smaller enterprises, they tend to retard innovation or at least direct it to incremental changes in existing products, services, and processes.5 This thesis contributes to the apprehension that in the future there will be fewer Googles, Microsofts, Yahoos, Genetechs, Amgens, Suns, Oracles, and Ciscos.6 What may matter more than a drop in the number of firms going public and exhibiting average performance is the lower probability of an IPO leading to an exceptional engine of breakthrough technology development and job creation. Another concern is that the shift from IPO to acquisition exits means generally lower returns to venture capital investing and therefore lower venture capital investment, which has played an important role in the development of technology-based firms in the United States since the 1980s.

One line of counter-argument asserts that entrepreneurs who are bought out before they would normally exit by taking their firms public frequently go on to launch new start-ups based on other technologies. In theory, moreover, established firms are better positioned to accept higher risks and nurture new enterprises than if they are subject to the expectations of institutional and individual investors focused on quarterly earning reports. Acquisitions can take many forms and are by no means uniformly hostile to all forms of innovation. In any case, exit outcomes are not necessarily dichotomous or permanent. A venture-backed firm may go public and subsequently become a target of acquisition. Or it may be acquired by an established company and later spun off as an independent firm.

Less discussed but perhaps equally important is how exit strategies affect venture investor and entrepreneur decisions about firm strategy before the point of sale or IPO. The expectation of acquisition may favor investments in some kinds of technologies and discourage investments in others, depending in part on the field. In the case of biopharmaceutical technology, investment in the development of drugs with very large markets attractive to established pharmaceutical houses may be favored over drugs for niche markets that a medium-size biotechnology firm might profitably pursue were it to remain independent. In information technology, the expectation of an acquisition outcome might favor investment in new applications representing relatively little technological advance.

Suppose some of these consequences are real and are judged to be adverse to desirable kinds of technology development and the nation’s long-run economic interests. Then several other questions arise. Is the change in the composition of exit outcomes cyclical and in due course self-adjusting or structural and likely to continue in the absence of intervention? What combination of market forces and public policy decisions account for the change? What public policy instruments if any are available to make the domestic IPO route more attractive? What are the pros and cons of possible actions?

To take an example discussed at some length, the IPO recession in the United States and the migration of some IPO activity abroad is sometimes ascribed to changes in securities regulation, in particular the accounting requirements introduced by the Sarbanes-Oxley Act of 2002, passed by Congress in response to the Enron, WorldCom, and Adelphi scandals. This was the most obvious relevant policy change


Regarding the impact of acquisition on innovation, see Ahuja and Katila (2001) and Prabhu, Chandy and Ellis (2005).


Most but not all of these companies had successful IPOs prior to 2000. Google went public in 2004.

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