Do Venture Capital and Public Biomedical R&D Stimulate the Formation of New Biotechnology Firms?

Fostering the growth of regional clusters of biotechnology is a high priority for policy makers in many parts of the world. Examining regional success stories like Silicon Valley, California, suggests that providing venture capital and building a strong biomedical R&D infrastructure are important policies for promoting entrepreneurship and innovation. However, the formation of new biotechnology firms within a region is not simply a function of these “supply-side” policies but also depends on perceived entrepreneurial opportunities. This paper suggests an empirical strategy for identifying the supply-side effects of venture capital and biomedical R&D on biotechnology entrepreneurship. Using detailed data on entrepreneurship in five California regions, the analysis finds evidence that ignoring entrepreneurial opportunities leads to an upward bias on the effects of venture capital and biomedical R&D. After correcting for the endogeneity of entrepreneurial demand, both venture capital and biomedical R&D are found to simulate biotechnology entrepreneurship.