INTRODUCTION

Entrepreneurship has been defined as the dynamic process of creating incremental wealth (Ronstadt, 1984); as the creation of an innovative economic organization for the purpose of gain or growth under conditions of risk and uncertainty (Dollinger, 1994) and as profiting from bearing risk and uncertainty (Knight, 1921). What these definitions have in common is the goal of wealth creation. While entrepreneurs may create organizations to pursue lifestyle choices such as being their own boss, from an economic perspective the key to entrepreneurship remains the creation of wealth through innovative activity. It is the process of wealth creation which will serve as the focus of this paper.

The process of creating wealth is ambiguous, idiosyncratic and poorly understood. In fact, the standard accounting measures of firm performance have been shown to be only weakly correlated to firm value (Rapport, 1986; Bennett, 1991). G. Bennett Stewart (1991) has proposed a method of measuring the amount of wealth created by an organization - Market Value Added (MVA). The idea behind MVA is to bring contributed capital into the equation. Wealth is created only when the value of the firm exceeds the amount of capital which has been invested in the firm. Therefore, to measure the amount of wealth created by a firm requires the total value of the capital contributed to the firm be netted out from the market value of the firm's equity. The actual process of calculating MVA will be discussed in detail in the methodology section. However, we believe that if we desire to understand and model the wealth creation process in entrepreneurial firms, MVA is the appropriate dependent variable.

However, this still leaves us with the question of how wealth is created within a firm. What actions can be taken by entrepreneurs which will add value. The resource based view of the firm, initially developed by Penrose (1959 ), proposes that a firm's competitive advantage and in turn it's ability to create wealth is in large part determined by its unique resources and capabilities. A basic premise in this theory is that those firm capabilities which are rare, inimitable and difficult to trade form the basis for sustainable competitive advantage (Barney, 1991). Subsequent researchers have highlighted the importance of intangible resources such as knowledge and scientific capabilities to competitive advantage (Henderson & Cockburn, 1994; Kogut & Zander, 1992; Petraff, 1993). These resources are tacit, complex and firm specific and form the basis of organizational capabilities. However, these same characteristics make the study of organizational capabilities difficult. However, firms 'going public' provide researchers a unique opportunity to study the relationship between wealth creation in entrepreneurial firm and organizational capabilities.

The process of issuing equity on the public market opens the firm to detailed analysis. The prospectus for the issue provides insight into the background and training of the key personnel, strategic decisions, detailed financial information and in-depth product development information This study will draw on the information provided by eighty nine biotechnology firms which went public during the last decade to test a model of wealth creation based upon the development of firm specific capabilities. In particular we will examine the role of the scientific and research capabilities which are critical to the success of new biotechnology firms.

The purpose of this paper is to present a normative model of the amount of wealth created by a biotechnology company in the years between its formation and its initial public offering. Specifically, we test a model which includes variables measuring the scientific/research capabilities of the firm: (a) the firm's patent position, (b) geographic location, (c) the rate of new product development, (d) the intensity of research and development effort, (e) the publication record of the firm's top researchers.

The contributions of this paper are fourfold. First, we combine insights from finance, technology management and strategic management to create and empirically test a model of the wealth creation within a firm. Second, we present two somewhat novel measures - MVA and firm citations. The first as discussed above is an attempt to overcome some of the problems of typical accounting or market based measure. The second attempts to measure scientific capabilities by gathering the number of times the research of the key scientists of the firm have been cited in the scientific literature. Third, we develop theory and empirical evidence attesting to the strategic importance of the geographic location decision in the wealth creation process. Finally, our results provide some insight into the process of creating shareholder value.

The paper proceeds as follows: The first section provides the theoretical background and the development of the hypotheses. The second and third sections present the methodology and the results of the statistical analysis, respectively. We conclude with a discussion of the implications of this research and suggestions for future research.

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Last Updated 1/15/97 by Geoff Goldman & Dennis Valencia

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