The Influence of R&d Expenditures on New Firm Formation and Economic Growth

This paper describes research designed to determine whether university R&D activity affects the local rate of new firm formations and economic growth. We created a file of university R&D expenditures by Labor Market Area (LMA) in the U.S. and combined this with data on new business formations by LMA. The hypothesized relationships were tested using multiple regression analysis, while controlling for other relevant exogenous socio-economic variables The results show that university R&D expenditures are significantly related to new firm formations in the same LMA. In addition, we tested for a relationship between R&D expenditures and local economic growth, measured as employment growth by LMA. The results show that university R&D expenditures are not significantly related to economic growth, once one has controlled for the birth rate in the previous period. However, the variations in the birth rates, which are affected by R&D spending, are strongly associated with the growth rates at the LMA level. These findings lend strength to the argument that government and private sector R&D expenditures made through research universities contribute to economic growth. Although this argument has traditionally been made with the expectation of long term lags in the R&D to growth relationship, our findings are that this lag is relatively small – as little as one year and the effect seems to decrease slowly, but steadily, after the first year but lasts for at least five years. University R&D spending is also associated with localities with higher levels of human capital, which also contributes substantially toward generating new firms., Thus, research universities and investment in R&D at these universities are major factors contributing to economic growth in the labor market areas in which the universities are situated.