The Effect of Market Entry on Innovation: Evidence from UK University Incubators
The Effect of Market Entry on Innovation:
Evidence from UK University Incubators
Christian Helmers
Universidad Carlos III Madrid & SERC LSE
June 2011
The Effect of Market Entry on Innovation: Evidence from UK University Incubators
Introduction
“We never anticipated at Fairchild that a lot of other participants
were going to enter the business later on. So we tended to patent
relatively few things [...]”
Gordon Moore (2004)
The Effect of Market Entry on Innovation: Evidence from UK University Incubators
Introduction
Overview
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What is the effect of market entry of new firms on incumbent
firms’ innovative activity (patenting)?
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Contribution: Allow effect of entry to vary according to
geographical distance
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Problem: Endogeneity of timing of entry and location choice
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Solution: Entry induced by establishment of university
incubators
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Findings: Positive effect of entry on propensity to patent of
incumbents attenuated by geographical distance
Policy implications:
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Does entry affect innovation measured as patenting?
What role does the location of firms play?
Are there externalities associated with the establishment of
university business incubators?
The Effect of Market Entry on Innovation: Evidence from UK University Incubators
Outline
Empirical Approach - Outline
B What is the link between innovation and market structure - focus
on effect of entry on incumbent firms?
B Does location choice of entrant matter?
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Intuition: Effect of entry varies by distance between entrant and
incumbent due to localised unobserved spillovers
Estimate strategic effect of entry on incumbent firm behaviour:
static discrete choice model allowing for strategic effects of
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Other incumbents’ patenting decision
Entrants’ patenting decision
The Effect of Market Entry on Innovation: Evidence from UK University Incubators
Identification
Identification
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Endogeneity of timing and location of entry: observed entry
correlated with both observed and unobserved firm
characteristics
Solution: Entry of firms induced by establishment of university
incubators
Assumption 1 - Timing:
Decision & timing of establishment of incubator is result of
administrational and political factors outside of tenants’
influence. This produces (some) exogenous variation in timing of
firms’ entry.
Assumption 2 - Location:
Tenant firms’ geographical location choice conditional on
entering the market through an incubator is exogenous with
respect to incumbent firms.
The Effect of Market Entry on Innovation: Evidence from UK University Incubators
Empirical Approach
Empirical Approach
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Firm’s decision to patent is static discrete choice problem with
strategic interactions and incomplete information
i = 1, ..., N firms in the economy potentially simultaneously
filing for a patent
Location of incumbents is taken as given
Observed choice pimt ∈ {0, 1}, where m denotes 3-digit SIC
Firm’s expected payoff π e from patenting:
πie (pi , pj , xi , i ; θ) = πi (pi , pj , xi ; θ) − i (pi )
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i 6= j, i.e., j denotes other firms than i
x ∈ X denotes firm and market-specific characteristics
Stochastic shock i (pi ) depending on action pi
Own as well as other firms’ actions, pi and pj respectively
(1)
The Effect of Market Entry on Innovation: Evidence from UK University Incubators
Empirical Approach
Empirical Approach continued...
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Firm i forms beliefs about j’s action - can be represented as
choice probabilities through
Z
Sj (pj = 1|xj ) = 1{h(xj , j ) = 1}f (j )dj
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Linear parametrization of πi (pi , pj , xi ; θ)
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Rewrite Equation (1) as
πie (pi , pj , x, i ; θ) = xi0 β + S−i (x)0 χ − i (pi )
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where S−i (x) = {Sj : i 6= j}
The Effect of Market Entry on Innovation: Evidence from UK University Incubators
Empirical Approach
Empirical Approach continued...
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Given a firm’s beliefs, firm i’s best response is to patent iff
πie > 0
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Firm i’s best response probability function is
Pr(i < xi0 β + S−i (x)0 χ|x) = Φ(xi0 β + S−i (x)0 χ)
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In Bayesian Nash Equilibrium, vector of choice probabilities
S(x) ≡ {Si (x) : 1, 2, ..., N}solves following fixed point problem
Si = Φ(xi0 β + S−i (x)0 χ)
The Effect of Market Entry on Innovation: Evidence from UK University Incubators
Data
Firm-level financial information and IP
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Main characteristics of data base used:
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Covers population of UK firms over the period 2000-2005
Firm-specific characteristics (FAME) and information on IP
(patents and trade-marks)
Result of matching FAME database and firm-level IP datasets
(Helmers et al., 2011)
Geographical distances through Code-Point data (Edina Digimap)
Use UK patent applications as measure of innovative activity of
firms
The Effect of Market Entry on Innovation: Evidence from UK University Incubators
Data
Incubators
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Information on existence of incubators at 139 British universities
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80 out of 139 universities (58 percent) offer business incubator
facilities to start-ups (total of 125 incubators)
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Firm-level financials & patent data match available only for
period 2000-2005 - kept only incubators in the sample that were
established between 2001 and 2004.
The Effect of Market Entry on Innovation: Evidence from UK University Incubators
Data
Identification of entrants (tenants)
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Identification of tenants - 3 sources of information:
1. Use lists of tenant names provided on incubators’ websites to
match with FAME (based on name and postcode)
2. Search FAME for firms located at incubators’ addresses
3. Contacted incubators to request list and registered number of
tenant firms
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Only tenants incorporated in same year as incubator (±3 months)
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Identified 128 tenants for 30 incubators
The Effect of Market Entry on Innovation: Evidence from UK University Incubators
Data
Identification of incumbents
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Set of incumbent firms:
1. At least one patent between 2000 and 2005
2. Belong to a 3-digit SIC industry in which entry occurred through
the establishment of an incubator
3. Report data both before and after the establishment of an
incubator, i.e., entry of new firms.
The Effect of Market Entry on Innovation: Evidence from UK University Incubators
Data
Location of universities and incubators
University
Incubator
The Effect of Market Entry on Innovation: Evidence from UK University Incubators
Data
University
Incubator
Aston University
University of Wales, Bangor
Bournemouth University
University of Bristol
University of Kent
University of Glasgow
London Metropolitan University§
University of Derby
Lancaster University
University of Hertfordshire
University of Bradford
Royal Veterinary College
Loughborough University
Imperial College London
University of Manchester
University of Liverpool
Durham University
University of Manchester
University of East Anglia
Royal Holloway, University of London
University of Wolverhampton
University of Southampton
University of Lincoln
University of Dundee
University of Surrey
University of Wales, Swansea
University of Southampton
University of Sunderland
University of York
University of York
Aston Science Park - Faraday Wharf
Bangor Bioincubators
Bournemouth University Innovation Centre
Bristol SETsquared
Canterbury Enterprise Hub
Centre for Integrated Diagnostic Systems
Digital Media Innovation Centre Accelerator
ID Centre Derby
InfoLab21
Innovation Centre
IPI Bioscience Business Incubator
London BioScience Innovation Centre (LBIC)
Loughborough Innovation Centre
Low Carbon Technology Incubator
MBS Incubator
MerseyBIO Incubator
NETPark
North Campus Incubator
Norwich Bio-Incubator
Royal Holloway Enterprise Centre
SP/ARK
Southampton SETsquared
Sparkhousestudios
Springfield Incubator
Surrey Technology Centre - SETsquared
Technium Digital
University of Southampton Science Park
St Peter’s Gate
Bio Centre
IT Centre
Year of
Establishment
2001
2003
2001
2003
2004
2002
2004
2002
2004
2003
2003
2001
2002
2004
2002
2003
2004
2004
2001
2002
2004
2003
2003
2002
2002
2003
2003
2004
2003
2003
Distance
(km)
0.34
0.37
3.04
0.36
0.38
0
1.73
4.21
0.56
0
0
0.60
0.62
0
0.26
0.85
13.89
2.19
1.29
0
1.29
0
0
0.43
1.71
0
3.35
1.20
0.41
0.41
The Effect of Market Entry on Innovation: Evidence from UK University Incubators
Data
Comparison: Total Assets of Tenants vs. all other Entrants (FAME)
Research and Development (SIC 73)
The Effect of Market Entry on Innovation: Evidence from UK University Incubators
Data
0
20
Percent Patenting
40
60
80
100
Share of patenting firms 2000-2005
2000
2001
2002
% Patenting Firms
2003
2004
2005
% Non-Patenting
The Effect of Market Entry on Innovation: Evidence from UK University Incubators
Estimation
Estimation
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Problem: Endogeneity of the strategic effects
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Two-step Pseudo Maximum Likelihood procedure
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1st step: Obtain consistent estimates of firm’s beliefs from
reduced form nonparametric regression of firm’s state variables
on observed patenting decision
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2nd step: Estimated beliefs used to account for strategic effects
to recover structural parameters.
Location: Distance bands defined based on the percentiles of
distance distribution between entrants & incumbents:
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Distance Band 1 for distance≤2.5th percentile
Distance Band 2 for distance>2.5th percentile and
distance≤30th percentile
Distance Band 3 for distance>30th percentile
The Effect of Market Entry on Innovation: Evidence from UK University Incubators
Results
Results - Marginal effects
Covariates
Entrant Patent
(1)
0.004*
(0.002)
Entrant Patent/Distance
(2)
0.160**
(0.036)
Entrant Patent Distance Band 1
0.0000
(0.000)
0.0000
(0.000)
0.020**
(0.001)
-0.029**
(0.006)
0.007
(0.005)
-0.406**
(0.111)
0.019**
(0.002)
-0.017*
(0.007)
0.007
(0.005)
-0.329*
(0.134)
Included
0.020**
(0.002)
-0.019**
(0.006)
0.007
(0.005)
-0.276*
(0.126)
Included
Included
Included
11,832
Included
Included
11,832
Included
Included
11,832
Entrant Patent Distance Band 3
ln Assets
ln Age
No of Trademarks
Entry Rate (SIC 3-digit)
Incubator Dummies
Incubator/Distance
Year Dummies
Sector Dummies
No. Obs.
(4)
(5)
0.173**
(0.038)
0.009*
(0.004)
0.002**
(0.001)
0.001**
(0.000)
0.0000
(0.000)
Entrant Patent Distance Band 2
Incumbent Patent
Patent dummy
(3)
0.0000
(0.000)
0.015**
(0.004)
0.002**
(0.001)
0.001*
(0.000)
0.0001
(0.000)
0.020**
(0.002)
-0.017*
(0.006)
0.007
(0.005)
-0.359**
(0.134)
0.020**
(0.002)
-0.019**
(0.006)
0.007
(0.005)
-0.298*
(0.136)
Included
Included
Included
11,832
Included
Included
Included
11,832
The Effect of Market Entry on Innovation: Evidence from UK University Incubators
Results
Results - Marginal effects
Covariates
Entrant Patent Distance Band 1
Entrant Patent Distance Band 2
Entrant Patent Distance Band 3
Patent dummy
0.015**
(0.004)
0.002**
(0.001)
0.001*
(0.000)
The Effect of Market Entry on Innovation: Evidence from UK University Incubators
Results
Results - Marginal effects
Covariates
Patent dummy
Entrant Patent Distance Band 1
++
Entrant Patent Distance Band 2
+
Entrant Patent Distance Band 3
0
The Effect of Market Entry on Innovation: Evidence from UK University Incubators
Results
Robustness Checks
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Include any incumbent that has patented between 1996-2005.
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Drop firms with average total assets in tails of distribution
(top/bottom 10%).
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Use different cut-off values to define distance bands.
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University quality
The Effect of Market Entry on Innovation: Evidence from UK University Incubators
Conclusion
Findings
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Positive effect of entry on incumbent patenting propensity (entry
escalation effect)
Effect varies according to distance between entrant and
incumbent: the closer entrant to incumbent, the stronger the
effect
Response by incumbents points to strategic nature of patenting
Possible motivations for strategic response:
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Signalling device to deter other entrants
Anticipate knowledge leakage by publishing information through
a patent publication
Aghion et al.’s escape entry effect
Block entrants from effectively participating in market
Increased patenting propensity by incumbents desirable?
Need to separate effect of competition on innovation from
patenting
The Effect of Market Entry on Innovation: Evidence from UK University Incubators
Current Work
Current Work
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Separate effect of competition on innovation from patenting
Created new database that includes innovation information and
R&D
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Firm census (Business Structure Database – BSD)
Firm-level survey (Annual Respondents Database – ARD2)
UK Community Innovation Survey (CIS) 3, 4, and 5
Business Enterprise Research & Development expenditure
(BERD)
Patent & trade-mark data