Using data from Chinese prefecture-level cities between 2006 and 2020, this study presents new causal evidence to the knowledge spillover theory of entrepreneurship, showing that research and development expenditures of listed firms significantly promote new business formation in the same city. We address endogeneity issues, account for alternative mechanisms, and consider knowledge spillover from mature firms to entrepreneurs as a plausible explanation. Consistent with this explanation, the effect is more pronounced in innovation-driven entrepreneurship and knowledge-intensive industries, and diminishes with distance. Furthermore, cities with a favourable business environment, particularly with increased government services for enterprises, exhibit more prominent effects.