Determinants of New Technology-Based Firms Performance in Catch-Up Regions: Evidence from the U.S. Biopharmaceutical an

Determinants of New Technology-Based Firms Performance in Catch-Up Regions:Evidence from the U.S. Biopharmaceutical and IT Service Industries 1996-2005 Wenbin Xiao December 16, 2009

Investigate how region-level factors affect the early stage-performance of New Technology-based Firms (NTBF) in catch-up regions 1. Objective I. Introduction

First, why do some catch-up regions succeed while others continue to lag behind? Second, besides the industrial cluster size, what other location-specific factors matter? Finally, how do the causal patterns vary between the biopharmaceutical and IT service industry? 2. Research Questions

Fostering “homegrown” NTBFs has become a popular strategy to reinvigorate a regional economy (Ellison & Glaeser, 1997; Feldman and Francis 2004) The conventional wisdom posits that location enhances NTBF performance by industrial clustering (Marshall 1920, Krugman 1991, Porter 1990 1998) Recent evidence suggests that some catch-up regions have better average NTBF performance than leading regions (Sorenson & Audia 2000, Florida 2002, Stuart & Sorenson 2003, Folta et al. 2006) ‘The best practice’ in leading regions may not be applicable to ‘catch-up’ regions, but there are few studies focusing on catch-up regions (Todtling & Trip, 2005). 3. Why Important?

+ Scientist job market Attracting technological entrepreneurs + Venture capital + Cultural diversity Average early-stage NTBFs performance in a region + Academic research Facilitating Radical Innovations + Industrial structure + Entrepreneurial climate II. Theoretical Framework

Local scientists job market conditions: H1a: The size of local scientist job market positively affects the average NTBF performance in a region. H1b: The average salary level of local scientists increases the average NTBF performance in a region. Venture capital H 2: The number of venture capital firms located in a region increases its average NTBF performance at a decreasing rate . Cultural diversity H 3: Cultural diversity increases the average NTBF performance in a region. Academic research H 4: Academic research positively affect the average NTBF performance in a region. Industrial structure H5a: The degree of industrial specialization in a region promotes its NTBFs’ performance. H5b: Coagglomeration with buyer-industries promotes NTBFs’ performance. H5c: Coagglomeration with supplier-industries promotes NTBFs’ performance. Local entrepreneurial climate H6: Entrepreneurial culture positively affects the average performance of NTBFs in a region. III. Hypotheses

Define it at Metropolitan Statistical Area (MSA) level; Create a 1995 high-tech index, with two equally weighted components: Industrial size: share of national establishments in a specific high tech industry Industrial density: number of industrial establishments per square mile Choose the 95th percentile as the cutoff point to generate a stable list during the study period 1. How to quantitatively define catch-up regions? IV. Methods

Fig.1: Leading and catch-up regions in the biopharmaceutical industry,1995 Total MSAs: 168 Leading: 8 Catch-up: 160

Fig.2: Leading and catch-up regions in the IT service industry, 1995 Total MSAs: 316 Leading: 15 Catch-up: 301

Dependent variable: average NTBF performance in a MSA Number of Initial Public Offering (IPO) and Merger &Acquisition (M&A) event Independent variables Local scientist job market conditions Job market size, absolute salary ratio, relative salary ratio Venture capital Number of industry-related venture capital firms Cultural diversity Share of population that were foreign born Academic research Share of industry-related university R&D expenditure Industrial structure Location quotients of the industry, buyer-industries, and supplier-industries Local entrepreneurial climate New small firm birth rate Control variables industrial cluster size and density, time fixed effect 2. Measures

List of IPO and acquisition companies Thomas Financial Co.’s SDC New Issue Database Hoover’s IPO Center Jay Ritter's 1975-2003 IPO dataset Company information Prospectus and other legal reports in the SEC filing database Region-specific data County Business Patterns, US Census Bureau Regional Economic Account, US Bureau of Economic Analysis Occupational Employment Statistics, US Bureau of Labor Statistics VC data Moneytree Venture Capital Profiles 3. Data sources

4. Models Cross-sectional model Dependent variable: total number of NTBF IPO and M&A events that occurred in industry i within a MSA m between 1996 and 2005. Independent variables: values in 1995 Control variables: industrial cluster size and density in 1995 Two-period panel model Dependent variable: number of NTBF IPO and M&A events that occurred in industry i within a MSA m between 1996-2000 or 2001-2005 Independent variables: values in 1995, 2000 Control variables: industrial cluster size and density, time fixed effect

5. Zero-Inflated Negative Binomial (ZINB) Model Specification Non-negative integer values, count data Overdispersion Sample variance bigger than mean Significant alpha test statistics Excess zeros Biopharmaceutical : 59% zero count values IT service industry: 34% Significant Vuong test statistics Heteroskedasticity Significant Breusch-Pagan/Cook-Weisberg test statistics Use robust standard errors

6. Distance-Weighted Measures Use distance-weighted measures to capture the spill over effects from the adjacent regions Step 1: calculate the physical distance between two MSAs Step 2: weight the contribution of each MSA to the focal MSA by the inverse of their distance Step 3: sum these weighted contributions across all MSAs to yield a distance-weighted value for the focal MSA. Construct five distance-weighted measures scientist job market size, venture capital firms, immigrants, academic R&D expenditure, and industrial establishments.

1.1: Local Scientist Job Market Size V. Findings • Life scientist job market size has positive and significant impacts on biopharmaceutical NTBF performance in catch-up regions • One additional percentage point of life scientist job market share increases the expected count of IPO and M&A events by a factor of exp(0.493), or 1.64, holding other variables constant • Computer scientist job market size has negative but insignificant impact on IT service NTBF performance in catch-up regions

1.2: Local Scientist Absolute Salary Ratio • Life scientist absolute salary ratio has positive and significant impact only in the full sample data. • Computer scientist absolute salary ratio has positive and significant impact in catch-up regions, but its impact is stronger and more significant in the full sample size.

1.3: Local Scientist Relative Salary Ratio • The impact of scientist relative salary ratio is negative but insignificant in catch-up regions for both industries; • The impact is negative and highly significant impact in IT leading regions.

2. Venture Capital • The impact of biotech VC firms is not significant • The number of IT service VC firms increases NTBF performance at a decreasing rate in catch-up regions. The optimal number is around 7 • The impact of IT service VC firms is negative and significant in the full sample regions

3. Cultural Diversity • Cultural diversity has positive and significant impact on IT service NTBFs in catch-up regions • One explanation is that the measure of cultural diversity, which is the share of foreign born population, favors the IT service industry over the biopharmaceutical industry

4. Academic Research • Academic research is not significant in catch-up regions for both industries. • The impact of life science academic research became significant in the leading regions, only after capturing the spillover effect. • The impact of computer science academic research is positive and significant only in the full sample regions.

5.1: Industrial Specialization • Industrial specialization has positive and highly significant impact only in the IT service industry.

5.2: Co-aggolomation with Buyer-Industries • Coagglomeration with supplier-industries has little impact on NTBF performance in both industries in catch-up regions.

5.3: Co-aggolomation with Supplier-Industries • Coagglomeration with Supplier-industries has little impact on NTBF performance in both industries in catch-up regions.

6. Local Entrepreneurial Climate • There is strong evidence that the local entrepreneurial climate has positive and significant impact on NTBF performance in catch-up region for both industries • The impact of entrepreneurial climate is stronger in the leading regions than in catch-up regions.

7. Industrial Cluster Size • Industrial cluster size increases NTBF performance at a decreasing rate • The optimal biopharmaceutical cluster size is about 68, which is very close to the result (65 firms) by Folter (2006). • The optimal IT service cluster size is about 742.

8. Industrial Cluster Density • Industrial cluster density increases NTBF performance in general.

1. Main findings Local entrepreneurial climate plays a significant and positive role on NTBF performance in both industries. Scientist job market size and absolute salary ratio have positive impacts, but the former matters more in the biopharmaceutical industry, and the latter matters more in the IT service industry. The effect of relative salary ratio is negative and insignificant. Venture capital increases NTBF performance at a decreasing rate. Cultural diversity has stronger impact in the IT service industry than in the biopharmaceutical industry. Academic research has little impact in catch-up regions for both industries. Industrial specialization is significant and positive only in the IT service industry. Industrial cluster size increases NTBF performance at a decreasing rate. Industrial cluster density generally increases NTBF performance. VI. Conclusions

Promote local entrepreneurial culture Lower the barriers to entry for human capital and increase cultural diversity and regional tolerance Increase the availability of venture capitals Invest in academic research and strengthen the collaboration between academia and NTBFs. 2. Policy implications

First, the event of IPO and M&A is only a rude measure of the early stage success of NTBF. Second, this study doesn’t decompose the impacts of industry-related entrepreneurial activities and that of general entrepreneurship. Third, this study doesn’t explicitly examine the effect of existing economic development policies on local NTBF performance. Finally, the temporal stability analysis in this study is based upon a two-period, ten-year-long time frame. 3. Limitations

Develop alternative measures of early-stage firm performance to obtain more robust results. Explore whether industry-specific entrepreneurial activities or just the overall entrepreneurial activities are the true determinant of NTBF performance. Conduct similar analysis at the state level which would allow for the addition of policy instruments to the model. Examine the temporal stability based upon a longer time span 4. Future Research Directions

Thank You!

Fig.3: IPO and M&A Events in the Biopharmaceutical Industry, 1995-2005 Statistics for catch-up regions Sum: 221 (575) Mean: 1.38 Max: 26 Min: 0 Std: 3.00

Fig.4: IPO and M&A Events in the IT Service Industry, 1996-2005 Statistics for catch-up regions Sum: 2399 (6982) Mean: 7.97 Max: 189 Min: 0 Std: 19.07

Table 1: Results of Cross-Sectional and Two-Period Panel ZINB Models ( biopharmaceutical) Note: Robust standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1

Table 1: Continued Note: Robust standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1

Table 2: Results of Distance-Weighted ZINB Models ( biopharmaceutical) Note: Robust standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1

Table 2 (continued) Note: Robust standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1

Table 3: Results of Cross-Sectional and Two-Period Panel ZINB Models ( IT service industry) Note: Robust standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1

Table 4: Results of Distance-Weighted ZINB Models ( IT service) Note: Robust standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1

Determinants of New Technology-Based Firms Performance in Catch-Up Regions: Evidence from the U.S. Biopharmaceutical an