The Effects of Startup Acquisitions on Innovation and Economic Growth
CEPR Press Discussion Paper No. 17752
68 Pages Posted: 12 Mar 2021 Last revised: 8 Mar 2023
Date Written: February 14, 2021
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: Suggested Citation