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Zucker et al 1998: Geographically localised knowledge: spillovers or markets Introduction Knowledge spillovers = positive externalities of scientific discoveries on the

e productivity of firms which neither made discovery themselves nor licensed its use from the holder of intellectual property rights Important as they cause economic growth and agglomeration R&D spillovers as source of endogenous growth in New Growth Theory Spillovers difficult to examine and find, but success in finding statistically significant effects on a firms productivity of being near great universities and other sources of scientific discovery leading to geographically localised knowledge spillovers Looks at biotechnology industry in California Intellectual human capital = star scientists they are at leading edge of bioscience, when and where they are active is a determinant of location and timing of entry of new biotechnology enterprises in US Zucker relates geographically localised knowledge spillovers in biotech industry to a relatively small number of outstanding scientists Paper looks to explore technology by which apparent geographically localised knowledge spillovers operate case studies and interviews point to fact that star scientists are not only located in same area with biotech firms, but are deeply involved in their operations as employees or consultants key point, not only located near to firms geographically but stars are involved by contract or ownership by market exchange Firms with explicit ties to star scientist appear to account for disproportionately large share of industry growth (measured by number of products in development, number of product on market, employment growth) Biotechnological revolution result of scientists more than of universities stars usually retain university affiliations while involved in commercial applications thus creating localized effects of university research Zucker examines effects of one breakthrough on small no. of industries Relying on typically assumed but unmeasured pre publication spillover of new discoveries made in university labs has led to flawed inferences about processes of technology transfer examine actual transfer by developing empirical indicator: - Articles written jointly between university star scientists and firm scientists (linked) - Or articles written by university star scientists who become employed full time by a firm (affiliated) Validity of indicator for the existence of contractual or ownership relationships with firms has been confirmed through interviews Multi industry technological revolution led to variety of industries benefitting pharmaceuticals, instrumentation, agriculture, brewing key ot this was 1973 discovery by Stanford professor Cohen and professor Boyer Key role of leading edge science in the entry of biotech firms that role continued in determining success and failure of these enterprises California used as study for identifying spillovers by identifying linkages between biotech firms and star scientists affiliated with universities Biotech science and industry in California California boasts 30% of US universities with biotech relevant departments Leading role in science and its commercialisation Long track record of firms such as Amgen, Genentech Describing California new biotechnology enterprises o Telephone census found results as expected that 109 of 110 Californian biotech firms were located in 4 of the 9 economic areas as defined by where star scientists also worked o Over 40% of firms are in san fran and another third in san diego o Entry dates for 110 firm spread over time 35% entering 1980, then 13, 26%, in 1976 and 1986 o Define firms by incumbent (pre-existing firms) and entrants (new firms founded to exploit new bioscience technologies) o 87 entrants 22 incumbents o Success heavily concentrated in firms with connections to star scientists by 1989 firms with star ties had average increase in employment of 366 workers 1989 to 1994 compared to only 82 workers for firms without such ties o Firms with tied stars also account for 10.7 products in development and 8.8 on the market compared to 1.2 and 3.5 for those without star ties o Star ties typically established before the firm, the star or both achieve success California star scientists and their ties to enterprises o 55 star scientists worked in California firms and universities during 76-89 o Of these, 10 gave a California firm at least once as their location during this period these stars are affiliated with the firm o Unaffiliated stars are pure academic scientists, devoid of commercial concerns and ties may appear so, but this conclusion is misleading surveys found California stars may be simultaneously be linked to firms in a number of different ways (exclusive direct employment (CEO), full or part ownership, consulting contracts, chairmanship or membership of advisory boards these ties establish

Given achievement of scientist some wish to retain university position even when employment full time by a firm university stars thus tend to be locally fixed input for commercial applications o Standard economic notion : is that by being near universities where cutting edge research is done, employees hear of important discovered first and thus utilize them before others in this information in the discovery is a public good freely available to those who incur the costs of seeking it out in the groves of academe o Further assumed that scientific discoveries only have value if formal intellectual property rights mechanisms effectively prevent use of the information by unlicensed parties i.e trade secrets, secrecy, value of discovery erodes quickly as information diffuses o Zucker view: scientific discoveries vary in the degree to which others can eb excluded from making use of them, inherent to this discovery is its degree of natural excludability if techniques for replication are not widely known prior to discovery then scientist wishing to build on new knowledge must first acquire hands on experience if he or she cannot gain access to research team or lab setting then working in area may be difficult if not impossible an invention of a method of inventing can give rise to localised industrial effects where information is sufficiently costly to transfer due either to its complexity to tacitness and information is embodied in particular individuals and tied to particular locales o Breakthrough discoveries in modern biotech have fundamentally changed how bioresearch is done new techniques used in creation have exhibited both high natural excludability and immense commercial value therefore not surprising that Zucker found that where and when stars were actively publishing were important determinants of where and when enterprises built to use their special knowledge would be formed o These stars can be seen as key determinant of geographical agglomeration of the new industries firms with most access to this intellectual human capital are most likely to be the winners in the new and transformed industries o Since star scientists can simultaneously provide immense value to research universities and firms many choose to do both o Star is locally linked to biotech firm if star publishes an article with one or more scientists in the firm while he or she is located at university in same region as it these locally linked stars are main channel by which university star scientists have influenced success of biotech firms o They do it in 2 ways: firstly provide access to information about discoveries, linked star is able to convey knowledge of processes and techniques which is not otherwise available to the firm, secondly linked university stars are able to maintain both uni and firm relations because of very high quality of their input o Article examines every article through 1989 reporting a gene sequence discovery written by a star located in a California university or firm for each article star classified as affiliated or unaffiliated o Look at 55 California stars local firm linked, ever firm affiliated, untied (never linked) o When knowledge is implemented to create alienable and commercially valuable discoveries, patents offer important mechanism for appropriating returns thus patenting by stars is indication of expected commercial value of their discoveries o Data shows stars affiliated firms are different in patenting activity compared to unaffiliated university stars half have patented discovered vs. only 15.6% of university stars o Among university stars, a quarter of those linked to specific firms in same region have patented discovered compared to 13.5% of those not tied to such firms o Commonly though that best scientists are unlikely to be involved with firms or in patenting discoveries this presumption rests on idea of scientific norms of openness to contribute to advance of science however patented scientists are generally more widely cited than unpatented scientists and affiliated scientists more cited than linked who in turn are more cited than untied scientists o Affiliated scientists with patents are cited 6.5 times as frequently as untied with patents o Appears that work done either in or in collaboration with firms is productive in terms of influence on future research o Strong positive effects of stars on firm productivity higher average rate of citation to articles written by stars with or as employees of firms Relation to other empirical work o Prior models assume innovative inputs measured by investment in R&D assumption that investment in R&S produces equal innovative returns is falsifiable, recently patents have been seen as better measure of inputs than output of the innovative process o Scientific output typically produced by top 1% or 2% of all scientists thus concerned with identify star scientists o Measures of their productivity in the firm linkage is measured by number of articles reporting genetic sequence discoveries that are publish either the firm listed explicitly as stars affiliation or which include fi rm scientists as co-authors o As alternative to patents as a measure of innovative output separately measure 3 different aspects of the economic impact of inventive activity: the number of products in development (generally close to the inventive activity), number of products on market (indicating successful development, and net growth in employment (indicating successful development and marketing of products) o

Each can be seen as successive step in moving from initial invention to impact on economic performance of the firm

Estimation Methods 2 approaches to estimation: (a) Poission regressions used for products in development and on the market (b) Modified Type II Tobit procedure used for change in employment Products in development and on the market are count variables (0,1,2,) Poisson regression estimate the logarithm of expected number of firm births Reports of no change in employment are most often due to response bias in which firms for which there has been little change report no change rather than bother to look up exact figures 2 stage procedure of Type II Tobit: (a) Estimates size of change using only observations reporting changes (b) Corrects sample selection bias by including as a regressor the IMR computed at the first stage (c) Calculates consistent and unbiased estimate of variance covariance matrix Empirical Results Reports results on 3 different measures of biotech using firm performance: number of products the firm has in development as of 19911, number of products on market at that time and net change in employment over 5 years following 1989 These indicators are interesting in and of themselves form organizational, economic and policy perspectives and are likely to reflect spillover effects if they exist In estimates use set of variables built by counting number of articles reporting genetic sequence discoveries and written by each star located in California universities or firms, according to whether for each article the star was affiliated with, locally linked to (by being in same region as coauthors affiliated with firm) or not tied to each of the 110 firms in data set Using article count to weight the stars publications important as there was considerable variation in the authorship and coauthorship histories Count also served to capture the strength and/or productivity of the relationship between stars and enterprises Have to address concerns over cause and effect 1. Firms could have established ties to star scientists as a signalling device o The scientists are too young to be and sort of signalling device and again it is more plausible that they are working with the firm because they are productive not famous 2. Or because firms which became successful ex post absorbed scientists as part of their expansion o With a 10 plus year product cycle, the timing argues that these scientists were the cause not the result of the success of the firm o These concerns were no supported in the data because stars typically were either with the firm when or very soon after it was founded or became part of the firms production and innovation process shortly after the star had first published Products in development o This measure appeared most closely related to success in application of the new biotechnologies and least affected wither by use of other technologies or by differences in business strategy (e.g. in house production/marketing vs. joint agreements with established pharma firms) o Poisson regression o Model a Explains products in development by the number of gene sequence discovery articles written by stars from within a local university who were not affiliated with any firm (unaffiliated articles=untied articles + linked articles) by whether to not the firm is a entrant, by the firm ages, and by whether or not firm utilises the rDNA technology As expected firms age and its use of rDNA technology both contribute significantly and positively to number of products in development Interestingly the new dedicated biotech firms are significantly morel likely to be developing new products than incumbent firms Stars concept which was used by zucker to identify scientists around which entrants and incumbent would be built also appears to work here to uncovered important significantly geographically localized spillover effects of local universities on success of nearby R&D efforts o Model b broadens model a by including number of gene sequence discovery articles written by stars affiliated wit the firm (affiliated articles) Results from a persist in model b Although addition of significantly positive number of affiliated articles for the firm generally reduces the magnitude of t statistics for other explanatory variables o Models c and d are identically to b respectively except that the number of articles written by university stars is broken down into those written in collaboration with scientists from the firm (linked) and the remaining (untied articles)

Coefficients on articles written by local university stars not in collaboration with the firm loses its significances and nearly vanishes in magnitude What had appeared to be an undifferentiated geographically localized knowledge spillover seems to have resulted form a specific error if we did not have this data set required to identify which university stars were linked to which enterprises then this study would have confirmed previous findings Instead we find that no such indiscriminate spillovers are apparent for biotechnology products in development Interesting that when linked articles is admitted to the regression separately the coefficients of both affiliated articles and dummy use rDNA are cut dramatically in magnitudes and only dummy use rDNA remains significant We believe that insignificance of affiliated articles in this regression should not be taken to mean that having stars affiliated is irrelevant for developing new products e.g. enterprises with affiliated stars are most likely to attract university stars to collaborate with them Then enterprises with links to university stars are able to most effectively acquire and use the results of on-going university research linked stars become conduits for the information and evaluation of different lines of research related to potential product development

Products on the market o For products on market (and also employment growth) no evidence of geographically localized knowledge spill overs so models a and b are not reported in either case o Coefficients on dummy entrant and dummy use rDNA are both negative and significant which believe reflects the fact that firms which are engaged in primarily applying the new technologies are likely to have fewer products than their suppliers o Firm age, affiliated articles (model d) and linked articles have positive effect on number of products on the market o Positive coefficients reflect fact that the most successful firms using the new biotechnologies are the ones most likely to have products which reached the market o More surprising result is the very small but statistically coefficients found for publications by local university star scientists not linked to the firm (united) do not think this represents any sort of negative spillover from the unliked university stars but may reflect the fact that areas with many stars have many firms competing for local resources so that we detect a slight congestion effect in these coefficients o Number of stars in region has a positive but diminishing effect on firm births Changes in employment o Enterprises more likely to increase employment and less likely to decrease employment if it uses rDNA technology to produce human therapeutics and if it is younger o Sorting phenomenon in which as the enterprise matures it either begins to grow more rapidly or else to shrink according to whether or not its strategy is proving successful o Increasing probability of decline or failure is in contrast to the findings for US manufacturing plants perhaps because it is so difficult to tell whether or not a young biotech enterprises is or not achieving success o Linked stars seen to have significant positive effect as with the other performance variables, united stars do not enter significant nor do affiliated stars as was case for products in development o Only significant effects are a positive coefficient on the use of rDNA tech Summary of empirical results o For al 3 measures linked articles have positive effect on firms performance when in the regression o Publications by stars affiliated with a firm have positive impact on performance whenever they are significant but their effect is not robust o While affiliated stars do not have robust direct effect on firm performance it should be notes that firms with affiliated stars are more likely to have linked stars and that this significant correlation between linked and affiliated articles variables makes it difficult to separately identify their effects o o