We provide evidence that an influx of technical human capital improves regional entrepreneurship, both by increasing firm entry and reducing entrepreneurial failure. The results also indicate negative externalities upon lowtech and competing industries: an influx of inventors in a county shifts the locus of venture capital investment away from low-tech startups to high-tech startups and moreover towards new ventures in the same sector as those inventors' skills. We strengthen causal inference with a shift-share instrument which combines the spatial distribution of surnames in the LM>= U.S. Census with thousands of surnamespecific shifts based on modern inventor mobility.

Schumpeter (1939) claims that recessions are periods of “creative destruction,” concentrating innovation that is useful for the long-term growth of the economy. However previous research finds that standard measures of firms’ innovation, such as R&D expenditures or raw patent counts, concentrate in booms. We argue that these measures do not capture shifts in firms’ innovative search strategies. We contemplate firms’ choice between exploration versus exploitation over the business cycle and find evidence with more nuanced measures of patent characteristics that firms shift toward exploration during contractions and exploitation during expansions, with a stronger effect for firms in more cyclical industries.

Research and development tax credits often aim to increase investment in experimentation, hoping that firms invent fundamentally new technologies that in turn generate positive spillovers. Since most policies require that companies make profits in order to claim credits, they might also shift investments towards less risky refinement and exploitation. Following the availability of credits, we demonstrate that firms do not experiment but deepen invention in areas of extant expertise. We observe stronger shifts for firms operating in uncertain markets where search failures are more likely to reduce credit eligibility.