Geography Reference
In-Depth Information
instance). Another mechanism, the creation of embodied knowledge, via education and
learning by doing, also takes multiple years, and possibly at multiple locations.
The degree to which technological change promotes new i rm formation (in high-tech
industries) depends on the institutional environment. The institutional setting af ects
the nature of technical labour markets, venture capital markets, and the structure of
buyer-supplier ties that are highly relevant for the incentive constraints and appropri-
ability constraints acting on incumbent and start-up i rms respectively (Casper, 2007;
Chesbrough, 1999). For example institutions enabling a l uid labour market, a well
developed venture capital market, and loose buyer-supplier ties allow new i rms to
rapidly assemble and deploy experienced engineering talent, and move quickly to com-
mercialize advanced technology. Cross-country research has shown that this latter situa-
tion can be found in the US, in contrast to Japan (Chesbrough, 1999), and cross-regional
research found for example that Silicon Valley was much more conducive to new
technology-based i rms than Route 128 (Massachusetts) for similar reasons (Kenney
and Von Burg, 1999; Saxenian, 1994). The institutional environment also af ects the
opportunity costs involved in leaving a (relatively secure) job at a university or research
centre for self-employment (see Feldman, 2001). The institutional environment thus acts
as a mediating factor between investments in the knowledge base of a society and the
knowledge spillovers exploited by entrepreneurs.
Financial capital
Liquidity constraints are an important factor disabling entrepreneurs to realize their
business opportunities (Evans and Jovanovic, 1989; Holtz-Eakin et al., 1994). This is
especially relevant for large new i rms that require relatively large-scale investments for
their initial activities. Small-scale i rms can often be i nanced with bank loans or the
support of the entrepreneur's family and friends. The entrepreneur's own housing is
shown to be the single most important source of collateral for bank loans (Black et al.,
1996). Indirectly, l uctuations in the local housing market could thus af ect the avail-
ability of i nancial capital for new i rms. New i rms that require large-scale investments
are more likely to enter the venture capital market. Providers of venture capital provide
not only i nancial capital, but also knowledge of developing a business (in a particular
industry). The provision of i nancial capital in general is more likely to be bounded to
national scales, while the provision of venture capital is often constrained to regions
(Gibbs, 1991; Zook, 2002). The supply of venture capital is not distributed evenly across
regions. For example the venture capital market in the USA is highly concentrated
(both in supply and investments) in the east and west coasts of the country (Powell et
al., 2002; Sorenson and Stuart, 2001), and in the UK it is highly concentrated in the
south-east, in and around London (Mason and Harrison, 1999, 2002; Martin et al.,
2005). This uneven regional distribution has also been found in other countries (Martin
et al., 2002). Venture capital markets are a relatively recent phenomenon and often co-
evolve with other investment intensive industries in particular regions (see Braunerhjelm
and Feldman, 2006). The uneven regional distribution of venture capital means that in
regions far away from these centres entrepreneurs might be discouraged from starting
capital- intensive i rms. The assumption is that spatial proximity may be necessary for the
formation of a venture capital relationship and that it makes monitoring of investments
easier. Face-to-face contacts between the entrepreneur and the venture capital provider
