Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/284294 
Year of Publication: 
2022
Series/Report no.: 
Working Paper No. 944
Publisher: 
Queen Mary University of London, School of Economics and Finance, London
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%.
Subjects: 
Acquisitions
Innovation
Productivity growth
Firm dynamics
JEL: 
O30
O41
E22
Document Type: 
Working Paper

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