The Effects of Startup Acquisitions on Innovation and Economic Growth

Christian Fons-Rosen, Pau Roldan-Blanco and Tom Schmitz

No 944, Working Papers from Queen Mary University of London, School of Economics and Finance

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: Keywords: Acquisitions; Innovation; Productivity growth; Firm dynamics. (search for similar items in EconPapers)
JEL-codes: E22 O30 O41 (search for similar items in EconPapers)
Date: 2022-12-09
New Economics Papers: this item is included in nep-des, nep-ent, nep-fdg, nep-gro, nep-ino, nep-mac and nep-sbm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: The Effects of Startup Acquisitions on Innovation and Economic Growth (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:qmw:qmwecw:944

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