The Influence of University R & D Expenditures on New Business Formations and Employment Growth

Since new firms generally lack the resources necessary to compete with their larger, older counterparts in the knowledge development process, we argue that they often rely on spillovers to fuel their own innovative efforts. Thus, we hypothesize that new firms will tend to form in areas characterized by high levels of university research and development (R & D) expenditures and that these births will in turn stimulate the local economy by generating increases in employment level and growth. We test our hypotheses at the U.S. labor market area level using secondary data from various government sources for the years 1990 through 1999. Our results demonstrate that university R & D expenditures are positively related to new firm formations, and that these new firm formations are positively related to employment level and change. These findings suggest that university R & D expenditures are an important indirect contributor to overall economic growth by encouraging primary and secondary firm births.