Entrepreneurship Working Group Fall 2020

Does local innovation attract venture capital? Using a regime change in the commercialization of university innovation in 1980 that strongly increased university incentives to patent and license discoveries, Fehder, Hausman, and Hochberg document the complement to Kortum and Lerner (2000)'s finding that financing drives future innovation. Because universities have different technological strengths, each local area surrounding a university experienced an increase in innovation relevant to particular sets of industries after 1980 -- industries which differ widely across university counties. Comparing industries within a county that were more versus less connected to the local university's innovative strengths, the researchers show that venture capital dollars after 1980 flowed systematically towards geographic areas and industries with the greatest sudden influx of innovation from universities. In contrast, the distribution of corporate patenting and prior venture financing in the pre-period does not predict a differential increase in future venture financing, suggesting that the findings are not solely driven by the 1979 pension fund reform that increased financing available to VCs across the board. The results support the notion of a "virtuous cycle" wherein innovation serves to draw capital investment that then funds future innovation.

Social distancing restrictions and health- and economic-driven demand shifts from COVID-19 shut down many small businesses with especially negative impacts on minority owners. Is there evidence that the unprecedented federal government response to help small businesses – the $659 billion Paycheck Protection Program (PPP) and the related $220 billion COVID-19 Economic Injury Disaster Loans (EIDL) – which had a stated goal of helping disadvantaged groups, was disbursed evenly to minority communities? In this descriptive research note, Fairlie and Fossen provide the first detailed analysis of how the PPP and EIDL funds were disbursed across minority communities in the country. From their analysis of data on the universe of loans from these programs and administrative data on employer firms, the researchers generally find a slightly positive relationship between PPP loan receipt per business and the minority share of the population or businesses, although funds flowed to minority communities later than to communities with lower minority shares. PPP loan amounts, however, are negatively related to the minority share of the population. The EIDL program, in contrast, both in numbers and amounts, was distributed positively to minority communities.

Wang studies the impact of the first joint licensing platform for patented drugs, the Medicines Patent Pool, on global drug diffusion and innovation. The pool allows generic firms worldwide to license drug bundles cheaply and conveniently for sales in a set of developing countries. Wang constructs a novel dataset from licensing contracts, public procurement, clinical trials, and drug approvals. Using difference-in-differences methods, they find that the pool leads to substantial increases in the generic supply of drugs purchased. In addition, there are positive responses in R&D inputs and outputs. Finally, they estimate a simple structural model for a cost-benefit analysis.

Using weekly establishment-level near real-time foot-traffic data, Maksimovic and Yang show that the collapse and reallocation of foot traffic during the COVID-19 pandemic affected pharmacies across localities across the US disparately. The evidence suggests that the COVID shock reshuffled foot traffic from independent stores to the national brands. This change occurred broadly and persisted after the initial demand shock. While government PPP subsidies and the presence of small-business-friendly banks temporarily softened the immediate shock for independent pharmacies the effect dissipated over time. The outcomes at the end of the sample period are consistent with the hypothesis that brand chains are more productive than independents and that they were able to gain relatively more customers as COVID scrambled demand. Brand stores are initially larger, they are in more customer-dense locations, and they are in higher-income areas. These characteristics also predict competitive outcomes of brand stores relative to independents. Thus, the COVID shock has accelerated the ongoing rise of brands and the decline of independent pharmacies. If generalized across other markets, this change will have large implications for small businesses and the shape of local communities.

Using unique City of Oakland data during COVID-19, Bartlett and Morse document that small business survival capabilities vary by firm size as a function of revenue resiliency, labor flexibility, and committed costs. Nonemployer businesses rely on low-cost structures to survive 73% declines in own-store foot traffic. Microbusinesses (1-to-5 employees) depend on 14% greater revenue resiliency. Enterprises (6-to-50 employees) have twice-as-much labor flexibility, but face 11%-to-22% higher residual closure risk from committed costs. Finally, inconsistent with the spirit of Chetty-Friedman-Hendren-Sterner (2020) and Granja-Makridis-Yannelis-Zwick (2020), PPP application success increased medium-run survival probability by 20.5%, but only for microbusinesses, arguing for size-targeting of policies.

Bernstein, Townsend, and Xu investigate how economic downturns affect the flow of human capital to startups. Using proprietary data from Angel List Talent, they study how individuals' online job searches and applications changed during the emergence of the COVID-19 crisis. The researchers find that job seekers shifted their searches toward larger firms and away from early-stage ventures, even within the same individual over time. Simultaneously, job seekers broadened their other search parameters, considering lower salaries and a wider variety of job types, roles, markets, and locations. Relative to larger firms, early-stage ventures experienced a decline in the number of applications per job posting, a decline driven by higher quality and more experienced job seekers. This led to a deterioration in the quality of the human capital pool available to early-stage ventures during the downturn. These declines hold within a firm as well as within a job posting over time. The findings uncover a flight to safety channel in the labor market, which may amplify the pro-cyclical nature of entrepreneurial activities.