The Effects of Startup Acquisitions on Innovation and Economic Growth

Innovative startups are frequently acquired by large incumbents. Such acquisitions have recently come under scrutiny, as policymakers suspect that incumbents might acquire startups just to "kill" their ideas. However, acquisitions also provide an incentive for startup creation, and have ambiguous effects on incumbents' own innovation. This paper assesses the net effect of these forces. To do so, we build an endogenous growth model with heterogeneous multi-product firms and startup acquisitions, and calibrate its parameters to match micro-level evidence from the United States. Our calibrated model implies that taxes on startup acquisitions lower the startup rate, but increase incumbent innovation as well as the implementation rate of startup ideas. Banning killer acquisitions, a policy that appears desirable in partial equilibrium, yields virtually no welfare gains in general equilibrium. The optimal policy instead imposes high taxes on startup acquisitions (reducing their frequency by more than half) and raises consumption-equivalent welfare by 0.48%.