The Effect of Defense Agency Funding of University Research on Regional New Venture Creation

• DOI: http://doi.org/10.1002/sej.1199
• Date: 01 June 2015
• Author: Lawrence A. Plummer,Brett Anitra Gilbert
• Published date: 01 June 2015

THE EFFECT OF DEFENSE AGENCY FUNDING OF

UNIVERSITY RESEARCH ON REGIONAL NEW

VENTURE CREATION

LAWRENCE A. PLUMMER1* and BRETT ANITRA GILBERT2

1Ivey Business School, Western University, London, Ontario, Canada

2Management and Global Business, Rutgers Business School, Rutgers Univer-

sity, New Brunswick, New Jersey, U.S.A.

This study explores the effects of defense agency funding of university researchon regional new

venture creation. We argue that ‘closed’ university research may constrain the direct flow of

new knowledge into the entrepreneurial process, but does not restrict more tacit and indirect

flows of university research. We find a negative (positive) effect of the defense share of

university research funding on short-term (long-term) regional start-up rates. This may indi-

cate that while defense-funded research may not seed start-ups directly, the knowledge carried

into the private sector through moreindirect channels may contribute, albeit slowly, to regional

entrepreneurial activity. Copyright © 2015 Strategic Management Society.

INTRODUCTION

Research universities are important catalysts behind

regional—even national—entrepreneurial endeav-

ors. Legislation such as the Bayh-Dole Act in 1980

empowered universities to increase their efforts

toward entrepreneurial activities by moving feder-

ally funded research from the laboratory to the

private sector (Grimaldi et al., 2011). The legislation

altered views on the role of research universities in

regional entrepreneurial activity (Kenney and

Patton, 2011), reinforced the justification for federal

support of university research (Mowery and Shane,

2002), and spurred discourse within the economic,

innovation, and management literatures to consider

the university’s strategic role in regional develop-

ment. Research such as that explaining the contribu-

tions of Stanford University (Kenney, 2000) and the

University of Waterloo (Bramwell and Wolfe, 2008)

as drivers of entrepreneurial activity within their

respective regions, to the broader studies that show

how universities galvanize economic and entrepre-

neurial activity within cities and regions (e.g.,

Guellec and Van Pottelsberghe de la Potterie, 2004;

Youtie and Shapira, 2008), acknowledges this

important role. While the role that research univer-

sities play in stimulating economic growth appears

to be clear, our understanding of the reasons why

some research universities fail to drive regional

entrepreneurial activity is not.

Knowledge creation that leads to entrepreneurial

activity requires an entrepreneur to discover the

opportunity created by university research (Shane

and Venkataraman, 2000) and to build a company

around the newly developed technology. For this

reason, many explanations involving the limits to

university research as a source of entrepreneurial

activity address the barriers that block the flow of

ideas and technologies from universities to new ven-

tures. Explanations include anti-commercialization

university cultures (Feldman, 1994), university

bureaucracy (Rothaermel, Agung, and Jiang, 2007),

ineffective technology transfer efforts (Markman

et al., 2005), and various environmental factors.

Keywords: university research; defense agency funding; new

ventures

*Correspondence to: Lawrence A. Plummer, Ivey Business

School, Western University, 1255 Western Rd., London,

Ontario N6G 0N1 Canada. E-mail: lplummer@ivey.ca

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Strategic Entrepreneurship Journal

Strat. Entrepreneurship J., 9: 136–152 (2015)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/sej.1199

Copyright © 2015 Strategic Management Society

These explanations are important because in many

cases, the systems for managing intellectual property

and technology transfer within some universities

indeed create disincentives for the commercializa-

tion of university inventions (cf. Grimaldi et al.,

2011). However, an understudied explanation for

why some research universities fail to drive regional

entrepreneurial activity is that some university

research is ‘closed,’ i.e., inaccessible to all those

beyond a narrow community of organizations and

interests, and consequently, not immediately avail-

able to entrepreneurs (Chubin, 1985; David, 1998).

Indeed, the organizational and institutional arrange-

ments associated with some federal funds for univer-

sity research divert and accelerate the transfer of

federally funded research to established companies.

Because the entrepreneurial process is bypassed

intentionally, such closed research would naturally

limit the resultant entrepreneurial activity.

The purpose of this study is to examine whether

defense agency funding of university research—

principally funding from the departments of defense

(DOD) and energy (DOE)—is less conducive than

other federal agency funded research for spawning

regional entrepreneurial activity. With defense re-

search, strict industry-university-government coop-

eration and coordination of research efforts is

common practice and justified on national security

grounds given the nation’s need for sophisticated

technologies in general and advanced weaponry in

particular (Geiger, 2012). As a consequence, defense

agencies often direct grants to academic researchers

to support a defense industry contractor’s research.

Accordingly, the new knowledge is transferred to a

waiting contractor at the conclusion of the grant

(Libaers, 2008). Under these terms, defense agency

funded university research is often closed and, thus,

limits the near-term opportunity for an entrepreneur

to apply the knowledge via start-up. Thus, our prin-

ciple argument is that as the proportion of defense

agency funding to a university increases, fewer start-

ups are likely to emerge within the region.1

To test this argument, we empirically examine the

relationship between defense agency funding of uni-

versity research and regional entrepreneurial activ-

ity. We also examine moderators of this relationship.

That is, we seek to understand the potential environ-

mental factors that counter the expected adverse

effects of high defense agency funding. We apply an

institutional framework to develop our arguments,

and we test them using data on federally funded

university research and regional entrepreneurial

activity collected for 58 southwestern U.S. counties

over an eight-year period. We test our hypotheses

using spatial panel econometric methods, which are

robust to spatial and serial dependence in the data

and endogeneity from model specifications.

In the ensuing section, we discuss the university

role in regional economic development, the various

federal agencies and their roles in supporting R&D

activity, the theoretical role of federally funded uni-

versity research to entrepreneurial activity, and its

importance for regional economic development. We

reconceptualize university research in terms of its

short- and long-term implications for regional

start-up rates. We present hypotheses concerning the

defense share of university research funding and

the effects on regional start-up rates. We follow the

hypothesis section with an overview of the research

methods employed to test the hypotheses, the results

of our analysis, and the contributions and implica-

tions of the research for theory, policy, and practice.

Through rigorous spatial panel estimation tech-

niques at the county level, we test the regional effect

of university research and show that the university-

regional new venture creation relationship is contin-

gent on the funders who back university research.

INSTITUTIONAL CHARACTERISTICS

OF UNIVERSITY RESEARCH

University research has been responsible for the

introduction or revival of many important industries

(Arora, Landau, and Rosenberg, 1999; Bresnahan

and Malerba, 1999; Gelijins and Rosenberg, 1999;

Guellec and Van Pottelsberghe de la Potterie, 2004;

Henderson, Orsenigo, and Pisano, 1999; Mowery

and Nelson, 1999). For example, Bresnahan and

Malerba (1999) suggest the computer industry owes

its existence in part to the university scientists who

developed prototypes and conducted early scientific

work for computers in the 1940s in cooperation with

the government, which was both a source of funds

and an early customer. Because of the socioeco-

nomic benefits, university research is commonly

funded by the federal government. In the U.S., the

government allocates funds to university researchers

not as a monolithic entity, but rather as a collection

of departments, agencies, and programs. The mis-

1To be clear, our purpose is not to question the merit of uni-

versity research funded by defense agencies or the procedures

by which the defense agencies award universityresearch grants.

Defense Agency Funding of University R&D and New Venture Creation 137

Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J.,9: 136–152 (2015)

DOI: 10.1002/sej