State Governments as Financiers of Technology Startups: Implications for Firm Performance

Abstract:     
U.S. state governments are active financiers of new science and technology companies. Yet little is known about the effects of state R&D funding on the performance of recipient ventures. This study provides new evidence based on competitive R&D awards administered by the state of Michigan from 2002 through 2008. We find strong and compelling evidence that state R&D awards enhanced the commercial viability (i.e., survival) of recipient firms, suggesting a relaxation of financial constraints. Among firms with scores near the discontinuous funding threshold, our estimates suggest that awardees were 15% to 25% more likely to survive three years after the competition than otherwise comparable applicants that sought but failed to receive an award. We also find that receipt of state R&D funding enhanced the follow-on financing for these new ventures, but only for those with more onerous information challenges in entrepreneurial capital markets.

Number of Pages in PDF File: 42

Keywords: innovation, government R&D programs, entrepreneurial finance, regression discontinuity design

JEL Classification: G28, M13, O32

working papers series