| The importance of venture financing (venture capital) to the incubation and early-stage growth of new enterprise (new firms) has been well documented. Studies exploring the determinants of new-firm formation have tested for hypothesized linkages involving contextual (socio-economic) factors on a variety of spatial scales. To date, however, little or no published research is focused on the role of venture-capital investment flows on new-firm formation at the regional level. This study seeks to address this gap in our understanding. In order to isolate the effects of venture capital on new-firm formation, while controlling for categories of covariates whose influences may be confounded, I identified five categories of regional attributes as controls. The five categories are (1) macroeconomic contextual factors, (2) market-demand conditions, (3) industrial structure, (4) human-capital assets, and (5) innovation-related factors. The primary dependent variable exploits recently available data on metro-level dynamic establishments---firm entry and exit developed by the U.S. Bureau of Census files for the 1989-2002 period. The main independent variable is developed by using the data from the VentureXpert (Thompson Financial) database of venture-capital investment flows that occurred from 1961 to 2002 within the United States. Findings indicate that VCI flows do account for variation in metro-regional rates of new-firm formation. Not only the current-year VCI, but also the VCI lagged up to five years, have a positive effect on rates of new-firm formation. I also find that a region's rates of total output and of population growth, the prior year's firm-entry rate, the current firm-exit rate, high-tech employment share, and number of locally produced PhDs in all fields per 1 million employees are positively associated with new-firm formation. By contrast, mean establishment size and the number of patents per 1 million labor-force participants are negatively related to rate of new-firm formation. |
