Strategic Management Society Presentation Oct. 2009, Washington DC

1. 1 What Should Drive an Innovation Strategy? Chuck Eesley (Stanford), Edward B. Roberts (MIT), Delin Yang (Tsinghua Univ.) Strategic Management Society October, 2009(with support of a Kauffman Foundation Dissertation Fellowship, the Tsinghua Univ. Alumni Association, and the MIT Entrepreneurship Center)

3. External environment

5. Bush 1945, Aghion, Dewatripont, Stein 2008

6. Grant-based vs. Contract-Based

7. Short run vs. Long run effects (Mansfield, 1977)

9. Funding searchR&D investment decisions Survival/Growth or Productivity Strategy

11. Two Solutions to More Innovation in Society Pr(It=1) = (HAtAt )/ [1/(ρθAt)] (4) (1) existing firms doing more innovation (2) new firms are created, a higher percentage of these innovate 5

12. Public R&D Influence on Firm Search H1: Grant based public R&D expenditures will (via indirect effects) result in greater knowledge spillovers and greater use of an innovation strategy (with a lag) H2: Grant-based public R&D expenditures will result (via direct effects in higher prices for research inputs) in lower use of an innovation strategy (contemporaneous) H3: Grant or contract-based public R&D expenditures will result in more scientists/engineers becoming entrepreneurs with a lag. H4: Venture capital funding will result in greater use of an innovation strategy. (Counter-hypothesis to hypothesis 1)

13. Ideal Experiment Exogenous shift in HAit , Ait or C(Vit, i) Proportion of firms adopting an innovation strategy The effectiveness of government incubators, seed funding, …and other such policies for funding R&D deserves further study, ideally in an experimental or quasi-experimental setting. In particular, studying the cross-country variation in the performance of such programs would be desirable, because the outcomes may depend to a great extent on institutional factors that are difficult to control for using data from within a single country. - Bronwyn Hall 2005 t Proportion of firms adopting an innovation strategy No shift t

14. Merged MIT and Tsinghua Dataset Similar educational background, academic talent (engineering) Similar industries (electronics & software) 2,067 + 330 firm observations Innovation measures Patents (foreign and domestic) Product/service available in the market 3 years ago (China) Importance of innovation, speed to market, low cost, other factors Detailed fundraising data US and China data on public R&D expenditures, publications and venture capital Sources: OECD Science and Technology Indicators, 2008; Ministry of Science and Technology, China; China Statistical Yearbooks; SDC Venture Economics Database; Asian Venture Capital Journal; Dow Jones VentureOne; Thomson ISI Inflation and Purchasing Power Parity conversion process

15. Merged MIT and Tsinghua Dataset

16. Industry Breakdown

17. Capital and Lack of Ideas Only 27% had never considered entrepreneurship.

18. Patents a Good Measure of Innovation Strategy?

19. Methods Differences-in-differencesestimation Probit Model Prob (innovation= 1) = Prob(Yt=1) = α + β1(funding)t + β2(science and technology funding)t + β3(human capital) + β4(business environment)t + β5(funding)t*(China) + β6(China location) + β7(science and technology)t*(China) + yeart + sector + η + φ +εt Xi = Set of controls academic dept., region, education, work history, job type, Communist party, overseas educ. or work, family economic status. Include (τ + η + φ) grad. year, sector and Bachelor’s academic dept. fixed effects Proportional Hazards Test 13

20. National Level Standard errors are robust. ***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels (two-tailed). PPP GDP is used for China. Log indicates that a log transformation was done to address the skewed distribution. In parentheses, (t-1) and (t-6) indicate that the variables were lagged one year and six years, respectively

21. Individual Level Controls: Non-US citizen, Communist party, Gender, graduation year, founding year, Bach. Dept. Standard errors are robust. ***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels (two-tailed).

22. Regional Level (2004-2007) Expenditures are in billions of yuan, ratios and growth rates are percentages, all lagged 1 year. Controls for region and founding year are included. Standard errors are robust. ***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels (two-tailed).

23. Progress Update National level Individual level Regional level Further robustness checks Alternative definitions of innovation Alternative measures of R&D/funding environment Other shifts – law/IP

26. Where to spend more time for early-stage, high tech founders

27. Active view on identification of valuable resources, difficult to imitate18

28. Thank you! Chuck Eesley Stanford University Management Science & Engineering (MS&E) cee@stanford.edu

29. Index of Backup Slides Response Bias Innovation Measures Source of Ideas Founding Rates MIT and Tsinghua Firm Characteristics Theory 20

30. Characteristics of Non-Respondents 21

31. Patents a Good Measure of Innovation Strategy?

32. Founding Rates

33. Where did the primary idea for the start-up come from?

34. MIT and Tsinghua alumni firms Purchasing Power Parity converted to constant 2005 U.S. dollars