The effect of local entrepreneurial activity on firm R&D activity and profitability: Evidence fr

AUTHOR(S) Frank Crowley and Declan Jordan

Presented at ERSA 2017 in GRONINGEN August 31st 2017


A key concept in the economics of innovation is the ‘public good’ nature of knowledge. This generates a tension between incentivizing knowledge production by allowing knowledge creators appropriate the economic benefits and encouraging its diffusion to enhance the social return to knowledge creation. This paper addresses this tension by exploring the effect of greater local entrepreneurship on firms’ research and development activity. Where firms operate in localities that are characterized by greater entrepreneurship, measured by the rate of start-up businesses, there may be lower incentives to engage in research and development. This would result from a higher risk that knowledge spillovers to local start-ups and/or that employees may exploit new knowledge in spin-out firms. It has also been suggested in the literature that greater local entrepreneurial activity may lower profits for incumbent firms, through greater competition and/or the leakage of commercially valuable new knowledge. Using firm-level data from the 2013 Business Environment and Enterprise Performance Survey (BEEPS) for Sweden and county-level data on new start-ups the paper estimates the effect on R&D activity and profitability of local rates of business start-ups.