State Governments as Financiers of Technology Startups: Evidence from Michigan’s R&D Loan Program

65 Pages Posted: 16 May 2012 Last revised: 10 Feb 2020

See all articles by Bo Zhao

Bo Zhao

University of Hong Kong - Faculty of Business and Economics; International Monetary Fund

Rosemarie Ham Ziedonis

Boston University - Questrom School of Business

Date Written: December 30, 2019

Abstract

State governments in the United States often fund and support technology startups within their borders. Yet little is known about the magnitude with which these place-based policy interventions shift the performance trajectories of entrepreneurial firms. We provide new evidence based on 241 startups that compete for advanced research and technology commercialization loans between 2002 and 2008 through a Michigan-based program. Among applicants with project scores near the threshold required for funding, we find that award recipients are 20% to 30% more likely to remain in business four years after the competition relative to similar companies that seek but fail to receive funding. We also find that award receipt stimulates follow-on venture capital (VC) investments in surviving companies. The VC stimulus effect is, however, disproportionately driven by subsets of firms that are very young, relatively inexperienced at external fundraising, or located outside the dominant hub of entrepreneurial activity within the state. This distinctive pattern of heterogeneous effects remains visible for follow-on R&D financing from federal government sources, and for supplemental outcome measures that use news articles to track shifts in financing and business development activities. These findings are consistent with the view that public R&D programs are particularly beneficial when frictions in private resource markets are more severe.

Keywords: entrepreneurship; innovation policy; R&D subsidies; startup performance

JEL Classification: G28, L26, 031

Suggested Citation

Zhao, Bo and Ziedonis, Rosemarie Ham, State Governments as Financiers of Technology Startups: Evidence from Michigan’s R&D Loan Program (December 30, 2019). Research Policy, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2060739 or http://dx.doi.org/10.2139/ssrn.2060739

Bo Zhao (Contact Author)

University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong

International Monetary Fund ( email )

700 19th St NW, Washington
Washington, DC 20036
United States

Rosemarie Ham Ziedonis

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

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