Towns and Gowns: The Impact of Public Universities on Local Innovation and Entrepreneurship

Joowon Kim

Universities often serve as incubators and nurturers of innovation and entrepreneurs.  But can those effects be quantified and measured? New research establishes a causal connection between state funding for public universities and its impact on innovation and the local economy.  This paper argues that state funding plays a crucial role in increasing patenting at the university and new business formation nearby.

Analyzing more than a decade of data on state funding for public universities, patents, and start-ups, the paper shows that increases in state funding to public universities lead to more patents and more small businesses in the surrounding area.  

Because innovation and the patenting process takes time, the paper analyzed the number of patents granted to a university three years after any given year’s funding.  For every $17M a public university receives in state funding, it receives one additional patent three years later. However, since the number of patents itself does not demonstrate their quality, the paper approximates patent quality by counting the number of times each patent is cited by a subsequent patent, because better or more innovative patents tend to be cited more often by subsequent inventors.  While increased funding may lead to more patents, it does not necessarily lead to higher quality patents; the same proportion of patents are of high quality regardless of the level of funding.

Increases in funding and patenting also boost the local economy.  State funding for universities leads to the formation of more start-up manufacturing firms within five miles of campus five years after that funding.  The paper examines start-ups five years after the university’s funding on the assumption that once a university receives funding, it will take a few years to invent and receive a patent, and some time for a new firm to incorporate, acquire or license that patent, and locate near the university.  The paper ties university patents to start-ups because it is likely that local entrepreneurs know about and intend to use university inventions even before a patent application is filed. For every $64M in state funding that a public university receives, one new manufacturing firm (20-49 employees) opens within five miles.  The manufacturing sectors seeing the greatest increase are pharmaceutical, medical equipment, and semiconductors. For them, for every additional $1M in state funding, there is a 1.3% increase in small pharmaceutical firms (i.e., 10-19 employees), 0.7% more small semiconductor firms, and 0.9% more small medical equipment firms.  These results may seem minor, but are nonetheless significant because these spillover effects come from only a small portion of the total state funding; the majority of funding of any public university goes into educational support rather than research. Moreover, these start-ups can have long-term impact on the local economy:  small retail and service firms also increase in line with state funding of universities, which suggests further indirect benefits from the funding.  

Notably, the regions to experience the greatest benefit from state funding are the Great Lakes and Plains, and not places like Silicon Valley, New York, or Boston.  Another intriguing finding is that universities tend to receive more funding when an alum represents the school’s legislative district in the state senate. 

These strong connections between state funding, patents, and new businesses show how vital the link between universities and industry is, not just for the state and the university, but for promoting and growing local knowledge and entrepreneurship, and all the economic benefits that accompany those developments as well.  

Working paper