Scaling versus Selling Startups: The Role of Foreign Acquirers in Entrepreneurial Ecosystems

This paper analyzes the decision of growing startups to either scale up on their own or sell to an established company. The model shows that in a closed economy, the number of scaleups is efficient. In an open economy, foreign buyers increase demand and raise acquisition prices. This stimulates startup formation but also encourages too many growing startups to sell instead of scale. In a dynamic equilibrium without externalities, foreign acquirers are a net benefit to the domestic ecosystem. Two model extensions identify conditions under which they can weaken it: (i) intergenerational externalities in the accumulation of scaleup experience and (ii) significant brain drain of serial entrepreneurs.