquired by large incumbent firms. On the one hand, these acquisitions provide an incentive for startup creation and may transfer ideas to more efficient users. On the other hand, incumbents might acquire startups just to kill their ideas, and acquisitions can erode incumbents' own 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 in the United States. Our calibrated model implies that acquisitions raise the startup rate, but lower incumbents' own innovation as well as the percentage of implemented startup ideas. The negative forces are slightly stronger. Therefore, a ban on startup acquisitions would increase growth by 0.03 percentage points per year, and raise welfare by 1.8%.

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). Max Planck Institute for Innovation & Competition Research Paper No. 23-02, CEPR Press Discussion Paper No. 17752, 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

Queen Mary University of London ( email )

Mile End Road
London, London E1 4NS
United Kingdom

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