Science-Based Business: Knowledge Capital or Entrepreneurial Ability? Theory and Evidence from a Survey of Biotechnology Start-Ups

Abstract

The conventional view of science-based businesses focuses on the inseparability of the roles of the inventor generating the underlying idea and the Schumpeterian entrepreneur who implements it in practice. We present an equilibrium model of science-based entrepreneurship where scientific ideas and entrepreneurial ability of a scientist-entrepreneur are complementary resources that can be positively matched for an idea of certified good quality. If the costs of outside evaluation (certification) of an idea are not very high, there is a unique equilibrium where high-ability founders whose ideas are not good become free agents and are hired to develop good ideas for the startups with low-ability founders. The equilibrium is constrained efficient and a reduction in evaluation costs increases entrepreneurial turnover and improves welfare. We use novel data on the biotechnology startups in Japan and find evidence that is consistent with the theory and also with empirical studies of the U.S. biotechnology industry.