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SPATIAL CLUSTERING OF VENTURE CAPITAL-FINANCED BIOTECHNOLOGY ... SPATIAL CLUSTERING OF VENTURE CAPITAL-FINANCED BIOTECHNOLOGY ... Document Transcript

  • SPATIAL CLUSTERING OF VENTURE CAPITAL-FINANCED BIOTECHNOLOGY FIRMS IN THE U.S. Ke Chen Assistant Professor Department of Geosciences P. O. Box 70686 East Tennessee State University Johnson City, TN 37614 Tel: 423-439-6986 chenk@etsu.edu Michael Marchioni Associate Professor Department of Geosciences P. O. Box 70686 East Tennessee State University Johnson City, TN 37614 Tel: 423-439-5362 marchion@etsu.edu ABSTRACT Biotechnology is a knowledge-intensive industry that requires a large amount of capital for research and development. The Biotechnology Industry Organization indicates that approximately one fourth of the industry financing comes from venture capital, which provides not only money but also managerial guidance to biotechnology firms. This paper focuses on biotechnology businesses that are financed by venture capital and examines their geographic distribution pattern across United States metropolitan areas. Based on data from 2006, we found that there is a highly concentrated pattern of these biotechnology firms in a few metropolitan areas. Using Poisson regression, we found that, these biotechnology venture activities are highly clustered in urban centers where there is socio-economic diversity. Such firms are also located in close proximity to research universities, institutes and/or hospitals, where there is a strong life science research base and a large pool of life scientists. These firms also cluster in areas where there are large pharmaceutical companies, venture capital providers and entrepreneurial spirit as well. Key words: biotechnology, venture capital, cluster The Industrial Geographer, 2008, Volume 5, Issue 2, Pages 19-38. Copyright © 2008 Chen and Marchioni.  
  • The Industrial Geographer Microsoft, Genetech and Google, all received INTRODUCTION venture capital financing at their start-up stages (Gompers and Lerner 2006; Global Biotechnology is the subfield of biological Insight 2007; Neis 2007). In the science that is linked to such research areas biotechnology industry, commercial activities as genetic engineering and recombinant are claimed to have emerged out of DNA technology; thus it is applied in a wide university labs because of venture capital range of industries. According to a survey by (Kenney 1986; Boehm and Schuehsler 2003). the United States Department of Commerce As venture capital is an equity investment (2003), firms that label themselves as until the company matures, the investors’ “biotechnology” fall into over 60 North fate is bound to the firms in which they American Industry Classification System invest. As experienced entrepreneurs, (NAICS) codes. Due to this wide application venture capitalists are usually actively and especially its success in pharmaceutical involved in a biotechnology firm’s production (United States Department of development during the early critical stage Commerce 2003), biotechnology is becoming by becoming board members and advisers on more commercialized. According to the potential strategic partnerships (Kenney Biotechnology Industry Organization (2007), 1986; Munroe et al. 2002). They can also act by the year 2005, there were 1,415 as a ‘‘coach’’ to help a company establish a biotechnology companies in the United business plan (Boehm and Schuehsler 2003). States, most of which were highly Very often, a venture capitalist provides not concentrated in a few geographic areas. This only cash but also contacts, information, pattern has raised great interest in location advice and a set of networks in the region analysis for the biotechnology industry that prove to be very important to the (Kenney 1986; Audretsch and Stephan 1996; success of the ventures they fund (Rind 1981; Feldman 2000; Audretsch 2001; Cortright Saxenian 1996). These resources, therefore, and Mayer 2002). provide venture capital backed firms advantages over non-venture capital backed As a knowledge-intensive industry, firms. Furthermore, when compared to non- biotechnology commercial activities need a venture capital backed firms, venture capital large infusion of capital dedicated to backed firms are usually newer; more research and development (United States focused to new technologies and thus more Department of Commerce 2003). One likely to make technology breakthroughs and important way that biotechnology firms get to boost economic growth (Black and Gilson funded is through venture capital financing 1998; Kortum and Lerner 2000; Neis 2007). (Biotechnology Industry Organization, 2007), The relationship between these firms and which is specialized in high-growth, high- venture capitalists is also a circular process, risk and high-technology firms in the form of as the greater the innovation, the greater equity rather than debt (Black and Gilson venture capital investment to come in the 1998). In 2005, almost one fourth of future (Gompers and Lerner 2006). From an biotechnology industry financing came from economic perspective, evidence has shown venture capital (Biotechnology Industry that venture backed companies Organization 2007). In general, although outperformed their non-ventured venture capital accounts for a small fraction counterparts in both job creation and of total corporate finance in the United revenue growth (Global Insight 2007). For States, it plays a crucial role in technology instance, between 2003 and 2005, the annual innovation and economic growth in the growth rate of jobs among venture capital national economy (Global Insight 2007). backed companies was 4.1 percent, more Major public technology firms, such as than three times faster than the 1.3 percent Chen and Marchioni 20
  • The Industrial Geographer for total private sector employment for the variety sources, including professional same time period; similarly, the annual sales venture capital firms, small business growth rate was 11.3 percent for venture investment companies (SBICs), venture capital backed companies, compared to 8.5 arms of corporations, institutions and percent for all U.S. companies (Global investment banks (PricewaterhouseCoopers Insight 2007). At the regional level, venture 2007). PricewaterhouseCoopers database capital is viewed as an important economic also includes other investors, such as angels, infrastructure for regional economic corporations, and governments, as long as development (Florida and Smith 1993). their financing rounds are qualified and verified. This database has been widely used The purpose of this study is to investigate in venture capital studies (Zook 2002; Green the spatial clustering of biotechnology firms 2004; Wonglimpiyarat, 2005) that are financed by venture capital. For convenience, these firms are referred to as All biotechnology firms that received venture biotechnology ventures or venture firms / capital investment in 2006 were investigated activities / businesses in this study. We aim in our study. Therefore, our sample does not to establish theoretically-informed statistical include biotechnology firms that have models to explain the geography of these received venture capital in years other than biotechnology venture firms. Despite the 2006. Using zip code centroids, biotechnology interest in the biotechnology industry as a ventures were integrated into the geographic whole, very few studies have focused on information system (Figure 1). Overall, three biotechnology firms that are financed by hundred biotechnology companies in the venture capital. We believe that our study United States received venture capital will add insights applicable to the fields of investment during the time frame under location analysis and regional economic study. This figure represents slightly more development. than twenty percent of all biotechnology firms (Biotechnology Industry Organization 2007). As indicated in Figure 1, there is a CLUSTERING OF strong pattern of clustering in the Bay Area and the northeastern part of the U.S. BIOTECHNOLOGY VENTURE ACTIVITIES Biotechnology venture businesses were then aggregated according to metropolitan This study investigates the spatial boundaries, where there is more distribution of biotechnology venture firms homogeneity and economic connectivity than that are financed by venture capital for individual municipal boundaries investment. Biotechnology firm data came (Cortright and Mayer 2002). Among all from the MoneyTree survey in 2006. The biotechnology venture firms studied, 292 MoneyTree survey is a quarterly study of (97%) were located inside 370 metropolitan venture capital investment activity in the areas. Table 1 presents the top ten United States. It has been used in other metropolitan areas, ranked by the number of studies on venture capital (Green 2004). In biotechnology ventures. San Francisco, the this database, the phrase “biotechnology home of biotechnology industry, ranked companies” refers to developers of technology number one. In 2006, 48 (16%) firms in San promoting drug development, disease Francisco received venture capital treatment, and a deeper understanding of investment. San Francisco was followed by living organisms (PricewaterhouseCoopers Boston, with 37 venture capital funded 2007). All these venture capital recipient firms. In third place was San Diego, a fast companies are private and new. Venture growing and well recognized biotechnology capitalists in this database come from a Chen and Marchioni 21
  • The Industrial Geographer Figure 1: Location of venture capital financed biotechnology firms in 2006   center. Washington D.C. was fourth and Why Cluster? Philadelphia ranked fifth. These top five metropolitan areas accounted for 45 percent Geographers have always been eager to of all biotechnology venture businesses. explain the uneven spatial distribution of industries and the regional disparity of economic development. One popular explanation of industrial concentration in LOCATION FORCES IN space is the industrial cluster model, offered by Porter (1990, 1998). In his model, Porter BIOTECHNOLOGY INDUSTRY (1990, 1998) defines industrial clusters as “geographic concentrations of inter- We assume that the geographic clustering of connected companies and institutions in a venture capital financed biotechnology particular field, linked by commonalities and businesses follows a similar geographic complementarities”. Porter states that pattern as the overall biotechnology innovation is enhanced through close contact industry. In the following section, we first between various players in a cluster, review cluster theory and then the location including businesses, universities, forces for biotechnology business clustering. infrastructures and government agencies. Chen and Marchioni 22
  • The Industrial Geographer Table 1: Biotechnology Ventures for the Top Ten Metropolitan Areas Rank Metropolitan areas # of Ventures Share of Total % 1 San Francisco-Oakland-Fremont, CA 48 16.4% 2 Boston-Cambridge-Quincy, MA-NH 37 12.7% 3 San Diego-Carlsbad-San Marcos, CA 21 7.2% 4 Washington-Arlington-Alexandria, DC-VA-MD-WV 20 6.8% 5 Philadelphia-Camden-Wilmington, PA-NJ-DE-MD 19 6.5% 6 San Jose-Sunnyvale-Santa Clara, CA 17 5.8% 7 New York-Newark-Edison, NY-NJ-PA 15 5.1% 8 Baltimore-Towson, MD 12 4.1% 9 Seattle-Tacoma-Bellevue, WA 11 3.8% 10 Los Angeles-Long Beach-Santa Ana, CA 8 2.7% Industrial clusters are especially linked to Ronde 2003). The high turnover rate in the the concepts of innovation process, Silicon Valley is one good example of innovative milieu, regional innovation technology spillover through labor mobility systems and learning regions, knowledge within industries (Saxenian 1994). This economy, and learning economy etc spillover effect, however, is argued to occur (Antonelli 2000; Martin and Sunley 2003; in circumscribed geographic areas and Coenen et al. 2004). As indicated by decays with increasing physical distance Marshall in the late 19th century, the (Almeida and Kogut 1999). benefits for businesses to cluster can be explained through scale economy, specialized Antonelli (2000) states that clustering of labor pooling, knowledge and technology technological changes is attributable to the spillover, and decreased transaction costs decreased transaction costs among economic (Marshall 1890; Hotelling 1929; Czamanski agents. He argues that technological and Ablas 1979; O’hUallachain 1984; Porter knowledge is fragmented among different 1990; Feser and Bergman 2000; Feser and institutions, and that more economic Lugar 2003). In our study, we focus more on institutions bring out higher degrees of the latter two aspects, technology spillover productivity. This process is facilitated by and transaction costs. geographic proximity (Antonelli 2000). The benefits of decreased transaction costs could High labor mobility is one important reason be further understood through the concepts for knowledge and technology spillover of tacit knowledge communication and face- within an industrial cluster (Saxenian 1994; to-face contact (Antonelli 2000; Martin and Fosfuri and Ronde 2003). The clustering of Sunley 2003; Coenen et al. 2004; Zook 2004). firms in a similar industry makes it easy for In contrast to codified knowledge that could workers to change jobs for higher salary or be learned through textbooks, learning of promotion, as they do not have to travel long tacit knowledge often needs regular face-to- distances for job interviews and may not face interactions (Almeida and Kogut 1999; need to relocate homes after job transfer. Sainsbury 1999; Desrochers 2001; Pinch et Labor mobility then facilitates the exchange al. 2003). It is even argued that effective of information, technology and knowledge communication can only be transmitted via among different firms or organizations, personal contact in limited spaces raising the likelihood that newer ideas and (Lawson and Lorenz 1999). There are several products will be developed (Fosfuri and ways that face-to-face contact creates an Chen and Marchioni 23
  • The Industrial Geographer economic advantage (Almeida and Kogut scientists of Genetech, Biogen and 1999; Sainsbury 1999; Desrochers 2001; Immulogic all retained their university Pinch et al. 2003). First of all, it allows more affiliations (Powell et al. 2002). In most in-depth and speedy feedback among cases, a university faculty’s involvement in economic agents and facilitates collective biotechnology businesses can only occur learning (Lawson and Lorenz 1999). It also when their biotechnology firms are helps build trust and incentives in economic physically close to universities due to the relationships, which further decreases tacit nature of knowledge (Audretsch and transaction costs. Furthermore, it facilitates Stephan 1996; Feldman 2000). socialization within a professional network, where participants share a pool of Life science universities or institutions also technological knowledge, which further provide a quality labor force (Kenney 1986; stimulates cooperation, competition or Lawson and Lorenz 1999; Feldman 2000). innovation (Storper and Venables 2004); According to a survey of biotechnology therefore, Storper and Venables (2004) argue industries in 2003, 55 percent of their labor that face-to-face contact is central to the force is comprised of life scientists, who coordination of the economy, even in modern usually hold a Ph.D. degree (United States society that is experiencing tremendous Department of Commerce 2003). Apparently, reduction in transportation costs and more areas that are geographically close to life efficient communication. science research institutions enjoy an advantage with better access to trained Spatial clustering within the biotechnology graduates or post-doctorate students. In industry, it is argued, results from the reality, it has been reported that a large concentration of specific location factors, portion of biotechnology firms recruited their such as life science knowledge, venture employees from the local labor market. In capital availability, large pharmaceutical Boston, for instance, it was reported that 50 firms, entrepreneurship and urban diversity percent of biotechnology scientists in the (Kenney 1986; Florida 2003; Audretsch and industry came from local universities Stephan 1996; Feldman 2000). In the (Audretsch and Stephan 1996). University following sections, we will review the scientists often prefer to work locally after importance of these location forces. school or training because of family situations and local connections (Feldman 2000). Public Research Base One important characteristic of life science One highlighted characteristic of the research universities is that, as non-profit biotechnology industry is its reliance upon institutions, they are highly dependent on public life science research base (Kenney public funding, the largest amount being 1986; Audretsch and Stephan 1996; from the National Institute of Health (NIH) McMillan et al. 2000; Dalpe 2003; Oliver (Cooke 2003). Without substantive funding 2004). Before the first biotechnology firm, from NIH, it may not be possible for Genetech, was established in San Francisco universities and institutions to make in 1977, practitioners of genetic engineering breakthroughs in the research of genetics were almost without exception located and cellular processes (Cortright and Mayer around universities and research institutes 2002). However, NIH funding is highly (Kenney 1986). Since then many new competitive. Only those proposals that stand biotechnology firms have formed and out in the evaluation of significance, maintained strong ties with academic approach, innovation, investigator, and researchers. For example, the founding environment will be funded. As a result, the Chen and Marchioni 24
  • The Industrial Geographer amount of NIH funding has also been used to funding requests (Jeng and Wells 2000). measure the strength of life science research Besides firm-specific characteristics (Boehm capability (Cortright and Mayer, 2002). and Schuehsler 2003), geographic proximity between firms and venture capitalists decreases information asymmetry and, thus, Venture Capital enhances the possibility of receiving funding (Gifford 1998). Second, when funding In the introduction section, we discussed the decisions are made, venture capitalists are importance of venture capital for usually engaged in their portfolio companies’ biotechnology firms. The focus here is on the management operations. Geographic geography of venture capital. proximity, or face-to-face contact, then Geographically, venture capital investments reduces transportation and opportunity costs have been highly concentrated in space for and facilitates transfer of technical skills and decades (Green 2004; Gompers and Lerner managerial experience between investors 2006). Leinbach and Amrhein (1987) found and investees (Mason and Harrison 2003). that the Pacific Southwest, New England Studies have shown that venture capital and Gulf Coast/Southwest regions attract firms favor investees close to their offices the largest volumes of venture capital. In the (Powell et al. 2002; Mason and Harrison late 1990s, more than one-third of venture 2003). The following is a quotation from an capital was invested in the state of interview conducted by Zook (2002) that California (Gompers and Lerner 2001). In illustrates the importance of geographic the biotechnology industry particularly, proximity between investors and investees heavy investment of venture capital has from an entrepreneur’s perspective: been infused into California and Massachusetts, including San Francisco, San You can’t be anywhere. To start Diego and Boston (Cortright and Mayer companies you need to raise capital 2002; Green 2004; Gompers and Lerner and investors would prefer to make 2006). investments locally because they have to spend time with the Demand for venture capital from high companies. I know some venture technology firms has greatly shaped this firms that say, ’if I can’t drive there spatial pattern (Florida and Smith 1993; within an hour, I don’t make the Mason and Harrison 2003; Gompers and investment.’ Especially in an early Lerner 2006). As discussed earlier, high stage company, you want to have technology firms prefer to locate close to each regular contact with the company, so other to reap the benefits of clustering, access to capital drives a lot of including scale economy, specialized labor decisions. pooling, knowledge and technology spillover, and decreased transaction costs (Marshall This spatial concentration pattern may 1890; Hotelling 1929; Czamanski and Ablas change over time. Myrdal (1957) proposed 1979; O’hUallachain 1984; Porter 1990; that capital investment is cumulative and Feser and Bergman 2000; Feser and Lugar that spatial unevenness deepens. Thompson 2003). Geographic proximity between (1989), however, provides a contrasting venture capital investors to biotechnology perspective. He argues that there might be a firms then are beneficial to both parties for spatial diffusion or the trickle down effect in the following reasons. First, the process of venture capital investment over time to venture capital investment is highly peripheral areas to seek new investment selective and it is not uncommon for a single opportunities. For instance, Green (2004) venture capital firm to receive thousands of Chen and Marchioni 25
  • The Industrial Geographer found a short period of venture capital protection of scientific inventions through diffusion after the dotcom bubble burst. patents not only indicates interest in product commercialization but also signals involvement of scientists in commercial Entrepreneurship activities (Feldman 2000; McMillan et al. 2000; Dalpe 2003; Oliver 2004). For small Broadly speaking, entrepreneurial spirit is firms, patenting is especially important, as especially important for innovation and a they develop their intellectual property and knowledge-based economy. Schumpeter often sell the technology to larger firms (1942) states that innovation and (Cortright and Mayer 2002). There have technological change of an economy comes been some concerns over the use of patent from entrepreneurs. Following Schumpeter, data, for instance, in the way they are it is argued that entrepreneurial spirit is structured and collected (Desrochers 1998). vital to the effectiveness of markets and the It was also found that patents are often increased productivity of the economy granted to venture backed companies early (Kirzner 1997; Jenner 1998). The finding in their development and there might be that entrepreneurial spirit leads to greater multiple filings (Kortum and Lerner 2000; economic growth has been well-established Neis 2007). Therefore, patents may not for technology innovations at not only the provide an accurate picture regarding national level, but at local levels as well innovative activities, but represent for (Kreft and Sobel 2005). innovation potentials (Desrochers 1998). In the biotechnology industry, Despite these concerns, the ability to patent securing funds from venture capitalists is is still perceived as a reflection of the most not an easy task. Findings or brilliant ideas direct and visible outcome of the in university labs will not attract money and entrepreneurial process in innovation turn into products without a clear and (Feldman 2000; McMillan et al. 2000; Dalpe thorough business plan. For a biotechnology 2003; Oliver 2004; Kreft and Sobel 2005). firm, especially during its early stage of development, entrepreneurial skill and knowledge are needed to convince investors Anchoring Effects from Large that a given proposal will be profitable Pharmaceutical Firms (Witriol 2004). When the company gets started, entrepreneurs are mostly A large proportion of biotechnology firms are responsible for recruitment and management engaged in pharmaceutical research and (Witriol 2004). Without talented development (United States Department of entrepreneurs, life science findings may not Commerce 2003). Many of them can move be able to move out of university labs and quickly during drug discovery, but when it survive in the competitive business comes to development, preclinical work, and environment. human trials, they may not have sufficient In biotechnology, entrepreneurial financial or human resources to complete spirit exists not only in venture capitalists these tasks (Boehm and Schuehsler 2003). and business managers, but also among Alternatively, if they align themselves with academicians. University scientists can reap large pharmaceutical firms that are monetary benefits from intellectual property regarded as anchors in a regional economy by starting businesses (Feldman 2000). One (Feldman 2002), they can get not only measurement of entrepreneurship in both monetary supports, but also gain access to academics and industry is patents, which are experienced executives in pharmaceuticals widely used to protect intellectual properties regarding product commercialization (Besen and Raskind 1991; Oliver 2004). The applications and procedures (Gwynne and Chen and Marchioni 26
  • The Industrial Geographer Page 2004); therefore, there is a recognized infrastructure, value chain linked industries, one-way technology and knowledge spillover accounting and legal services, urban from large pharmaceutical anchors to small amenities, large pool of workers, and a biotechnology firms (Westlund 2000; population with high purchasing power Audretsch 2001). (Hoover 1948; Vernon 1966). This technology spillover exists even if there is no direct alliance between small In a modern society, the importance of biotechnology firms and large backward and forward linkages and pharmaceutical companies (Westlund 2000; transportation costs in urban areas is fading Audretsch 2001; Feldman 2002). Anchor (Gordon and McCann 2000; Storper and firms usually provide a large pool of skilled Venables 2004). However, the diverse social, labor and possess an established customer economic and intellectual environment in and supplier base (Feldman 2002). These large urban settlements still makes them may bring beneficial externality effects to centers of innovation and creativity (Florida small biotechnology firms if they are located 2003). In the creativity class argument, for close to anchor firms. Furthermore, when example, Florida (2003) states that the there is a regional anchor with a emerging geography of the creative class is sophisticated expertise in new drugs, start- dramatically affecting the competitive up firms may be more likely to specialize in advantage of regions across the United that direction (Feldman 2002). Over time, a States. The core creative class includes cluster may develop around a specialized scientists, engineers, architects, educators, expertise. Anchor firms may be beneficial to writers, artists, and entertainers. The the regional innovative system as well, since creative class also includes a broader group large pharmaceutical firms are found to be of creative professionals in business, finance, more capable of establishing collaborations law, health care and related fields. The more with research universities, fund their diverse the urban center is, the greater the research projects and exploit their research advantages it enjoys in economic results (Dalpe 2003). Consequently, development. innovation in science is encouraged and supported, and the knowledge and Storper and Venables (2004) offer further technology transfer from science to industry explanations on how highly populated areas is facilitated. In empirical studies, the possess an economic advantage in a modern Milken Institute (2004) suggests that San society. They argue that, urban areas, with Diego, for example, needs more higher population densities, enjoy an biotechnology anchor firms to stabilize advantage from geographical proximity, or biotechnology industry development in the face-to-face contact among the different region. agents in the economic production. Face-to- face contact facilitates socializing, learning, and communication between workers; it also Urban Attraction helps build trust in economic relationships and provides psychological motivation Spatially the biotechnology industry is also (Storper and Venables 2004). found to be located near large population centers (Schweitzer et al. 2006). Numerous studies indicate that large urban centers are, HYPOTHESIS in general, favorable places for industry development (Hoover 1948; Isard 1956; Isard Informed by literature, we expect that et al. 1959; Swann and Prevezer 1996). biotechnology venture businesses that are Urban advantages include easier access to financed by venture capital investment have Chen and Marchioni 27
  • The Industrial Geographer similar demands for specific locations as the Patent and Trademark Office. Although our biotechnology industry as a whole. search does not exhaust all patents related Therefore, we developed the following to biotechnology, it provides a good hypotheses regarding the spatial clustering representation of the patents that are of biotechnology venture businesses. We directly applied in biotechnology industry. hypothesize that there are more Large pharmaceutical firms or anchor biotechnology venture businesses in establishments refer to those companies with metropolitan areas where there is 1) a 500 or more employees. This number comes concentration of life-science research 2) from the United States Small Business proximity to venture capital providers 3) Administration, where the standard size for entrepreneurial spirit 4) closeness to large small business in manufacturing is less than pharmaceutical companies and 5) an urban 500. Data came from the 2005 County agglomeration economy. Business Patterns. The last variable is metropolitan population. Data for metropolitan areas came from the 2000 DATA AND VARIABLES census. All data were integrated into the geographic information system and The number of biotechnology venture aggregated into 370 metropolitan areas businesses for each of 370 metropolitan according to the 2003 Census definition. For areas in the U.S. is the dependent variable convenience, definitions of all variables are in this study. Ten independent variables are provided in Table 2. used as proxies for non-commercial life science research base, venture capital providers, entrepreneurial spirit, anchor METHODS impact from large pharmaceutical companies, and urbanization economies. This research employs several methods to investigate the importance of various Life science research base is measured location forces on the geographic clustering through five variables: the number of of venture capital financed biotechnology research universities with active life science firms. Examination of the extensive research, the number of life science research literature on the subject of biotechnology institutes, the number of hospitals that are firms provides hypotheses and supports for active in life science research, the amount of conclusions. New empirical analyses add to NIH funding grants between 2003 and 2005, this knowledge base. and the number of life scientists in 2006. Data came from NIH website and the Statistical descriptions and tests were Bureau of Labor Statistics. Data on the performed on the dependent and number of venture capital providers came independent variables. Correlation analyses from the MoneyTree survey database in among all variables were applied and a 2006. The majority of venture capital principal component analysis (PCA) was providers are professional venture capital conducted to reduce data redundancy. companies and the rest are investment Location factors generated from PCA results banks, large pharmaceutical companies, then became the new independent variables government agencies, universities, and even for further regression analysis. A Poisson individuals. Entrepreneurial spirit is regression was then performed to estimate measured by patents and patent holders. the counts of biotechnology venture These data were collected through a keyword companies in each metropolitan area. The search of “biotechnology” in the abstract same technique is used by Schweitzer et al. section between 1995 and 2005 from the U.S. (2006). We assume that the probability (p) of Chen and Marchioni 28
  • The Industrial Geographer having a certain number of biotechnology estimate the parameters of the regression companies (k) in each metropolitan area is model for log(μ). e−μ ( X ) μ ( X )k p(Y = k | X1 , X 2 ,..X n ) = , k! RESULTS k = 0, 1, 2, 3, … For the expectation μ, log(μ) = b0 + b1*X1 Descriptive Statistics +b2*X 2 +…+ b n *Xn and μ= exp(b0 + b1*X1 +b2*X 2 +…+ b n *Xn ). Table 3 provides some descriptive statistics of dependent and independent variables in In the above equation, X1, X2, … and Xn refer the study. All but the metropolitan to the location factors from PCA results. K population variable are highly skewed. This refers to the number of biotechnology suggests that both biotechnology venture ventures each metropolitan area hosts and e activities and biotechnology related location is the constant in a natural logarithm. The factors are highly concentrated in very few maximum likelihood method was used to metropolitan areas. Table 2: Definition of Variables (spatial unit: metropolitan)  Variables Definition Dependent Variable Biotechnology Ventures Number of biotechnology firms that received venture capital investments in 2006 Independent Variables Life science research Number of universities active in life science research between 2003 and 2005 universities Life science research Number of institutes active in life science research between 2003 and 2005 institutes Hospitals with life Number of hospitals active in life science research between 2003 and 2005 science research NIH Amount of NIH grants between 2003 and 2005 Life scientists Number of life scientists in 2006 Venture capital providers Number of venture capital providers to biotechnology firms in 2006 Patent Number of patents between 1995 and 2005 Patents inventors Number of patent holders between 1995 and 2005 Pharmaceutical Anchors Number of large pharmaceutical firms with over 500 employees in 2005 Population Metropolitan population in 2000 Chen and Marchioni 29
  • The Industrial Geographer (r=0.81), the venture capital provider Correlation Results variable (r=0.79), and the hospital variable (r=0.78). The life science research institutes The results of correlation analyses among variable is highly correlated with the life dependent and independent variables are scientist variable (r=0.84) and venture presented in Table 4. The dependent capital provider variable (r=0.76). The variable, number of biotechnology ventures, hospital variable is also highly correlated is most highly correlated with the number of with the population variable (r=0.76). There venture capital providers (r=0.84), the is high positive correlation coefficient amount of life science research institutes between the venture capital providers (r=0.80) and the amount of life scientists variable and the pharmaceutical anchor (r=0.79). Its relationship with other variable (r=0.74) as well. Furthermore, there variables is positive and significant. is no surprise that patent variable is highly correlated with the patent inventor variable The independent variables are correlated (r=0.84). High correlation coefficients among within themselves as well. The life science all variables further suggest that there is a research university variable is highly related network of resources in biotechnology to the metropolitan population variable innovative activities. (r=0.90), the pharmaceutical anchor variable Table 3: Descriptive Statistics Mean Median St. dev Kurtosis Skewness Mini Max Biotechnology Ventures 0.78 0 3.93 81.01 8.30 0 48 life science research 1.33 0 3.47 95.48 8.33 0 48 universities life science research institutes 0.60 0 2.68 67.38 7.62 0 31 Hospitals with life science 0.26 0 1.04 90.11 8.14 0 14 research NIH (in millions) 194.97 0 722.82 53.68 6.38 0 8375 Life scientists 256.86 0 988.20 54.03 6.75 0 10700 Venture capital providers 0.68 0 3.14 72.64 7.88 0 36 Patent 0.10 0 0.61 193.24 12.52 0 10 Patents inventors 0.26 0 1.34 76.74 8.02 0 16 Pharmaceutical Anchors 0.20 0 0.83 108.50 8.89 0 12 Population 5797 4162 6529 8.84 2.64 502 35874 (in thousands) Chen and Marchioni 30
  • The Industrial Geographer Table 4: Correlation Results 1 2 3 4 5 6 7 8 9 10 11 Biotechnology Ventures 1 1 0.55 0.81 0.40 0.66 0.79 0.84 0.54 0.69 0.51 0.46 Life science research 2 1 0.68 0.78 0.56 0.44 0.79 0.35 0.32 0.81 0.90 universities Life science research 3 1 0.51 0.69 0.84 0.76 0.44 0.48 0.55 0.65 institutes Hospitals with life science 4 1 0.38 0.31 0.62 0.25 0.22 0.71 0.76 research NIH 5 1 0.68 0.56 0.31 0.38 0.41 0.50 Life scientists 6 1 0.60 0.38 0.49 0.32 0.48 Venture capital providers 7 1 0.61 0.66 0.74 0.73 Patent 8 1 0.84 0.37 0.37 Patents inventors 9 1 0.39 0.33 Pharmaceutical Anchors 10 1 0.76 Population 11 1 Note: all significant at 0.01 level  PCA Results and pharmaceutical anchors, also have large contributions. Therefore, the first factor Due to the high correlation among represents an urban factor with strong life independent variables, a principal science education, hospital research and component analysis (PCA) was conducted to pharmaceutical anchoring effect. In the overcome the multicollinearity problem and second factor, the highest loading comes to reduce data redundancy. PCA produced from the life scientists variable, science three rotated factors, which represented 92 research institutes variable and NIH percent of all variance in the original ten variable. This factor represents a strong life independent variables. Factor loading of science research base. In the third factor, each independent variable on the new factor highest loading comes from the patent are presented in Table 5. In the first factor, inventor variable and patent variable. It also which captures 70 percent of all the variance has a contribution from the venture capital among the independent variables, the provider variable. This factor could be highest loading comes from the life science interpreted as an entrepreneurship and research universities variable. Three other venture capital factor. variables, hospitals with life science research variable, metropolitan population variable Chen and Marchioni 31
  • The Industrial Geographer Table 5: Principal Component Analysis Results  Factor1 Factor2 Factor3 Life science research universities 0.742 0.079 -0.055 Hospitals with life science research 0.704 -0.030 -0.068 Population 0.693 0.083 -0.028 Pharmaceutical Anchors 0.692 -0.078 0.099 Life scientists -0.114 0.736 0.027 life science research institutes 0.164 0.596 0.016 NIH 0.105 0.519 -0.026 Patents inventors -0.064 0.060 0.767 Patents 0.027 -0.048 0.752 Venture capital providers 0.424 0.156 0.313 CONCLUSIONS AND Poisson Regression Results DISCUSSIONS As the dependent variable in this study is This study investigated the spatial highly skewed and most metropolitan areas clustering of biotechnology firms that are possess little or no biotechnology venture financed by venture capital. All proposed activities (Table 3), the use of Ordinary hypotheses are supported through statistical Least Square regression on such a analysis, indicating that biotechnology distribution will produce biased estimates venture activities are clustered in urban and invalid inferences (Maddala 1983). centers, where there is a strong life science Alternatively, a Poisson regression was research base, a large pool of life scientists, performed (Schweitzer et al. 2006). Results large pharmaceutical firms, many venture from Poisson regression are presented in capital providers and a strong Table 6. With no surprise, all three factors entrepreneurial spirit. This conclusion on have significant and positive impacts upon the biotechnology venture firms is consistent the dependent variable. This result leads to with studies on the biotechnology industry the conclusion that biotechnology venture as a whole (Schweitzer et al. 2006). activities are located where there are large urban centers with strong life science There is no surprise that biotechnology education, hospital research and venture activities are located in urban pharmaceutical anchoring effect, where centers. This finding is consistent with there is a strong life science research base, Schweitzer et al. (2006) and gives further and where there is strong entrepreneurship support for the creative class argument and a large number of venture capital (Florida 2003). With a large concentration of providers. Chen and Marchioni 32
  • The Industrial Geographer talent, technology, and tolerance, a favorable capitalists provide insights, managerial environment exists for new ideas and skills and entrepreneurial spirit to newly technological breakthroughs (Florida 2003). established biotechnology companies. This An urban environment also provides more proximity encourages people with ideas to geographic proximity between various communicate and collaborate with people economic agents (Storper and Venables with fiscal resources and business expertise. 2004), facilitating the communication of tacit It is important to note that, in reality, most knowledge in biotechnology industry (Dalpe biotechnology venture firms receive 2003). investment from multiple sources. In such cases, there is almost always one local Biotechnology venture activities are also venture capital firm involved in the new found to be located close to a strong life biotechnology business. One biotechnology science research base with a large pool of life firm, Microbia, Inc., for instance, located in scientists. While previous studies have Cambridge, received 75 million venture focused on the attraction of research capital investments from six investors in the universities (Schweitzer et al. 2006), we also first quarter of 2006. Among five identified included life science research institutes and investors, one is located in Cambridge, one in hospitals. Besides the strong statistical Dallas, one in Waltham, MA, one in Boca evidence of co-location between life science Raton, FL, and the other one in New York. research universities and biotechnology The finding is also consistent with the co- firms at metropolitan level, detailed investment argument in the studies on examination of firm locations and firm venture capital, where it is found that if a founders provide additional insights. For firm secures investment from a lead instance, within 5 miles, there are 19 investor, other investors would follow and biotechnology venture companies around infuse more money into the investee Stanford University, 32 companies around company, resulting in an accumulated MIT and Harvard, and 33 companies around money influx (Timmons and Bygrave 1986; California State University at San Diego. Powell et al. 2002). This geographic proximity enables university faculties to be directly involved in The hypothesis that entrepreneurial spirit is biotechnology businesses. important for biotechnology venture activities is also supported. Using patents Our hypothesis that proximity to venture and patent holders as proxies for capital providers increases the number of entrepreneurial spirit, this study finds that biotechnology venture businesses is when there are more patents filed in supported by statistical results as well. biotechnology and/or more patents holders in Venture capital is not only important in biotechnology, there are more biotechnology terms of financial support, but also venture firms. Entrepreneurial spirit is one important in the sense that venture key link to attract venture capital Table 6: Poisson Regression Results Dependent variables Estimates Chi-square Pr > ChiSq Factor1 - urban factor 0.139 59.72 <0.0001 Factor2 - life science research factor 0.401 479.65 <0.0001 Factor3 - entrepreneurship factor 0.243 215.46 <0.0001 Chen and Marchioni 33
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