The NBER's Working Group on Entrepreneurship met in on December 8, 2017. The Director of Productivity, Innovation, and Entrepreneurship Program Josh Lerner, Harvard University and NBER and Research Associate Antoinette Schoar, Massachusetts Institute of Technology and NBER organized the meeting, sponsored by the Ewing Marion Kauffman Foundation. These researchers' papers were presented and discussed:

Ufuk Akcigit, the University of Chicago and NBER; Salomé Baslandze, Einaudi Institute for Economics and Finance; and Francesca Lotti, Bank of Italy

Connecting to Power: Political Connections, Innovation, and Firm Dynamics

Do political connections affect firm and industry dynamics? Akcigit, Baslandze, and Lotti study the Italian firms and their workers to answer this question. Their analysis uses brand-new data spanning the period from 1993 to 2014 where they merge: (i) firm-level balance sheet data, (ii) universe of social security data on workers, (iii) patent data from the European Patent Office, (iv) registry of local politicians, and (v) detailed data on local elections in Italy. The researchers find that firm-level political connections are widespread, especially among large firms, and that the industries with more politically connected firms feature worse firm dynamics. Market leaders are much more likely to hire a politician and less likely to innovate, compared to their competitors. In addition, connections relate to higher survival and growth in employment and sales but not in productivity. Akcigit, Baslandze, and Lotti build a firm dynamics model where they allow firms to invest in innovation and/or rent-seeking to advance their productivity and to overcome regulatory or bureaucratic burden. The model highlights an interaction between static gains and dynamic losses from rentseeking for aggregate productivity.

Meghana Ayyagari, George Washington University, and Vojislav Maksimovic, the University of Maryland

Human Capital, Competition, and Entrepreneurial Success in Manufacturing

Ayyagari and Maksimovic use micro data on skill levels of establishments to examine the human capital of US manufacturing entrants and incumbent plants over the period 2005-2013. They find a large drop in the cognitive skill levels of the entrant work force over this period. This has serious long-term implications since initial cognitive skills at the establishment level predict future skills and growth rates. While there is a differential decline in entrant skills in industries exposed to Chinese imports, the researchers also find that incumbents upgrade skill levels in exposed industries. High skilled incumbents grow faster than low skilled establishments in exposed industries. The evidence for entrants is weaker, suggesting that they are entering in niches appropriate to their skill sets. The economic effect of import competition on the differential in skills between entrants and incumbents is economically significant explaining between 17%-60% of the skill differential in 2011. Overall, the researchers find that entrepreneurial firms and incumbents are acquiring different skill sets, leaving entrants more exposed to the risk of automation or offshoring.

Michael Ewens, California Institute of Technology, and Richard Townsend, the University of California at San Diego

Are Early Stage Investors Biased Against Women?

Ewens and Townsend examine whether male investors are biased against female entrepreneurs. To do so, the researchers use a proprietary dataset from AngelList covering fundraising startups. They find that female founders are less successful with male investors compared to observably similar male founders. In contrast, the same female founders are more successful than male founders with female investors. The results do not appear to be driven by differences across founder gender in startup quality, sector focus, or risk. Given that investors are predominately male, our results suggest that an increase in female investors is likely necessary to support an increase in female entrepreneurship.

Geraldo Cerqueiro, Universidade Catolica Portuguesa; Maria Fabiana Penas, Universidad Torcuato Di Tella; and Robert Seamans, New York University

Debtor Protection and Firm Dynamics

Cerqueiro, Penas, and Seamans study the effect of debtor protection on firm entry and exit dynamics. They find that more lenient personal bankruptcy increase firm entry only in sectors with low entry barriers. The researchers also find that debtor protection increases small firm exit rates and job destruction, and that this effect is stronger for very young firms. This negative effect takes three years to materialize and is persistent in time. Finally, Cerqueiro, Penas, and Seamans find that there is no difference between exit rates of firms born before and after the change in debtor protection. Their results overall indicate that the main mechanism affecting firm dynamics is a reduction in credit supply to the smallest and youngest firms.

Charlie Eaton, University of California at Merced; Sabrina T. Howell, New York University and NBER; and Constantine N. Yannelis, New York University

When Owner and Customer Incentives Diverge: Private Equity in Higher Education

In competitive industries, private equity's high-powered incentives have been found to increase firm productivity and benefit consumers. However, in sectors such as education, infrastructure, and health care, profit-maximizing incentives may be misaligned with consumer interests because of intensive government subsidy, opaque product quality, and long time frames for evaluation. Eaton, Howell, and Yannelis study the effect of private equity buyouts in the for-profit postsecondary education sector. Employing novel, hand collected data on 88 private equity deals and 639 school-level ownership changes, they find that private equity buyouts lead to expanded enrollment and higher profits, but also to higher per-student debt, lower graduation rates, lower loan repayment rates, and lower wages. These results may reflect selection, but the researchers find operational changes that point to a treatment effect. Supporting a treatment channel, they also show that following the expansion of federal credit limits for students, tuition and student debt at private equity owned schools rise faster than at other for-profit schools. Several analyses indicate that superior capture of federal aid is an important channel through which high-powered incentives translate to higher profits.

Joshua L. Krieger, Harvard Business School; Danielle Li, MIT and NBER; and Dimitris Papanikolaou, Northwestern University and NBER

Developing Novel Drugs

Krieger, Li, and Papanikolaou analyze firms' decisions to invest in incremental and radical innovation, focusing specifically on pharmaceutical research. They develop a new measure of drug novelty that is based on the chemical similarity between new drug candidates and existing drugs. The researchers show that drug candidates that we identify as ex-ante novel are riskier investments, in the sense that they are subsequently less likely to be approved by the FDA. However, conditional on approval, novel candidates are, on average, more valuable -- they are more clinically effective; have higher patent citations; lead to more revenue and to higher stock market value. Using variation in the expansion of Medicare prescription drug coverage, they show that firms respond to a plausibly exogenous cash flow shock by developing more molecularly novel drug compounds. This pattern suggests that, at the margin, novel drugs are perceived to be as more valuable ex-ante investments than me-too drugs.

Colleen M. Cunningham, London Business School; Florian Ederer, Yale University; and Song Ma, Yale University

Killer Acquisitions

Cunningham, Ederer, and Ma demonstrate that incumbent firms acquire innovative targets to discontinue the development of the targets' innovation projects in order to preempt future competition. They call such acquisitions "killer acquisitions." The researchers illustrate the phenomenon using a model with product market competition, innovation, and endogenous acquisition decisions. In their model incumbent firms have incentives to acquire innovative targets and then terminate the targets' project development when those products have strong replacement effects. This killer acquisition motive is stronger when the acquirer-target product overlap is high and when product market competition is low. Empirically, the researchers exploit the setting of drug development, in which they are able to track detailed project-level development histories of more than 55,000 drug projects. Cunningham, Ederer, and Ma show that acquired drug projects are less likely to be continued in the development process, and this result is particularly pronounced when the acquired project overlaps with the acquirer's development pipeline and when the acquirer has strong incentives to protect its market power. The researchers also show that alternative interpretations such as optimal project selection, organizational frictions, and human capital redeployment do not explain their results. Their findings have implications for antitrust policy, startup exit, and the process of creative destruction.

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