The Virtuous Cycle of Innovation and Capital Flows

50 Pages Posted: 1 Dec 2020

See all articles by Naomi Hausman

Naomi Hausman

Hebrew University of Jerusalem - Department of Economics

Daniel C. Fehder

Massachusetts Institute of Technology (MIT); USC, Marshall School

Yael V. Hochberg

National Bureau of Economic Research (NBER); Rice University - Jesse H. Jones Graduate School of Business

Date Written: October 18, 2020

Abstract

Does local innovation attract venture capital? Using a regime change in the commercialization of university innovation in 1980 that strongly increased university incentives to patent and license discoveries, we document the complement to Kortum and Lerner (2000)’s finding that financing leads to future innovation. Because universities have different technological strengths, each local area surrounding a university experienced an increase in innovation relevant to particular sets of industries after 1980—industries which differ widely across university counties. Comparing industries within a county that were more versus less related to the local university’s innovative strengths, we show that venture capital dollars after 1980 flowed systematically towards geographic areas and industries with the greatest sudden influx of innovation from universities. In contrast, the geographic and industry distribution of corporate patenting and prior venture financing in the pre-period does not predict a differential increase in future venture financing, suggesting that our findings are not solely driven by the 1979 pension fund reform that increased financing available to VCs across the board. The results support the notion of a “virtuous cycle” wherein innovation serves to draw capital investment that then funds future innovation.

Keywords: innovation, venture capital, universities, Bayh Dole

JEL Classification: G24, R11, R58

Suggested Citation

Hausman, Naomi and Fehder, Daniel C. and Hochberg, Yael V., The Virtuous Cycle of Innovation and Capital Flows (October 18, 2020). Available at SSRN: https://ssrn.com/abstract=3714727 or http://dx.doi.org/10.2139/ssrn.3714727

Naomi Hausman (Contact Author)

Hebrew University of Jerusalem - Department of Economics ( email )

Jerusalem
Israel

Daniel C. Fehder

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

USC, Marshall School ( email )

Los Angeles, CA
United States

Yael V. Hochberg

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

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