Innovation Policy andNanotechnologyEntrepreneurshipJennifer L. WoolleyRenee M. Rottner

In this article, we explore the relationship between innovation policy and new venturecreation in the United States. Specifically, we examine two components of innovation policyin nanotechnology—science and technology (S&T) initiatives and economic initiatives—andtheir relationship with the founding of nanotechnology firms. We find strong support relatingnew firm formation to S&T and economic initiatives. States with both S&T and economicinitiatives had six times as many firms founded than those states without such initiatives. Wealso find evidence of a first-mover advantage as states with the earliest innovation policieshad higher rates of related firm foundings over time. These findings suggest that states thatare most attractive to entrepreneurs not only pursue technological innovation and provideresources, but also encourage and legitimize commercial development. Implications forpublic policy makers and scholars are provided.

Introduction

Technological innovation and commercialization are key components of entrepre-neurship and firm development (Aldrich & Ruef, 2006). On the one hand, innovation isconsidered a cornerstone of entrepreneurial activity (Schumpeter, 1934). On the otherhand, entrepreneurial activity is viewed as a means for generating innovations (e.g.,Birley, 1986, 1987). Given the link between innovation and entrepreneurship, it followsthat policies supporting innovation efforts will be likely to have an effect on entrepre-neurial activity. Landau and Jorgenson (1986, p. 8) assert that innovation, which consistsof invention and implementation, depends on policies that “encourage entrepreneurship,risk-taking investment, and technological change.” These innovation policies includesponsorship of economic initiatives and science and technology (S&T) initiatives for thedevelopment and commercialization of inventions.

Despite its centrality to innovation, the relationship between innovation policy andentrepreneurship was mostly overlooked by scholars until the 1990s (Holcombe, 2007). Atthat time, neoclassical economists and policy scholars began to respond to criticisms forfailing to include entrepreneurship and innovation in their models (Landau & Jorgenson,1986; Romer, 1986). New economic growth theory began to consider the role of institu-tions and government (e.g., Leyden & Link, 1992) and organization theory began to model

Please send correspondence to: Jennifer L. Woolley, tel.: (408) 554-4685; e-mail: jenniferwoolley@yahoo.com, and to Renee M. Rottner at rrottner04@merage.uci.edu.

PTE &

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the entrepreneurship–environment connection (Gnyawali & Fogel, 1994; Specht, 1993;Van de Ven, 1993). Simultaneously, governments became more active in assisting entre-preneurs and fostering industrial clusters, technology transfer, and high-tech start-ups(Plosila, 2004; White & Reynolds, 1996).

While the contribution of innovation policy to entrepreneurship has become an under-lying tenet for today’s policy makers, the implementation and assessment of policyremains problematic. Innovation policy in the United States is decentralized and frag-mented, characterized by large public investments with little central government oversightof resources, which, in turn, are allocated by dozens of agencies and congressionalcommittees (Mowery, 2001). As a result, it has fallen to individual states to interpret andimplement innovation policies, with varying results and disparate performance measures.This has provided a challenge for scholars, as expressed by Jaffe (1998, p. 77), thecoordinator of the National Bureau of Economic Research Project on Industrial Technol-ogy and Productivity: “I do not believe that it is possible to perform a reliable andcomprehensive measurement of the outcomes of science and technology programs.” Jaffe(1998) advocates that multiple measures must be developed and considered.

The purpose of the present study is to provide an empirical test of the relationshipbetween innovation policy and entrepreneurial outcomes, specifically the founding ratesof new ventures. We do this by examining the implementation of innovation policy at thestate level, as it relates to the development of nanotechnology. By tracking the emergenceof nanotechnology policy initiatives and related firm formation from 1985–2005 in theUnited States, this study provides an empirical test of Van de Ven’s (1993) model forthe infrastructure of entrepreneurship. Specifically, we find strong support relating newfirm formation to S&T and economic initiatives. States with both S&T and economicinitiatives had six times as many firms founded than those states without such initiatives.We also find that new ventures are formed earlier and more frequently in states withinnovation policies in a related technology area.

Theoretical Frameworks

New ventures, like all organizations, are embedded in social environments that greatlyinfluence their operations and performance (Aldrich & Ruef, 2006; Gnyawali & Fogel,1994; Granovetter, 1985). The environment of organizations includes institutions involvedin creating public policy to foster innovation and enhance environmental munificence (i.e.,the level of resources available in the environment). Gnyawali and Fogel (1994, p. 59)suggest three goals for public policy: “(a) increasing the opportunity for entrepreneurs andcreating a general environment that fosters entrepreneurship; (b) encouraging the estab-lishment of institutions that support entrepreneurs; and (c) providing financial and non-financial assistance once entrepreneurs’ likelihood to enterprise has been enhanced.” Onemethod used by policy makers to enact these goals is to increase the level of resourcesavailable in the environment for entrepreneurs (i.e., environmental munificence).

Environmental munificence is especially important for new ventures (Begley, Tan, &Schoch, 2005; Specht, 1993). Research on munificence often draws on two theoreticalperspectives: resource dependence and organizational ecology. Both perspectives contendthat organizations are shaped by the environment in which they arise. The resourcedependence perspective argues that organizational activities and outcomes are based onthe firm’s ability to obtain resources from the context in which it is embedded (Pfeffer &Salancik, 1978). Thus, the greater the environmental munificence, the easier it is for neworganizations to obtain resources from their environment. For example, regional spillovers

792 ENTREPRENEURSHIP THEORY and PRACTICE

of knowledge, capital, and labor have been shown to foster the formation of new firms(Kirchoff, Newbert, Hasan, & Armington, 2007), as well as innovation in new and smallfirms (for a review, see Link & Siegel, 2003). Organizational ecology argues that socialand economic conditions determine an environment’s carrying capacity or the number oforganizations that its resources can support (Hannan & Freeman, 1989). Thus, the found-ing rate of new organizations and the number of organizations in a location or niche aredictated by the environment’s carrying capacity (Aldrich, 1990; Specht, 1993). Forexample, the prevalence of similar or related organizations grants legitimacy, which hasbeen shown to be important for new industry creation (e.g., Aldrich & Fiol, 1994) and newfirm survival (e.g., Zimmerman & Zeitz, 2002).

An environment’s munificence and carrying capacity encompass the resources avail-able in the setting in which a new firm is formed. Specht (1993) formulated a model ofnew firm formation in which she argued that environmental munificence is positivelyrelated to carrying capacity and when munificence and carrying capacity increase, therate of organizational formation increases. Van de Ven (1993) explored this macroper-spective further by postulating the issues and events that constrain and facilitate entre-preneurship. He proposed a multilevel infrastructure of entrepreneurship that includesthree arenas: (1) institutional arrangements, such as the legitimation, regulation, andstandardization of a new technology; (2) resource endowments, such as basic research,financing, and skilled labor; and (3) proprietary functions, such as R&D, manufacturing,and marketing (Van de Ven, 1993). Venkataraman (2004) argued that this “tangibleinfrastructure” has a positive impact on related innovation, entrepreneurship, andultimately, economic development.

When a technology is first developed the infrastructure for entrepreneurship is under-developed (Van de Ven, 1993). Often, legitimacy has not been established, institutionshave not been developed, resources have not been allocated, and commercializationefforts have not been implemented (Hannan & Freeman, 1989; Stinchcombe, 1965).One method to build such an infrastructure is through market mechanisms that enableinvestment despite uncertainty and risk (Akerlof, 1970). Such market mechanismsmight include venture capital (e.g., Gompers, 1995), or mergers and acquisitions (e.g.,Maksimovic & Phillips, 2001). A possible alternative method to build an infrastructure forentrepreneurship is through the creation of innovation policies to support such activity.Typically, innovation policies focus on one type of technology, and attempt to facilitate theuse of that technology in the economy and in society. While many countries spendsubstantial amounts of money on programs to encourage entrepreneurship, little evidenceexists that this funding has the expected influence on new enterprise (Davidson &Wiklund, 2001).

As billions of dollars of federal funds are spent on research each year in the UnitedStates on the development of technology (National Science Foundation, 2006), the long-term value of funding innovation carries significant policy implications. U.S. innovationpolicy is made up of S&T initiatives and of economic initiatives positioned to support thescientific discovery and commercial application of inventions. The present study focuseson (1) S&T initiatives that are funded and implemented at the state level, and (2) economicinitiatives that are funded by state governments, often in collaboration with profit andnonprofit organizations, and implemented at the state level. Despite different fundingsources and objectives, there is congruence in terms of the goals of S&T initiatives andeconomic initiatives. For instance, both types of initiatives increase entrepreneurial infra-structure through institutional development and resource endowments. We now examinethese two types of initiatives in more detail and develop hypotheses about their relation-ship to new firm formation.

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Science and Technology (S&T) InitiativesS&T initiatives are programs created to support R&D in emergent fields. State S&T

initiatives are typically approved by voters, funded by state governments, and conductedby regional consortia of universities. The organizations implementing these state S&Tinitiatives can then apply for supplemental federal funding on a competitive basis. Innanotechnology, S&T initiatives focus on “fundamental nanoscale science and technologyresearch, centers and networks of excellence, and support of new research infrastructure”(National Research Council, 2002, p. 13). For example, in 2000, the U.S. governmentestablished the National Nanotechnology Initiative (NNI) to coordinate the grant dissemi-nation activities in nanotechnology across various federal agencies (National Science &Technology Council, 2000). With initial funds of $465 million, U.S. federal investment innanotechnology has grown to $1.3 billion annually across 22 agencies, which share thegoal of developing an infrastructure for nanoscale technology (National Science Founda-tion, 2006). A portion of these funds are provided to state governments and universityconsortia engaged in advancing nanotechnology research.

S&T initiatives foster the development of resource endowments necessary for entre-preneurial infrastructure. In particular, the S&T initiatives that encourage research anddevelopment (R&D) have wide impact on new technologies, ventures, and knowledge.Studies have shown a link between firm formation and the development of new technology(Shane, 1996) and university R&D (Kirchhoff et al., 2007). Research has shown that R&Dspillovers are especially important in knowledge-intensive industries (Audretsch &Feldman, 1996) by increasing labor mobility, awareness of university research, regionalindustrial diversity, and ultimately accelerating the diffusion of new technology (Link &Siegel, 2003). In nanotechnology, a third of the S&T initiatives in our data were imple-mented by consortia of universities from across a state. Such broad initiatives can help tobuild state-level resource endowments, such as new knowledge and trained labor, andincrease the institutional arrangements and legitimacy of that activity in the eyes ofnascent entrepreneurs, thereby spurring new venture formation in that technology. Moreformally, we argue that:

Hypothesis 1a: The creation of an S&T initiative is positively associated with ashorter time to first venture founding (in same state and of the same technology).Hypothesis 1b: The creation of an S&T initiative is positively associated with anincreased rate of venture founding (in same state and of the same technology).

The mere presence of an initiative, as examined in the previous hypotheses, isexpected to positively relate to entrepreneurial activity. Additionally, first-mover advan-tages resulting from both institutional and resource environments have been shown to beimportant for nascent ventures (Doh, 2000). Therefore, we argue that the earlier a statepursues innovation policies, the sooner or faster new technology ventures will begin inthat state. The earliest S&T initiatives provide more time to develop resource endowmentswhile competition is least dense. As a result, more time would be available to developknowledge in both basic science and applied technology and for the technology to diffuse.More formally, we argue that:

Hypothesis 2a: The shorter the time to creation of an S&T initiative, the shorter thetime to first venture founding (in same state and of the same technology).

S&T initiatives also act as institutional arrangements that build legitimacy in the eyesof nascent entrepreneurs, thereby spurring new venture formation in that technology.Therefore, a shorter time to the creation of S&T initiatives heightens awareness of that

794 ENTREPRENEURSHIP THEORY and PRACTICE

technology across the community, attracting more potential entrepreneurs and givinglegitimacy to that technology development activity. Additionally, a shorter time signalspotential entrepreneurs of the support being built for such activity. Therefore, we argue:

Hypothesis 2b: A shorter time to creation of an S&T initiative is positively associ-ated with an increased rate of venture founding (in same state and of the sametechnology).

Economic InitiativesThe second type of initiative that we examine are economic initiatives, which are

programs created to promote the development of an innovation or technology for thepurpose of improving the economic status of that area as measured by related sales,employment, and firm foundings. Economic initiatives are formal policies enacted bylawmakers, voters, or (in the case of Texas) constituent corporations, and financed by thegovernment of the region whose economy the initiative is intended to benefit. Programsthat encompass more than a single technology or region, such as Small Business Inno-vation Research (SBIR) grants, are omitted. For example, an economic nanotechnologyinitiative is “a focused effort to promote nanotechnology research and development for thepurpose of economic development for a region” (National Science & Technology Council,2005, p. 1).

Economic initiatives may take a variety of forms and contribute in many ways toentrepreneurial infrastructure. First, they may consist of attempts to stimulate the eco-nomic environment by providing financial resources to a distinct technological area. Forexample, the Pennsylvania Nanotechnology Initiative was started in 1999 with the goal ofstimulating the regional economy by providing direct funding for firms working onnanotechnology. Second, economic initiatives may foster collaborations between diverseparties, host networking events, and advocate legislation. For example, The Texas Nano-technology Initiative was started in 2001 to bring together industrial, academic, andgovernmental constituents working in the field. Additionally, economic initiatives supportthe creation of institutions to legitimate, regulate, and standardize the technology. Forexample, the Colorado Nanotechnology Initiative was launched by academic and industryleaders as an advocate for nanotechnology in the state. In these ways, economic initiativessponsor the development of the institutions and resources necessary for an infrastructureof entrepreneurship. More formally, we argue that:

Hypothesis 3a: The creation of an economic initiative is positively associated with ashorter time to first-venture founding (in same state and of the same technology).Hypothesis 3b: The creation of an economic initiative is positively associated withan increased rate of venture founding (in same state and of the same technology).

As with S&T initiatives, economic initiatives are likely to produce first-mover advan-tages (Doh, 2000). We argue that the earlier economic initiatives begin, the earlier or morequickly entrepreneurial activities should be expected to begin in that state. Economicinitiatives would provide more time to develop the institutional infrastructure that signalsto entrepreneurs the legitimacy of starting a venture in that technology and that region.States that are early to launch economic initiatives may also find themselves ahead ofother states in taking leadership on issues of regulation and standardization, potentiallyshaping policies that favor firms in their state. More formally, we argue that:

Hypothesis 4a: The shorter the time to creation of an economic initiative, the shorterthe time to first-venture founding (in same state and of the same technology).

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The creation of an economic initiative acts as a signal to entrepreneurs of theenvironmental munificence and support for new venture creation. Thus, a shorter timeto the creation of an economic initiative increases the rate of new venture creation due tothe faster signaling and resource building from that initiative.

Hypothesis 4b: A shorter time to creation of an economic initiative is positivelyassociated with an increased rate of venture founding (in same state and of the sametechnology).

Methods

Setting: The Nanotechnology CommunityThe nanotechnology community includes public and private universities and for-profit

and nonprofit firms conducting research and participating in the commercialization anddevelopment of nanoscale materials and products, which have a size between 1 and 100nanometers (National Science & Technology Council, 2000). Applications of nanotech-nology are extremely diverse, ranging from computer chips, medical devices, andhazardous waste containment to clothing, sunscreen, and tennis rackets (NationalNanotechnology Coordination Office, 2007).

Nanotechnology is not simply the art of taking existing materials and instruments andshrinking things down to a smaller scale; the physics and properties of matter are surpris-ingly different at the nanoscale (National Nanotechnology Coordination Office, 2007).The unprecedented scientific and engineering challenges associated with working at thesubmolecular level has brought together scientists from dozens of scientific and technicaldisciplines, including chemistry, physics, biology, robotics, metrology, and computerscience (Foster, 2006). Just as the science draws on nearly every physical discipline, theramifications and applications of nanotechnology apply to nearly every industry.

Nanotechnology provides a natural experiment for evaluating the direct relationshipbetween innovation policy and entrepreneurship. Due to its diverse scientific origins andequally diverse commercial markets and outcomes, nanotechnology has no identifiablehistorical or industrial precedents (Rothaermel & Thursby, 2007). Thus, the infrastructurefor nanotechnology had to be built from scratch. Contrast this case with biotechnology,another recently formed community, which followed from identifiable scientific traditionsin biology and chemistry, as well as industrial traditions in pharmaceuticals, medicaldevices, and healthcare (Zucker, Darby, & Brewer, 1998). Even in the absence of inno-vation policy initiatives, the growth of the biotechnology industry might have occurredsimply by following paths laid by earlier institutions and industries. Such preexistingpaths did not exist for nanotechnology firms, which are not unified by a particular purposeor market, but merely share a common focus on the nanoscale.

DataFor this study we draw on an original dataset that details the entire history of the

nanotechnology community from its inception in the 1950s. Specifically, the data for thisstudy represent the earliest entrepreneurial and policy activity in the U.S. nanotechnologyfield from 1985 through 2005, including public policy initiatives and new venture forma-tion. Although our data ranged from 1959 through 2005, we use 1985 as the cutoff, sinceneither new nanotechnology ventures nor activity related to nanotechnology initiativesbegan before this year. Data were collected from several sources and represent the most

796 ENTREPRENEURSHIP THEORY and PRACTICE

active organizations in nanotechnology from the government, associations, media, busi-ness groups, and firms. To obtain the necessary longitudinal data, we drew on over fourdecades of archival sources and conducted interviews with members of this community.Archival data included over 8,000 pages of technical reports, press releases, industry lists,conference participant lists, directories, news stories, presentations, and other textualmaterial. Specifically, we examined records from the National Science Foundation (e.g.,Federal Funds for Research and Development Report), the NNI (e.g., Regional, State, andLocal Initiatives in Nanotechnology Report), the Department of Energy (2004; e.g.,research activities reports), Nano Science and Technology Institute (conference proceed-ings), NanoTechWire (e.g., weekly newsletters), Foresight Institute (e.g., NanotechnologyHistory Report), Nano Investor News, the National Nanotechnology InfrastructureNetwork (2006; e.g., overview and reports from individual participants), as well asdirectly from select firms and grant recipients, such as universities. Using several sourcesof data allowed us to verify data by triangulation, increasing the confidence and strengthof results (Jick, 1979; Singleton & Straits, 2005).

All data sources were searched for firm and organization names, and information onall possible nanotechnology firms were compiled into a database. The search yielded a listof over 3,000 potential nanotechnology firms. Of the firms that claim participation in thenanotechnology community, many do not operate at the nanoscale. To be a nanotechnol-ogy firm, by definition the technology being developed or used must be less than 100nanometers. To capture the activity of firms working at the nanoscale, we define newnanotechnology firms as those firms with over 50% of their activity (i.e., products, R&D,other expenses, or revenue) that are a single-business venture founded to develop,produce, and sell nanotechnology products.1 Unless these firms utilize technology tomanipulate components at the nanoscale, they are not considered nanotechnology firmsand are excluded from the population. Consequently, captive producers, divisions, andspin-offs of existing firms, distributors, designers, and custom engineering firms wereexcluded from the sample, as were service providers, such as software, investing, andconsulting firms.

Using these criteria, 303 confirmed nanotechnology firms were identified to have beenfounded before 2006. The headquarters’ location (city and state) and dates of founding anddeath were recorded for each firm. By verifying our database with that of other researchersand through interviews with nanotechnology business leaders, we can be reasonablycertain that essentially all firms were captured in this analysis. The first firm to usenanotechnology as its primary focus and to create products was founded in 1987. Before1987, no firm identified the majority of its activity related to the application or commer-cialization of nanotechnology and was able to support this capability claim. Initially, veryfew firms were able to manipulate at the nanoscale and only five nanotechnology firmswere founded between 1987 and 1991.

From the archival data, we also collected data on nanotechnology innovation policyinitiatives. Recall that in nanotechnology, S&T initiatives focus on “fundamental nanos-cale science and technology research, centers and networks of excellence, and support ofnew research infrastructure” (National Research Council, 2002, p. 13). An economicnanotechnology initiative is “a focused effort to promote nanotechnology research and

1. We focus on new firms only and thus, use a definition similar to previous works also focusing on theidentification of new technology firms. For instance, in their examination of semiconductor firms,Schoonhoven, Eisenhardt, and Lyman (1990, p. 187) define a new semiconductor firm as a “new organizationfounded for the purpose of developing, producing, and selling semiconductor devices on the merchantmarket,” which did not include subsidiaries or spin-offs.

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development for the purpose of economic development for a region” (National Science &Technology Council, 2005, p. 1).

Figure 1 shows the number of S&T and economic nanotechnology innovation initia-tives from 1991–2005 on the left axis and the number of nanotechnology firms on the rightaxis. We identified 33 S&T initiatives and 16 economic initiatives created during or before2005, of which 17 S&T and 8 economic initiatives were created before or during 2002.During the same period (1991–2005) the number of nanotechnology firms has continuedto increase since the early 1990s. For all initiatives the location (city and state) and dateof inception were collected.

MeasuresAll variables were measured for each of the 50 U.S. states and Washington, DC

(n = 51). Testing the hypotheses requires two dependent variables: (Ha) the time to firstnanotechnology firm in the state and (Hb) the founding rate of nanotechnology firms in thestate from 1985 through 2005. Time to first firm was measured from 1986, since no activityfor new firms or initiatives started before 1987, thereby providing a baseline year andpreventing left censoring of the data. The founding rate of nanotechnology firms wasdetermined by the number of nanotechnology firms founded in the state by the end of 2005.

The independent variables are: (1) the creation of an S&T initiative by 2002; (2) thetime to an S&T initiative from 1985; (3) the creation of an economic initiative by 2002;and (4) the time to an economic initiative from 1985. S&T initiatives were defined assupport for research typically given to one or more institutions of higher education in astate to establish a research center focused on nanotechnology development. Economicinitiatives were defined as an economic development program focused on nanotechnologyand formally enacted by a state’s law makers, voters, or (in the case of Texas)2 constituentcorporations (National Science & Technology Council, 2005).

2. In Texas, a nanotechnology initiative was launched in 2001 by leaders in the nanotechnology community,including corporate leaders, academic researchers, and government officials.

Figure 1

Science & Technology (S&T) and Economic Initiatives and New Firms in theU.S. Nanotechnology Community, 1991–2005 (cumulative)

0

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Economic Initiatives S&T Initiatives Nano-firms

798 ENTREPRENEURSHIP THEORY and PRACTICE

We measured the existence of an S&T nanotechnology initiative by 2002 with adummy variable, where 1 represented the presence of an S&T initiative and 0 representednone existing by the end of 2002. The existence of an economic initiative by 2002 was alsomeasured with a dummy variable, where 1 represented the presence of an economicinitiative and 0 represented none by the end of 2002. We chose to measure the presenceof an initiative in each state by 2002 for three reasons. First, the NNI was started in theyear 2000, which acted as a legitimating factor for nanotechnology. Before 2000, only oneeconomic initiative, the Pennsylvania Nanotechnology Initiative, had begun. The secondreason is that since 2001 the rate at which new S&T initiatives were founded began todecrease, a trend that continued through 2006. Third, the year 2002 provides a 3-year lagbefore the end of the data set, which allows us to observe the influence of the earlyinitiatives. Taking these facts together, the year 2002 provides a natural break in the dataand a substantive lag for a temporal relationship between the dependent and the indepen-dent variables. Time to first S&T initiative and time to first economic initiative weremeasured as a count of years from 1985 to the beginning of the first S&T or economicinitiative, respectively.

Control variables included aspects of environmental munificence unrelated to thepublic policy initiatives of interest. First, the availability of venture capital funding isknown to improve the infrastructure of entrepreneurship and the likelihood of firmfounding (Delacroix & Solt, 1988; Van de Ven, 1993). Therefore, we control for amountof venture capital funding in 2002, by state, as reported by PricewaterhouseCoopers.3

Second, new firm creation has been found to be correlated with general governmentalspending in the immediate environment (Begley et al., 2005), thus we control for this byusing state expenditures per capita in 2002 as reported by the RAND Corporation andstandardized across states.

Another important control is the pool of potential entrepreneurs (De Carolis & Deeds,1999). Nanotechnology firms operate in a broad range of industries, from low to high tech,from textiles to transistors. Therefore, to measure the pool of potential entrepreneurs andto ensure that the founding rate of new nanotechnology firms is not simply a reflection ofthe overall rate of firms started in the state (Hannan & Freeman, 1989), we control for thechange in the number of all new firms founded in each state. This measure representsthe potential pool of human capital from a wider range of industries, including hightechnology, and it is the standardized, 10-year average of the percentage change in thenumber of new firms founded annually, by state, as reported by the Small BusinessAdministration and the U.S. Census Bureau between 1995 and 2004.4

ModelsThe event history models predicting the time to firm foundings (Hypotheses 1a, 2a,

3a, and 4a) are estimated by the exponential survival model using STATA, which takes theform:

logT X T= +β 0 [1]

3. MoneyTree Report (2002). Prepared by PricewaterhouseCoopers and the National Venture Capital Asso-ciation, based upon data from Thomson Financial. [http://www.pwcmoneytree.com].4. Statistics of U.S. Businesses (SUSB), 1995–2004. Prepared by US Census Bureau and Office of Advocacyof the U.S. Small Business Administration (SBA). [http://www.census.gov/epcd/susb/].

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where log T is the predicted waiting time to the event, X is a vector of covariates, b is avector of unknown parameters, and T0 is the baseline event–time distribution. Models canbe compared by considering the difference in the log-likelihood ratios using the chi-squaredistribution (Blossfeld & Rohwer, 2002). The log-likelihood test statistic is:

W L b= ′( ) − ( )[ ]2 ln ln β [2]

where L(b′) is the likelihood of the model with parameter vector b′, and ln(b) is thelikelihood of the null hypothesis where all parameters are zero.

The best fitting survival model for the data was the exponential accelerated failure(event) time model which reports the ln(time) at which an event occurs. The estimate ofthe coefficient is the influence of the independent variable on the time to the event, if itwere to occur. A positive coefficient means that there is more time to the event and it is lesslikely to occur during the time period under examination. A negative coefficient indicatesthat there is less time to the event and it is more likely to occur.

The models predicting the rate of firm foundings (Hypotheses 1b, 2b, 3b, and 4b) aretested using a negative binomial regression model in STATA of the form:

f v vy x x e yi i i iyi xi i

i( ) = ( ) +( )− Γ 1 [3]

vi = +( )exp x offseti iβ [4]

where yi is the number of firms founded in the state from 1986 though 2005 (STATA Press,2007, p. 362).

The baseline models with control variables are models 1 and 8 (Tables 2 and 3) for theevent history analyses and models 15 and 22 (Tables 4 and 5) for the regression analyses.The subsequent models build on the base model and use both an individual covariate anda block analysis approach in which groups of covariates are examined (Delacroix,Swaminathan, & Solt, 1989). As the two groups of covariates are highly correlated, afull model using all variables would not be meaningful and is omitted. The fit of eachevent history model is reported as the log-likelihood, and the fit for each regression modelis reported as the adjusted chi-squared.

Results

Overall, we find strong support relating new firm formation to economic initiativesand mixed support for the hypotheses relating new firm formation to S&T initiatives.Figure 2 summarizes the hypothesized relationships and the findings from the statisticalanalyses. A dark line indicates significant support for hypotheses 1b, 2b, 3a, 3b, 4a, and 4b(p � .05) and a dotted line indicates no support for hypotheses 1a and 2a. Table 1 presentsthe means, standard deviations, and correlations among the variables.

The results of statistical tests for hypotheses 1–4a are shown in models 1–7 (seeTable 2). Model 1 is the control model. Models 2 and 4 do not show a significantrelationship between S&T initiatives and the time to the first nanotechnology firm,providing no support for hypothesis 1a. Models 3 and 4 show that states with economicnanotechnology initiatives before or during the year 2002 have a lower time to thefounding of the first nanotechnology firm in the state, supporting hypothesis 3a. Models5 and 7 do not show a significant relationship between the time to the first S&T

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nanotechnology initiative in the state and the time to the first nanotechnology firms in thatstate, providing no support for hypothesis 2a. Models 6 and 7 show that states with alonger time to the first economic nanotechnology initiative have a longer time to thefounding of the first nanotechnology firm, supporting hypothesis 4a. Two of the controlvariables were not significant: state expenditures per capita and average change in thefounding of new firms. Therefore, we test the models without these two controls, as shownin models 8 through 14 (see Table 3) that replicate models 1 through 7 (see Table 2). Weobtain similar results with the full and parsimonious models, indicating robust support ofhypotheses 3a and 4a.

The results of statistical tests for hypotheses 1–4b are shown in models 15 through 21(see Table 4). Model 15 is the control model. Model 16 shows that states with an S&Tinitiative also have a higher rate of nanotechnology firm foundings, supporting hypothesis1b. Model 17 shows that states with an economic nanotechnology initiative have a higherrate of nanotechnology firm foundings; supporting hypothesis 3b. Model 18 simultaneouslyexamines the relationship of economic and S&T initiatives on rates of nanotechnology firm

Figure 2

Summary of Hypothesized Relationships and Results (solid line indicates strongsupport, dotted line weak support)

Rate of new

technology firm

formation(by state)

Presence of economic initiatives

Presence of science & tech initiatives

Time to science & tech initiatives

Time to economic initiatives

Timeto first

technology firm

formation(by state)

H2a +

H1a - H1b +

H3b +

H2b -

H4b -

H3a -

H4a +

Table 1

Descriptive Statistics: Mean, Standard Deviation, Correlations

Variable M SD N 1 2 3 4 5 6 7 8 9

1 Time to first nanofirm in state 14.14 5.79 51 12 Number of nanofirms in state 5.92 12.24 51 .310* 13 State VC funding (2002) .00 1.00 51 -.150 .960* 14 State expenditures per capita

(2002).00 1.00 51 .185 .045 .061 1

5 Average change in state newfirm foundings (1995–2004)

.01 .02 51 -.143 -.111 -.091 .364* 1

6 S&T initiative by 2002 .33 .48 51 -.162 .392* .293* -.160 -.125 17 Economic initiative by 2002 .16 .37 51 .312* .586* .478* -.005 -.016 .496* 18 Time to S&T initiative 19.29 5.22 51 .240 .530* .412* .180 .136 .660* .893* 19 Time to economic initiative 21.24 2.83 51 .382 .552* .456* .053 -.012 .826* .387* .623* 1

* p < .05.S&T, science and technology; VC, venture capital.

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foundings. The findings suggest that, in the presence of S&T initiatives, economic initia-tives are related to higher rates of firm foundations. Model 19 shows that states with ashorter time to S&T initiatives have a higher rate of nanotechnology firm foundings,providing support for hypothesis 2b. Model 20, which examines whether states with a

Table 2

Event History Models for Time to First New Nanotechnology Firm (all controls)

1 2 3 4 5 6 7

Control variables:State VC funding (2002) -.126* -.115† -.030 -.034 -.079 -.015 -.020State expenditures per capita

(2002).155 .144 .141 .153 .109 .118 .125

Average change in firmfoundings (1995–2004)

-3.859 -4.085 -3.956 -3.713 -4.906 -4.143 -3.994

H1a: S&T initiative by 2002 -.088 .099H3a: Economic initiative by

2002-.626** -.678**

H2a: Time to S&T initiative .026 -.005H4a: Time to economic initiative .111** .115*Constant 2.935*** 2.967*** 3.032*** 3.004*** 2.462*** -.656 .651chi2 7.84 8.04 15.69 15.54 9.20 15.40 15.67df 47 46 46 45 46 46 45pseudo log-likelihood -58.554 -58.524 -57.71 -57.678 -58.359 -57.456 -57.45N 51 51 51 51 51 51 51

† p < .1; * p < .05; ** p < .01; *** p < .001.H, hypothesis; S&T, science and technology; VC, venture capital.

Table 3

Event History Models for Time to First New Nanotechnology Firm(parsimonious)

8 9 10 11 12 13 14

Control variables:State VC funding (2002) -.106* -.088 -.005 -.006 -.047 .011 .013

H1a: S&T initiative by 2002 -.154 .042H3a: Economic initiative by 2002 -.670** -.693**H2a: Time to S&T initiative .034 .002H4a: Time to economic initiative .121** .118*Constant 2.877*** 2.927*** 2.979*** 2.969*** 2.244*** .387 .392chi2 4.1 4.56 11.87 11.86 5.900 11.85 12.06df 49 48 48 47 48 48 47pseudo log-likelihood -59.28 -59.18 -58.32 -58.31 -58.91 -57.96 -57.96N 51 51 51 51 51 51 51

* p < .05; ** p < 0.01; *** p < 0.001.H, hypothesis; S&T, science and technology; VC, venture capital.

802 ENTREPRENEURSHIP THEORY and PRACTICE

longer time to the first economic initiative have a lower rate of nanotechnology firmfoundings, provides support for hypothesis 4b. Model 21 simultaneously examines therelationship of economic and S&T initiatives on time to first nanotechnology firm founding,but we do not find support for this block analysis, with only moderate support for economicinitiatives.As before, Models 22 through 28 (Table 5) omit nonsignificant control variables,but otherwise replicate Models 15 through 21 (Table 4). We obtain similar results with thefull and parsimonious models, indicating robust results for hypotheses 1–4b.

Although the statistical analyses draw on the entire population (rather than a sample)of the 50 U.S. states and the District of Columbia, this nevertheless results in models witha relatively low n of 51, thereby limiting the power of the models. To further examine therelationship between innovation initiatives and entrepreneurship, we created a two-by-twomatrix (see Table 6) to compare the states with and without S&T and economic initiatives.These data are graphically presented in Figure 3. Each state is placed in one of four groups(by the presence of S&T and/or economic initiatives) for which a few key statistics arepresented: the average number of nanotechnology firms founded in that state by 2005, theaverage number of years until the founding of the first nanotechnology firm in the state(from 1985), and the average annual change of new nanotechnology firm foundings in thestate.

From this descriptive comparison, we find important differences between the stateswith and without S&T and economic initiatives. For example, the states with both S&Tand economic nanotechnology initiatives averaged over 25 firms each, while those with

Table 4

Negative Binomial Regression Models for Nanotechnology Firm Formation(all controls)

15 16 17 18 19 20 21

Control variables:State VC funding (2002) .911** .579** .450* .437* .518** .460* .426*State expenditures per

capita (2002)-.149 -.082 -.173 -.120 -.080 -.182 -.128

Average change in newfirm foundings(1995–2004)

-1.987 5.520 -3.021 1.410 4.906 -4.561 .077

H1b: S&T initiative by 2002 .938** .499H3b: Economic initiative by

20021.222** .883*

H2b: Time to S&T initiative -.087** -.048H4b: Time to economic

initiative-.173*** -.115†

Constant 1.411*** .913*** 1.142*** .950*** 2.907*** 5.014*** 4.618***chi2 27.44 34.87 36.70 38.45 36.72 38.05 39.75df 3 4 4 5 4 4 5log-likelihood -127.69 -123.98 -123.06 -122.19 -123.05 -122.39 -121.54N 51 51 51 51 51 51 51p .000 .000 .000 .000 .000 .000 .000pseudo R2 .097 .123 .130 .136 .130 .135 .141

† p < .1; * p < .05; ** p < .01; *** p < .001. Coefficients in the table are standardized betas.H, hypothesis; S&T, science and technology; VC, venture capital.

803September, 2008

Table 5

Negative Binomial Regression Models for Nanotechnology Firm Formation(parsimonious)

22 23 24 25 26 27 28

Control variables:State VC funding (2002) .900** .591** .446* .428* .527** .458* .416*

H1b: S&T initiative by 2002 .869** .495H3b: Economic initiative by

20021.198** .881*

H2b: Time to S&T initiative -.083** -.050H4b: Time to economic

initiative-.167*** -.111†

Constant 1.390*** 1.023*** 1.113*** .977*** 2.893*** 4.836*** 4.589***chi2 26.85 34.00 35.69 37.85 35.94 36.75 39.20df 1 2 2 3 2 2 3log-likelihood -128 -124.4 -123.6 -122.5 -123.4 -123.04 -121.8N 51 51 51 51 51 51 51p .000 .000 .000 .000 .000 .000 .000pseudo R2 .095 .120 .126 .134 .127 .130 .139

† p < .1; * p < .05; ** p < .01; *** p < .001.Note: Coefficients in the table are standardized betas.H, hypothesis; S&T, science and technology; VC, venture capital.

Table 6

Comparison of Nanotechnology Entrepreneurship in States with and withoutNanotechnology Science & Technology (S&T) or Economic Initiatives

Economic initiative by 2002

Yes No S

Science &Technology(S&T) initiativeby 2002

Yes N 7 10 17Average number of nano-firms 25.1 3.9 12.6Average years until the founding of the first nano-firm 9.7 years 15.0 years 12.8 yearsAverage annual change in new nano-firm foundings 18.8% 7.3% 12.0%

No N 1 33 34Average number of nano-firms 3.0 2.5 2.5Average years until the founding of the first nano-firm 12 years 14.9 years 14.8 yearsAverage annual change in new nano-firm foundings 5.5% 4.3% 8.7%

S N 8 43 51Average number of nano-firms 22.3 2.8 5.9Average years until the founding of the first nano-firm 10.0 years 14.9 years 14.1 yearsAverage annual change in new nano-firm foundings 17.1% 5.0% 6.9%

804 ENTREPRENEURSHIP THEORY and PRACTICE

S&T initiatives but without economic initiatives averaged less than four firms each. Stateswith only economic initiatives and no S&T initiatives averaged only three firms each. Inother words, states with both S&T and economic initiatives had six times as many firmsstarted in their states than those states with S&T initiatives but without economic initia-tives, and dual-initiative states had almost eight times as many firms as those with onlyeconomic initiatives.

States lacking economic initiatives (irrespective of an S&T initiative) also havesmaller percentage increases in the number of new nanotechnology firms started (17.1%versus 5.0%, respectively). These states lagged about 5 years behind their peers in the timeto the first nanotechnology firm founded in the state (14.9 years versus 10 years, respec-tively). Thus, it appears that states benefit greatly by starting an economic initiative, bothin the short and long run.

The difference between states with and without S&T initiatives is not as definitive.States with S&T initiatives had five times as many nanotechnology firms as those without(12.6 versus 2.5, respectively); however, the difference between the average time to thefirst nanotechnology firm founding in the state varied only by 2 years. Additionally,the difference between the annual rates in the number of firms founded was less than 4%.These results indicate that states do not gain an entrepreneurship benefit from S&Tinitiatives to the same degree as they do from economic initiatives.

Discussion

This study examines how public innovation policy is linked to rates of related newventure creation. Specifically, we argue that S&T initiatives and economic initiatives helpto build the entrepreneurial infrastructure needed for new firm formation. First, we

Figure 3

Summary of Nanotechnology Entrepreneurship in States with and withoutNanotechnology Science & Technology (S&T) or Economic Initiatives

0

5

10

15

20

25

30

No initiatives S&T only Econ only Both initiatives

Average years until first nano-firm

Average number of nano-firms

Average annual change in the number of new nano-firms founded

805September, 2008

provide an empirical test of two components of Van de Ven’s (1993) theoretical model ofentrepreneurial infrastructure: resource endowments and institutional arrangements. Weexamine the effect of public policy initiatives whose stated goals are to develop such aninfrastructure. Using an original dataset on the history of commercial nanotechnologydevelopment and new venture creation in the United States, we examine public policyinitiatives for economic and S&T development and observe an increase in environmentalmunificence for new ventures and an acceleration of nascent entrepreneurship.

We find that economic initiatives in a state are related to both earlier founding of newnanotechnology firms and higher rates of nanotechnology firm formation in that state(hypotheses 3a and 3b). The presence of an S&T initiative in a state is related to higherrates of (but not earlier occurrences of ) nanotechnology firm formation (hypotheses 1band 1a, respectively). These results provide evidence of the layering effect of multipleevents on resource endowments, as proposed by Van de Ven (1993), as well as increasingrates of firm formation when munificence increases, as proposed by Specht (1993).Economic initiatives were found to have a stronger effect than S&T initiatives on entre-preneurial infrastructure, which may be due to economic initiatives contributing to short-term munificence, while the effect of S&T initiatives spill over into other states or havelonger term impact.

Measures of economic and S&T initiatives in a state are undoubtedly endogenous torates of firm formation in a state. However, the two types of initiatives are only moderatelycorrelated; therefore, we argue that both types of initiatives are unique signals of legiti-macy and contributors to entrepreneurial infrastructure. It is probable that the creation ofone type of initiative increases the likelihood of the creation of the other; in the eight stateswith economic initiatives, all but one had an S&T initiative. The existence of both typesof initiatives provides evidence of greater entrepreneurial infrastructure development thanthe existence of either type of initiative alone. This is reflected in our finding that stateswith both types of initiatives have the highest number of new nanotechnology firms andthe highest rate of new nanotechnology venture formation over time (Table 6). As two ofour dependent variables are binary measures, they do not permit us to statistically examineinteraction effects; however, our descriptive findings imply that interaction effects shouldbe examined in future research. Furthermore, our results suggest that scholarship oninnovation policy and entrepreneurial infrastructure should be careful to distinguishbetween economic and S&T initiatives and we concur with Jaffe (1998) that multiplemeasures are necessary when measuring public policy initiatives on entrepreneurship,particularly to capture interaction and indirect effects.

While our study examines a specific kind of initiative and related entrepreneurship,the mechanisms by which the relationship occurs can be generalized to other types ofinnovation-development policies that provide resources, legitimacy, and ultimately, infra-structure to new venture creation and development. Here we see that the outcomes of theseinitiatives are linked not only with economic development in general, but also the par-ticular focus of that initiative. However, we are not arguing a causal model: in over half ofthe states in the data, the first technology firm in the state was founded before the creationof either a state-level economic or S&T initiative. It is possible that earlier, unobserveduniversity-level R&D efforts or local, informal initiatives were fostering nascent entre-preneurship, as found by Kirchhoff et al. (2007), and may even create the conditions forthe implementation of state-level economic and S&T initiatives. We provide a lag oneconomic and S&T initiatives to allow time for a relationship with entrepreneurship ratesto become apparent; however, the short history of nanotechnology requires us to take anequally short 3-year lag. Despite this conservative lag, we find support that economicinitiatives and S&T initiatives lead to ongoing and increasing rates of entrepreneurship in

806 ENTREPRENEURSHIP THEORY and PRACTICE

that technology. This suggests that public innovation policy initiatives help to build theinfrastructure needed for short- and long-term technical and economic evolution.Although we do not formally examine whether market mechanisms create entrepreneurialinfrastructure, the data show that there is only one state (Texas) in which industry took thelead in a nanotechnology-development initiative. This fact suggests future research mightbe warranted to examine whether and when market forces begin to support nanotechnol-ogy entrepreneurship.

Our study has relevance to other settings in which future public policy initiativestarget the development of nascent technologies or industries. For example, our findingsapply to other regions making large investments in nanotechnology, such as Japan,Germany, and South Korea (National Research Council, 2006). However, the precisecontributions of public policy innovation initiatives to environmental munificence maydiffer based on culturally specific arrangements, such as the pool of entrepreneurial talent(Begley et al., 2005), the nature of university–government–industry relations in thatregion (Debackere & Veugelers, 2005); or the preexisting infrastructure (Lund &McGuire, 2005). Thus, a valuable extension of this research is to compare the role ofinnovation policy across different cultural settings.

The history of entrepreneurship and public policy focused on nanotechnology inno-vation is only two decades old. This short duration leads to a few limitations of our study.Despite the finding that economic initiatives and S&T initiatives are related to entrepre-neurship, these effects may not be constant over time. It may be that public policyinitiatives have a stronger effect in the short term, when the technology or industrialapplications are emerging. A longer history of a technology is necessary to examine thetemporal aspects of innovation policy. Conversely, innovation policy may have morelong-term influences, such that these decisions are imprinted on organizations at foundingand retain influence throughout their lives. Again, only a longer history of initiativeswould enable the examination of the temporal nature of innovation policy.

Second, we tested only two categories of Van de Ven’s (1993) infrastructure ofentrepreneurship model: institutional arrangements and public resource endowments. Wedid not examine the third category, proprietary activity, as most firms using nanotechnol-ogy are in the earliest stages of commercialization and firm proprietary functionality islow. However, Van de Ven (1993) argues that these three categories are highly interde-pendent, and can serve to reinforce several segments of an environment’s infrastructure.Our findings support the likelihood of interactions that merit further empirical examina-tion. It is possible, for example, that the increased rate of new venture creation observedin our data is due to the specific nature of nanotechnology and would not emerge inindustries that lend themselves to the creation of lock-in effects.

Third, while we have shown that a relationship exists between economic and S&Tinitiatives and related entrepreneurship, we only explore two dimensions of these initia-tives: creation and timing. Additional research is needed to examine other dimensions ofthese initiatives that might impact an initiative’s efficacy. For example, actual fundingfigures for each initiative would provide a more accurate measure of initiative resources,which may moderate the relationship between public policy initiatives and entrepreneur-ship. Further research should address whether it is the existence of infrastructure elementsor the level to which these elements are funded that influence entrepreneurship.

Despite these noted limitations, we contribute to the entrepreneurship literature bybuilding on theoretical work by Specht (1993) and Van de Ven (1993) on entrepreneurialinfrastructure by empirically examining factors beyond the firm level that are influentialto entrepreneurship. We also contribute to the growing body of work on innovation byeconomists and organization theorists that emerged since the 1990s (e.g., Gnyawali &

807September, 2008

Fogel, 1994; Leyden & Link, 1992). In our study, we provide a closer examination of therelationship between government innovation policy, entrepreneurial infrastructure, andrates of entrepreneurship. Overall, our findings suggest that states attractive to entrepre-neurs are those that not only pursue technological innovation and provide resourcesvaluable to new firms, but also encourage and legitimate commercial development.

The implications of our findings for public policy makers are threefold. First, weexamine the relationship between innovation policy and find a relationship with new firmformation related to that technology. Thus, the creation of innovation initiatives, whichfocus on both economic development and S&T development, are useful public policytools for those wishing to support the commercialization of that innovation and entrepre-neurship in their region. Second, our results suggest the existence of a first-mover advan-tage for states, particularly for economic initiatives such that those states with the earliestpolicy and new venture formation had higher numbers of related firms over time. Third,we find that it is the states with both economic and S&T initiatives that have the highestrates of entrepreneurship in the short term. For those states wishing to spur scientific andtechnological innovation, sponsoring a related S&T initiative may provide a more munifi-cent environment, particularly if it is coupled with an economic initiative focused on thesame technology. Thus, innovation policy can contribute to the development of an infra-structure for entrepreneurship through initiatives that increase the resources and legiti-macy that are valuable in venture formation.

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Jennifer L. Woolley is an Assistant Professor of Management at the Leavey School of Business at Santa ClaraUniversity.

Renee M. Rottner is a Ph.D. student in Organizations and Management at the Paul Merage School of Businessat the University of California, Irvine.

The authors would like to thank Mary Tripsas for graciously sharing her archival data, on which our study ispartly based. We also appreciate the helpful comments on earlier versions by Tammy Madsen, Norris Krueger,Brad Killaly, and participants of the 2008 Strategy & the Business Environment/Institutions for IndustrySelf-Regulation Conference. Lastly, we would like thank the special issue editor Maria Minniti and threeanonymous reviewers for their constructive feedback and guidance.

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