DO GOVERNMENTS FUND THE BEST ENTREPRENEURIAL VENTURES? THE CASE OF THE SMALL BUSINESS INNOVATION RESEARCH PROGRAM

Policy-makers around the world are increasingly interested in spurring entrepreneurship by providing capital to promising ventures, and often develop government programs designed to do so. Whether governments can effectively identify and reward the most promising ventures is a topic of considerable debate. We examine the selection capabilities of the largest such government program in the United States-the Small Business Innovation Research (SBIR) grant. No prior work has systematically evaluated whether SBIR prioritizes the most promising technical and commercial ventures. We are able to do so by exploiting a quasi-natural experiment made possible by the sudden release of additional funds through the American Reinvestment and Recovery Act (ARRA). Since our sample consists of two sets of firms having received SBIR grants-one prioritized through the regular-funded process and a second group funded through the additional ARRA money-we can ascertain whether the prioritized ventures outperform the others, while controlling for the treatment effect. Our evidence supports the view that governments can effectively implement entrepreneurial programs, and we provide some insight into the capabilities underlying effective selection. Moreover, the evidence reveals that governments are capable of selecting risky ventures-the kind that might produce high impact.