Entrepreneurialism and Innovation in the U.S. Technology Industry: Analysis of Early Stage Acquisition Activity and Allocation of Venture Funding (2008-2019)

Abstract

For the past three decades, empirical economic research has proven that there exists a startup deficit in the U.S. private sector, and other research has explored the severe consequences that a decline in business dynamism has had on the American economy. The dearth of startups has negatively impacted employment and productivity levels in the U.S. Other research shows that the U.S. technology industry, despite being amongst the fastest growing industries, is also experiencing a fall in firm entry and contributing to the overall startup deficit that our nation is facing. Although the existing research examines the decline in business dynamism and its effects on the economy, this paper addresses the question of whether there has been a drag on innovation in the U.S. technology industry. I construct a market for innovative startups in the U.S. tech sector that consists of a downstream demand, proxied by the proportion of early stage tech acquisitions, and the upstream supply of startups, proxied by the early stage funding of tech firms. Furthermore, this paper identifies the leading indicator between the two proxy variables. The results of my research suggest that there is a recent dry up in innovation in the U.S. technology industry. Furthermore, my analysis shows that between my two proxy variables measuring innovation, the acquisition activity of young startups is the leading indicator and influences subsequent early stage VC funding.