The United States has many banks that are small relative to large corporations and play a limited role in corporate governance, and a well developed stock market with an associated market for corporate control. In contrast, Japanese and German banks are fewer in number but larger in relative size and are said to play a central governance role. Neither country has an active market for corporate control. We extend the debate on the relative efficiency of bank-and stock market-centered capital markets by developing a further systematic difference between the two systems: the greater vitality of venture capital in stock market-centered systems. Understanding the link between the stock market and the venture capital market requires understanding the contractual arrangements between entrepreneurs and venture capital providers; especially the importance of the opportunity to enter into an implicit contract over control, which gives a successful entrepreneur the option to reacquire control from the venture capitalist by using an initial public offering as the means by which the venture capitalist exits from a portfolio investment. We also extend the literature on venture capital contracting by offering an explanation for two central characteristics of the U.S. venture capital market: relatively rapid exit by venture capital providers from investments in portfolio companies; and the common practice of exit through an initial public offering.

In recent years, scholars and policymakers have rediscovered the concept of industrial districts-spatial concentrations offirms in the same industry or related industries. In this Article, Professor Gilson examines te relationship between hightechnology industrial districts and legal infrastructure by comparing the legal regimes of California's Silicon Valley and Massachusetts's Route 128. He contends that legal rides governing evmployee mobility influence the dynamics of high tednology industrial districts by either encouraging rapid employee movement between employers and to startups, as in Silicon Valley, or discouraging such movement, as in Route 128. Because California does not enforce post-employment covenants not to compete high technology firms in Silicon Valley gain from knowledge spillovers between finns. These knowledge spillovers have allowed Silicon Valley firms to thrive while Route 128 firms have deteriorated. Professor Gilson concludes with three cautionary notes. Firs4 the success of Silicon Valley firms suggests that per capita firm value will be greater where intellectual property protection is somewhat diluted, in contrast to tie traditional law and economics prescription that emphasizes fidl protection of intellectual property. Second, the doctrine of inevitable disclosure, as developed in recent trade secret cases, threatens to undermine the advantages conferred by Calfornia's legal regime and should be considered with * Charles J.

for helpful comments. I owe a special debt to Zohar Goshen, whose work on the Israeli venture capital market was invaluable.