For Entrepreneurship, Are States Chasing the Wrong Smokestacks?

New NBER study suggests different tact may be necessary to breed entrepreneurial growth

Public strategies aimed at promoting tech-based entrepreneurial activity by providing capital or investment incentives may not be enough, posit Paul Gompers, Josh Lerner and David Scharfstein in Entrepreneurial Spawning: Public Corporations and the Genesis of New Ventures, 1986-1999. Instead, “regions may need to attract firms with existing pools of workers who have the ‘training and conditioning’ to become entrepreneurs.”

The authors' recent research, which analyzed numerous factors that affect the total number of venture capital-backed tech companies spawned by public companies during a sample period from 1986-1999, suggests the stimulation of entrepreneurial activity in a region with a small number of existing entrepreneurial companies is a difficult task. Gompers, Lerner and Scharfstein find entrepreneurial activity in a region has increasing returns — venture capital backed entrepreneurial companies spawn more VC-backed tech start ups. Additionally, they warn, the local group of suppliers and customers may not be robust enough to sustain more isolated new technology-based ventures.

The recent working paper released by the National Bureau of Economic Research also concludes that less-diversified companies, those focused on a single line of business for instance, spawn 19 percent more entrepreneurial ventures than do multi-faceted corporations. Findings by the authors are consistent with the notion that the best settings for the origin of entrepreneurial firms are other entrepreneurial firms. It is in these surroundings that employees gather information from their associates concerning what is necessary to initiate a new business and are introduced to a system of suppliers and customers who are familiar with interacting with start-up companies.

While large bureaucratic corporations unwilling to support commercialization of internal innovations spawn entrepreneurial start-ups, companies "that were once venture capital backed have a 23 percent higher spawning level."

Entrepreneurial Spawning: Public Corporations and the Genesis of New Ventures, 1986-1999 can be located at: http://papers.nber.org/papers/W9816