Star Scientists Are Attracted by State Incentives for Innovation

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State-provided incentives for biotechnology companies lead to significant increases in the number of private-sector "star scientists" and biotech workers employed in the state.

States spend billions of dollars through tax credits and other subsidies designed to attract cutting-edge technology companies and to spur creation of innovation clusters. In State Incentives for Innovation, Star Scientists and Jobs: Evidence from Biotech (NBER Working Paper No. 19294), authors Enrico Moretti and Daniel Wilson find that state-provided incentives for biotechnology companies lead to significant increases in the number of private-sector "star scientists" and biotech workers employed in the state. They also find that these incentives have a multiplier effect that generates employment in other sectors such as construction and retail. The incentives, however, have only limited effects on salaries, total patents, and on the productivity of incumbent scientists already employed in states.

In 2010, 11 states provided some type of incentive aimed at biotech companies in the hope of attracting life science jobs and firms. Thirty-four states offered broad-based R&D tax credits, which tend to heavily benefit research-intensive biotech firms. The average effective credit rate of the R&D incentives has grown rapidly in recent years, with some states' rates becoming as generous as or even exceeding federal credit incentives.

To analyze the effects of such incentives, the authors track data on scientists' relocations, employment, wages, companies, and patents - each specific to the biotech sector - for the period 1990-2010. They estimate that the adoption of subsidies for biotech employers by a state raises the number of "star biotech scientists" - defined as those whose biotech-related patent counts over ten years were in the top five percentiles of the U.S. scientist distribution - by about 15 percent over a three-year period. They also find that a 10 percent decline in the user cost of capital as a result of R&D tax incentives raises the number of star scientists by 22 percent. The authors find that the increases were largely concentrated among private-sector inventors and that there was little effect on academic researchers, whose financial incentives are structured differently within mostly non-profit institutions. The private-sector impact of various incentives went well beyond the number of top scientists, and affected total employment within the biotech sector.

The authors also note that the adoption of biotech incentives resulted in employment gains in other sectors, consistent with the notion of a strong local multiplier effect. For instance, they find that in states that adopted subsidies for biotech employers, the construction industry gained 37,000 jobs, a 16 percent increase over a pre-incentives baseline, while the retail industry added 31,000 jobs, a 6.7 percent jump. The real estate industry, which might be particularly sensitive to in-migration of new workers, saw 6,000 additional jobs, an 8.0 percent increase. States adopting tax credits for R&D generally did not experience significant employment gains in retail or real estate, but they did experience an employment increase in construction of 6.7 percent.

The authors note that "... the finding that subsidies to biotech R&D raise biotech employment in a state does not tell us whether those subsidies are economically justified." They emphasize that understanding the nature and magnitude of spillover effects in other industries may also be a critical input for such analysis.

--Jay Fitzgerald