SBA Study on the Impact of University R&D on Local Economies

Results of the Study:

• University R&D expenditures are (statistically) significantly related to new firm formations in the same Labor Market Area (LMA).
• University R&D expenditures influence local economic growth through the birth of new firms.
• Spillover effects are at work in and around universities, proportional to the amount of R&D spending at the universities, as new firms tend to form around the local university research activity centers.
• The lag between university R&D and growth is less than previously argued.

Policy Implications:

• Technology Transfer, Incubators, Science Parks, Patent Applications, University-Created Venture Capital Funds:
  Efforts universities are putting into mechanisms to promote commercialization of the inventions that emerge from their laboratories are key.
  
• Sustained Impact:
  The effect of R&D expenditures on firm formation endures annually for at least five years after the R&D spending occurs due to:
  1. growth of the newly formed entrepreneurial firms based on inventions derived from university R&D.
  2. secondary effects of the employment growth resulting from the births of those firms.
  
• Human Capital:
  Research universities graduate and attract college graduates to their local areas to provide the educated work force needed to support the clustering of new firms.

October 2002, the U.S. Small Business Administration released a report:
“The Influence of R&D Expenditures on New Firm Formation and Economic Growth”

The study is one of the first that seeks to quantify the impact of university R&D.

Title, Authors, Sponsors
“The Influence of R&D Expenditures on New Firm Formation and Economic Growth,” a research report for the Office of Economic Research, Office of Advocacy, SBA; the National Commission on Entrepreneurship; and Kauffman Center for Entrepreneurial Leadership, Kauffman Foundation, was prepared by Bruce A. Kirchhoff, Catherine Armington, Iftekhar Hasan, and Scott Newbert.

Primary Findings

1. University R&D expenditures are (statistically) significantly related to new firm formations in the same Labor Market Area (LMA).
2. The variations in the birth rates, which are affected by R&D spending, are strongly associated with the growth rates at the LMA level.
3. Since R&D does have an effect on firm births, and firm births have a substantial effect on local economic growth, university R&D expenditures influence local economic growth through the birth of new firms.
4. Jaffe type spillover effects are at work in and around universities, proportional to the amount of R&D spending at the universities, as new firms tend to form around the local university research activity centers.
5. The lag between university R&D and growth is less than previously argued.

Research Method
The study examines the impact of university R&D expenditures on new firm foundation and economic growth using statistical methods (multiple regression analysis).

The study uses Labor Market Area (LMA) data from the Bureau of the Census rather than SMSA’s. This shift allows the inclusion of R&D heavy rural areas (e.g. rural areas with major research universities) in the study.

The study examines the relationships among the following variables from 1990-1999:

• Firm births
• University R&D expenditures
• SBIR and STTR grants
• Employment
• Human capital – College education
• Human capital – High school education
• Human capital – Foreign-born population

The study uses the following primary environmental control variables:

• Population
• Population change
• Establishment density
• Establishment size
• Unemployment rate
• Labor force
• Trend
• National economic growth rate

Results

1. The study finds that R&D positively effects firm births, but finds no definitive evidence that human capital is related to economic growth. The researchers admit that multicollinearity may be at fault for their failing to find such evidence.
2. Establishment density, measured as LMA total establishments divided by the population, is related to firm births.
3. Firm birth rates have a positive impact on local economic growth.
4. University R&D expenditures have no detectable effect on economic growth rates but, since R&D does have an effect on firm births, and firm births have a substantial effect on local economic growth, the study concludes that university R&D expenditures influence local economic growth through their impact on the birth of new firms.
5. Economic growth rate is positively related to human capital.

Policy Implications
The study concludes that its findings support the U.S. Office of Technology Policy’s 2000 assertion that the wide disparity in university research funding among states is closely related to their differences in economic growth rates.

• Technology Transfer, Incubators, Science Parks, Patent Applications, University-Created Venture Capital Funds:
  Efforts universities are putting into mechanisms to promote commercialization of the inventions that emerge from their laboratories are key to the statistical relationships found in this study.
• Sustained Impact:
  The effect of R&D expenditures on firm births endures annually for at least five years after the R&D spending occurs due to:
  1. growth of the newly formed entrepreneurial firms based on inventions derived from university R&D.
  2. secondary effects of the employment growth resulting from the births of those firms.
• Human Capital:
  Research universities graduate and attract college graduates to their local areas to provide the educated work force needed to support the clustering of new firms as suggested by the large Pearson correlation coefficient between college educated persons and R&D expenditures.
• Funding:
  The full effect of the gradual decline in federal R&D will not show in reduced firm births for five or six years.