The Effects of Startup Acquisitions on Innovation and Economic Growth

Innovative startups are frequently acquired by large incumbent firms. 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. Our 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 a startup acquisition ban lowers the startup rate, but increases incumbent innovation as well as the implementation rate of startup ideas. As the negative forces are slightly stronger, the ban lowers growth by 0.03 percentage points per year. These results crucially depend on transaction prices: in the presence of higher acquisition premia, bans would increase growth.