Understanding the Impact of University R&D on Local Economic Development

Universities and the investment they pour into R&D are "major factors" that contribute to a region’s economic growth, concludes a recent report funded by the Ewing Marion Kaufman Foundation, NCOE and the U.S. Small Business Administration (SBA).

The report’s results show the growth occurs in less time than traditionally has been noted and that small firms innovate at a rate almost twice that of large firms.

Building on Joseph Schumpeter’s "creative destruction" concept and previous research, The Influence of R&D Expenditures on New Firm Formation and Economic Growth seeks to answer two questions: 1) do R&D activities at research universities have a significant effect on local new firm formations? and 2) do R&D activities as research universities have a significant effect on local economic growth? Creative destruction, the authors say, takes place when "newly formed independently owned firms commercialize inventions that increase overall demand thereby causing economic growth… ." Existing market structures consequently are destroyed, and the market’s remaining firms experience a redistribution of wealth.

The lag between R&D investment and economic payoff is relatively small, the report states. Although long-term lags have been expected in the past, the authors assert R&D-to-growth requires about a year to become realized before it tapers over the next five years.

Economic growth then is seen in a steady stream of new firms, new products and services, and increased employment.

That small firms may commercialize their discoveries and create new markets faster than large firms was evidenced in 1984 when The Futures Group, in a report for SBA, found that "small firms actually innovate at a rate of 1.24 to 2.38 times that of large firms."

Replicating a 1976 study by Gellman Research Associates, The Futures Group had analyzed more than 8,000 product innovations introduced in 1982. Even though large firms may boast greater levels of R&D investment than small firms, the studies suggested the latter is not at an innovative disadvantage.

How have small firms experienced this innovation success? R&D Expenditures, Firm Formation and Economic Growth contends the answer lies in spillover — when knowledge generated by the R&D process at one firm spills over to and is exploited for economic gain by other firms. Moving unidirectionally from large firms to small firms, the report states, the flow of knowledge bears a geographic proximity that especially benefits small firms en route to innovative clustering.

Spillover, while most prevalent in R&D intensive industries, is not unique to corporations, however. With respect to universities, the report offers the following:
"University research laboratories are equally likely to exhibit the same spillover effects.

To date, the research on such effects have focused on spin-off new firms typically started by one or more faculty from university R&D labs… Given the existence of university R&D spillovers, one can expect that new firm births would be correlated with the extent of R&D activity at research universities." Conclusions drawn in R&D Expenditures, Firm Formation and Economic Growth largely are based on previous research.

However, the authors test two hypotheses using many socio-economic variables that allow for further review. The authors also provide regression analyses and test for multicollinearity. The report is available at:

Copyright State Science & Technology Institute 2002. Information in this issue of SSTI Weekly Digest was prepared under a cooperative agreement with the U.S. Department of Commerce, Economic Development Administration. Redistribution to all others interested in tech-based economic development is strongly encouraged — please cite the State Science & Technology Institute whenever portions are reproduced or redirected. Any opinions expressed in the Digest do not necessarily reflect the official position of the U.S. Department of Commerce.

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