Industrial and Corporate Change, Volume 15, Number 4, pp. 625–652 doi:10.1093/icc/dtl007 Advance Access published April 20, 2006 © The Author 2006. Published by Oxford University Press on behalf of Associazione ICC. All rights reserved. Firm knowledge and market value in biotechnology Lionel Nesta and Pier-Paolo Saviotti We examine the relationship between the characteristics of the firms’ knowledge base in terms of knowledge capital and knowledge integration and the stock mar- ket value of 84 firms active in biotechnology during the 1990s. Panel data regres- sion models show that the degree of knowledge integration within firms is a significant explanatory variable of firms’ stock market value. Moreover, know- ledge integration becomes an increasingly important determinant of market value, which illustrates the growing integration of biotechnology in several indus- trial applications. However, the role of knowledge is sector specific, revealing dif- ferences in the extent to which biotechnology has become a key technology. 1. Introduction There is growing evidence that knowledge is becoming an important factor of production (Abramowitz and David, 1996). Of course, knowledge production is not the main goal of most firms. Firms create and use knowledge in order to be more competitive in the production of goods and services. Thus, the final performance of a firm has to be evaluated in the space of goods and services. However, observers external to the firm can only observe goods and services already on the market, which can give them a measure of current performance. Shareholders and stock exchange operators are likely to be equally interested in assessing the future performance of the firm. One could expect a delay between the construction of an intangible capital and its economic exploitation by means of the goods and services, which it can help create. Observation of the nature and properties of a firm knowledge base at a given time can thus be a useful tool to predict its future performance. It follows that to analyze how shareholders value intangible capital should help us understand the growing economic exploitation of scientific knowledge. The valuation of firms by shareholders is a very important but not completely understood economic phenomenon. The empirical studies that have been carried out on the firm’s market value point to three types of explanatory variables: (i) current market opportunities, such as sales, profits, and factor prices; (ii) tangible assets, measured by the value of firm’s assets at replacement cost; and (iii) intangible assets— past and current R & D investments, patent stock, and most recently the citations a