No. 222

October 2002

SMALL BUSINESS

RESEARCH

SUMMARY

The Influence of R&D Expenditures on New Firm Formation and

Economic Growth

by BJK Associates, 2002. [27 pages]

Maplewood, NJ 07040

under contract no SBAHQ-00-M-0491

This Small Business Research Summary (ISSN 1076-8904) summarizes one of a series of research papers prepared under contracts

issued by the U.S. Small Business Administration’s Office of Advocacy. The opinions and recommendations of the authors of this study do

not necessarily reflect official policies of the SBA or other agencies of the U.S. government. For more information, write to the Office of

Advocacy at 409 Third Street S.W., Washington, DC 20416, or visit the office’s Internet site at www.sba.gov/advo.

Purpose

Economists have long argued that innovation leads

to economic growth, and many studies have explored

the small business linkage between the two. This paper

explores the spillover effects from university research

and development (R&D), and more precisely, whether

university R&D activity influences the rate of local

new firm formations and economic growth.

Overall Findings

The study demonstrates that university R&D expenditures were significantly related to new firm formations in the labor market surrounding the universities. The authors found this relationship to be statistically significant for five years beyond the initial

R&D outlay, albeit less and less so as time elapsed.

The findings document how government and private

sector R&D expenditures made through research universities contribute to economic growth via the number of resulting new startups.

Highlights

• Utilizing labor market area data, the authors analyzed the impact of R&D on communities for the

entire nation, rather than selected geographic regions.

• University R&D promoted higher new firm birth

rates. R&D spending was strongly related to growth

rates at the labor market level.

• The researchers discovered that R&D achieved

the greatest impact right after initial R&D expenditures. Significant impact on the number of new firms

averaged five years.

• Labor market areas with larger average establishment sizes tended to have fewer firm startups.

The number of establishments (or competitors) also

negatively affected the firm birth rate.

Scope and Methodology

• The number of firm births from 1990 to 1999

was obtained from the Longitudinal Establishment

and Enterprise Microdata (LEEM) file at the U.S.

Census Bureau’s Center for Economic Studies.

• R&D expenditure data were derived from the

National Science Foundation’s (NSF) annual survey,

which includes Zip codes for university laboratories.

• Researchers relied on NSF data containing information on Small Business Innovation Research

(SBIR) and Small Business Technology Transfer

Research (STTR) grants.

• The following Census Bureau data sources were

used: County Business Patterns, the U.S. Census of

Population, and U.S. Census Annual Surveys.

• Employment information was obtained from the

Bureau of Labor Statistics.

• The authors converted data into labor 

market areas.
Ordering Information

The full text of this report and summaries of other

studies performed under contract to the U.S Small

Business Administration’s Office of Advocacy are

available on the Internet at: www.sba.gov/advo/research.

Printed copies are available for purchase from:

National Technical Information Service

5285 Port Royal Road

Springfield, VA 22161

Tel. (800) 553-6847

TDD: (703) 487-4639

www.ntis.gov

Order number: PB2003-100698

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