State Biotech Incentives Attract Jobs, But Do Less for Established Firms

States incentives for biotech research have proven to be an effective tool to attract star scientists, innovative firms and high-quality jobs, according to a recent academic article. Enrico Moretti and Daniel J. Wilson examined the performance of state biotech incentives in 11 states and found that these policies demonstrate an impressive ability to draw in firms and researchers from other states and create related jobs in construction and retail. These incentives, however, have little impact on patenting at academic institutions, and do not seem to increase productivity at established firms in the state.

Moretti and Wilson review both biotech-specific R&D incentives and general R&D incentives over the period 1990-2010 to track their impact on employment, wages, firm creation, patents and the presence of star scientists. Star scientists, in the context of the study, includes researchers that rank in the to five percent of biotech patenters nationally over the preceding ten years. In addition to analyzing the effect of new incentives in the state itself, they also examine the impact on surrounding states to find to extent of any competitive advantage over neighboring economies.

Because it can be difficult to identify the boundaries of biotech, Moretti and Wilson’s operating definition of the biotech sector incorporates three NAICs industries: pharmaceutical and medicine manufacturing; pharmaceutical preparation manufacturing; and, research and development in the physical, engineering and life sciences.

State’s employ a range of biotech incentives to encourage research and cluster growth. The 11 states in the study that offer biotech-focused efforts provide income tax credits for companies, sales and use tax refunds, investments tax credits, research grants, and loans. To be included, these policies had adopted at some point during the 1990-2010 period of the study. As part of the study, Moretti and Wilson actually examined whether or not adoption earlier in that period seemed to enhance their effectiveness, and found no evidence of a benefit for early adopters.

In the course of the study, the authors found that the adoption of some form of biotech subsidy raised the number of star scientists by 15 percent relative to the number before the policies went into effect. There was also an impressive impact on sector employment, with jobs in the pharmaceutical preparation manufacturing industry increasing by an average of 31 percent. Employment in pharmaceutical and medicine manufacturing grew an average of 16 percent and scientific R&D jobs grew by 18 percent. A similar effect was found for the number of biotech establishments.

Moretti and Wilson also found a significant indirect, multiplier effect for these incentives in associated industries. While biotech subsidies appear to do little to improve employment and patenting in other high-tech clusters, local non-traded industries do benefit. Biotech incentives were associated with gains in retail, construction and real estate through demand from biotech companies and a strengthening local economy.

There are, however, limits to advantages offered by these incentives. First, they appear to have little effect on patenting at academic institutions. The incentives in the study are generally unavailable to academic patenters, but they could have, conceivably, increased public-private collaborations and local knowledge exchanges. However, Moretti and Wilson find no evidence for such an effect. Also, they find limited impact on biotech firm productivity and salaries.

The results suggest that biotech incentives can be an effective means of attracting business to help regional clusters take off, but do not necessarily foster the researchers and firms that are already present. The researchers note that the fact that biotech incentives were effective in these states does not mean that all states suffer from market failures that can be remedied with incentives.

Download State Incentives for Innovation, Star Scientists and Jobs: Evidence from Biotech: http://www.nber.org/papers/w19294.