New Firm Formation and Industry Clusters: A Case of the Drugs Industry in the U.S.

Abstract

The importance of new firms in regional growth led many scholars to probe the determinants of new firm formation. A close examination of cluster theory predicts that industry clusters can enhance new firm births as well as the productivity of existing firms. Linkages among firms and related institutions, which are the key characteritics of the cluster phenomenon, can serve as an important determinant of new firm formation. The network aspect of clusters helps nascent entrepreneurs find resources and information easier and faster than in an isolated environment. In addition, nascent entrepreneurs in industry clusters often have rich experience in existing local firms, which becomes important prior knowledge to explore new market opportunities. This study examines the effects of clusters on new firm formation. We found that the cluster based on knowledge sharing (i.e., knowledge-labor cluster) significantly affects the new firm formation process, whereas the cluster based on market transactions (i.e., value-chain cluster) does not seem to play a role in new firm formation.