Lars Persson, IFN, presented the study “Verifying High Quality: Entry for Sale”. Discussant was Hong Lou, Harvard Business School, USA.
The first paper presented at the conference was “Firm Dynamics and Local Economic Shocks: Evidence from the Shale Oil and Gas Boom” by Ryan Decker, Federal Reserve Board of Governors. He uses the recent revolution in shale oil and gas extraction methods in the United States to analyze the role for business entry in adjusting for economic fluctuations. To identify this effect, he compares counties that experienced an economic boom through increased oil production with comparable counties that did not have the geological formations necessary for shale oil or gas extraction. Decker’s results show that aggregate employment growth in response to the shale boom is entirely accounted for by new firms and new establishments of existing firms, rather than by the expansion of established firms. New firms appear to start small but grow exponentially, while new establishments of incumbent firms start out larger, with a more gradual growth trajectory.
Lars Persson, IFN, presented theoretical work on when and how entrepreneurs sell their inventions. Persson’s model refers to the “lemons” problem, which shows that when buyers have less information than sellers, only low-quality products are sold since buyers’ willingness to pay reflects the average quality of the product in the market. In the paper “Verifying High Quality: Entry for Sale,” Persson and co-authors show that in the process where an entrepreneur wants to sell an invention of good quality to an incumbent firm, he or she can first enter the market to verify the actual condition, and then sell to get the full price. Entrepreneurs with low-quality inventions, on the other hand, will not be able to generate the amount of revenue needed to cover the cost of entry and will thus sell without entry. Incumbents realize this incentive and discount their willingness to pay accordingly. The study indicates that possibilities to enter the market as a means of verifying the quality can mitigate the problem of asymmetric information and spur high-quality inventions.
Rosemarie Ziedonis, Questrom School of Business, Boston University, USA, presented the study “Patent Collateral, Investor Commitment, and the Market for Venture Lending”. Duscussantwas Malin Gardberg, IFN and Erasmus University Rotterdam, Netherlands.
Next, Michela Giorcelli, UCLA, presented her work on long-run consequences of international aid on economic growth. In “Reconstruction Aid, Public Infrastructure, and Economic Growth”, she studies the Marshall Plan in Italy to estimate the effects of reconstruction and modernization of public infrastructure on economic activity. By instrumenting the number of reconstruction grants received by each Italian province with differences in regional bombings, she shows that firms became more likely to adopt new technologies and to develop patents in regions that received more reconstruction grants. Giorcelli argues that the newly adopted machines resulted in a shift of workers from the agricultural sector to the industry. While productivity increased and the number of workers decreased in the farm sector due to new machines, the number of industrial workers starkly increased.
The last speaker before lunch on day one was Joacim Tåg, IFN. In the paper “The Incredible Shrinking Stock Market: On the Political Economy Consequences of Excessive Delisting,” Tåg and co-authors develop a model to explain how a shrinking stock market can have harmful effects on society as a whole. Tåg said that the US stock market has halved in size over the past two decades and that their findings reveal that this can trigger a chain of events leading to long-term reductions in aggregate investment, productivity, and employment. The mechanism at heart of the model is that delistings reduce the size of the stock market and stock market participation, and hence reduce citizens’ economic incentives to care about government fostering a business-friendly climate.
Joacim Tåg, IFN, presented the study ”The Incredible Shrinking Stock Market: On the Political Economy Consequences of Excessive Delistings”.
Erik Prawitz, IFN, held the first presentation after lunch. He described his work “Mass Migration, Cheap Labor, and Innovation.” This paper estimates the effect of emigration on innovation activity. The perspective is historical, and Prawitz examines the Age of Mass Migration from Sweden to the US -- a quarter of the population emigrated. Using data covering all technological patents in Sweden 1860 – 1914, combined with data from church books and shipping line records covering all Swedish migrants, this paper compares long-term changes in innovative activity between municipalities within the same region, but with different emigration patterns. To identify a causal effect an variable design is used that utilizes local frost shocks together with travel costs to reach an emigration port. Prawitz presented evidence that emigration caused a substantial increase in technological patents in sending municipalities and that increased labor cost, due to low-skilled migration, was a likely mechanism.
Up next was Jorge Guzman, Columbia Business School, with his paper “Hidden in Plain Sight: Venture Growth With or Without Venture” that examines the role of venture capital (VC) in creating successful startups. He claims that researchers often focus on successful VC firms while neglecting successful non-VC funded firms. In the paper, Guzman develops a model that predicts, based on historical VC funding data, the success rate of firms, regardless of whether they are VC funded or not. The estimations use data covering 34 US states in the period 1995-2005. The results indicate that VC financed firms are six times more likely to experience future equity growth. Successful firms are, however, similar in their characteristics, VC funded or not. This result suggests that VC funding facilitates successful growth for startups but is not necessary for growth to happen.
An interantional research conferens, like the one in Vaxholm, offers many opportunities to network. To learn from other people's research and to find new research questions and new research partners.
Rosemarie Ziedonis, Boston University, started her presentation by stating her ambition with the paper: To challenge implicit assumptions about entrepreneurial firms. In “Patent Collateral, Investor Commitment, and the Market for Venture Lending,” she examines such assumptions for US venture capital startups in the period 1989–2008. In the startup industry, patents are central for securing future payoffs from innovative work. Little is known about what happens with patents after a startup fails and it is often assumed that the market for patents from failed startups is negligible. Rosemarie Ziedonis confronts this notion, mentioning General Magic, in Silicon Valley more known as “the most important company you have never heard about.” When the company shut down, it held patents that would later be central for the development of the smartphone. She proceeds by presenting anecdotal evidence from patents to failing startups. There are two main findings: First, it is mainly other adjacent operating companies that acquire these patents, either to block rivals or to develop the patent technology themselves. Second, the patents rarely stay with the original inventor – in fact, patents from failed startups are in 70 percent of the cases sold at least once and at short notice after failure.
Erik Stam, Utrecht University, presented his study ”Entrepreneurial Ecosystems: A Systems Perspective”. Markus Poschke, McGill University, Canada, was discussant.
Next Erik Stam, Utrecht University, presented his paper titled “Entrepreneurial Ecosystems: A Systems Perspective.” Entrepreneurial ecosystems have attained increasing attention from scholars as a mean to understand the complexity underlying successful entrepreneurship. Stam argues that success does not occur in a vacuum. He explains that in an entrepreneurial ecosystem, the interdependence between actors, institutions, and the fixed market characteristics makes it problematic to distinguish the causal effect from each entity.
This study develops a framework for separating these effects in entrepreneurial ecosystems. Stam examines twelve regions in the Netherlands and constructs an index encompassing ten elements contingent to an entrepreneurial ecosystem. The results indicate that the quality of the ecosystems is closely related to the entrepreneurial output. Another finding, affirming the importance of ecosystems, is that most of the chosen variables for entrepreneurial activity contribute to the entrepreneurial productivity. This effect shows that each actor can only add to a finite set of functions in the ecosystem – and they are thus dependent on the functioning of other branches in the system. Stam advises policymakers wanting to promote entrepreneurship to consider in what part of the ecosystem a policy is implemented, concluding that it is hard to find a blue-print policy to facilitate entrepreneurship.
Hong Luo, Harvard Business School, presented her study “How Does Product Liability Risk Affect Innovation? Evidence from Medical Implants”.
Hong Luo from Harvard Business School concluded the first day of the conference with her paper “How Does Product Liability Risk Affect Innovation? Evidence from Medical Implants”. US liability laws are designed to compensate consumers for defective products, and law scholars have long deemed this to obstruct innovation. Potential patent holders shun from innovations made in industries where litigation may cause future problems. While this is theoretically intuitive, it is inherently difficult to test in reality, Luo says. In her paper, she uses a unique exogenous increase in liability risk in the medical implant business, following the bankruptcy of implant manufacturer Vitek. The bankruptcy was followed by wide-ranging lawsuits against leading upstream supplier DuPont, costing over $40 million in legal expenditures. Luo analyzes how this increased risk of litigation affected innovation in the medical implant industry before and after Vitek’s bankruptcy. The main finding of her study is that medical implant patenting decreased substantially following the increase in litigation risk. Mainly this is because the litigation risk faced by suppliers like DuPont alters the incentive for downstream innovation.
The second day of the conference began with Myra Mohnen’s, University of Essex, presentation “Stars and Brokers: Knowledge Spillovers among Medical Scientists.” In this work, Mohnen studies the effect of so-called “stars” on scientific production in medical research. To identify the effect of being close to a star researcher, she studies the unexpected deaths of stars and the implication it has for researchers who were prodigies. To quantify this proximity, she develops a new measurement called brokerage degree, based on the idea that bridging links between different groups is a potential source of novel information. Her results show that the position within a network matters for the productivity of a researcher. On a larger scale, Mohnen argues, the results indicate that network externalities is a relevant factor in scientific productivity, and they also provide insights into the creation of knowledge and its mechanisms.
Michela Giorcelli, University of California - Los Angeles, USA, presented the study “Reconstruction Aid, Public Infrastructure, and Economic Growth”.
in Markus Poschke’s presentation “Wage employment, unemployment and self-employment across countries,” he notes three broad patterns in labor markets of developing countries which motivate this research: i) higher self-employment rates, ii) higher rates of unemployment relative to wage employment, and iii) higher self-employment rates in countries with high unemployment rates relative to wage employment even conditional on GDP per capita. In order to analyze these facts, Poschke presents a search and matching model which is an extension of the classic Diamond-Mortensen-Pissarides model. The extended model suggests that both differences in unemployment and self-employment across countries can be traced back to variations in labor market frictions.
Patrick Legros, Université libre de Bruxelles, Belgium, presented the paper "Learning Within or Outside Firms? Labor Market Frictions and Entrepreneurship”.
Patrick Legros, Université Libre de Bruxelles, presented theoretical work on the dynamics of entrepreneurship. He suggests a framework where people choose to either become entrepreneurs or be employed by a firm. There is also a fraction of individuals that will not receive an employment offer due to labor market frictions, and will, therefore, become entrepreneurs. Legros’ study shows that, when all other factors remain unchanged, the level of labor market frictions determines the proportion of different types of entrepreneurs as well as wages and the probability of becoming an entrepreneur. This, he argues, is consistent with empirical evidence from both the United States and Europe. Additionally, when entrepreneurs are faced with financial constraints, the effect of frictions will become even more pronounced. Legros also concludes that well-functioning labor markets render firms short-term and create a learning motive for entrepreneurs, increase their future success probability and give them a wage premium should they go back to employment.
The last presenter of the conference was Zorina Khan, Bowdoin College, who presented her work on the history and implications of patents and prizes - “Patents or Prizes? The Royal Society of Arts and Incentives for Innovation, 1750–1850”. The topic concerns the drivers of ideas and technological innovation. According to Khan, there has been a revived interest in cash prizes as an incentive for innovative activity, but she argues that the empirical evidence is scarce. Khan studies the case of the Royal Society of Arts, which had implemented a rule dictating that any inventions that were awarded a (monetary) prize could not be patented. Some economists argue that patents are socially inefficient and instead support prize systems. However, Khan explains that the Royal Society was not effective in advancing Britain’s economy. Additionally, inventors often bypassed the prize system to patent the inventions that were valuable in the market, suggesting that healthy skepticism may be advised regarding the role of elites and prizes in generating innovation and economic development.
Text by: Victor Ahlqvist, Charlotta Olofsson and Nicklas Nordfors