The Environmental Factors and Venture Capital Flows: The European Experience

Abstract

Venture Capital has grown dramatically in European countries during the past decade. Despite lack of entrepreneurial culture, fragmented market, lack of capital mobility, state domination, ineffective second tier market in Europe, the venture capital flows continued unabated throughout 1980s. However, the growth rate of venture capital has not been at the same rate in all the European countries. It has been observed that the process of venture flows is affected by the various environmental factors. An attempt is made in this paper to analyse the process of venture capital flows, identify the environmental factors and venture capital flows in five European countries namely United Kingdom, Germany, France, Italy and Spain over a period of nine years. The empirical results clearly indicate a high degree of relationship between venture capital flows and stock market indices, initial public offerings, interest rates and technology in all the five European countries. Capital gains tax rate has no impact or little impact on venture capital flows in Germany, Italy and Spain. In case of United Kingdom and France, there is a positive relationship between capital gains tax and venture capital flows. The findings of the study have far reaching implications for the venture capitalist, investors, entrepreneurs and researchers. Constructive policy related to interest rates, technology, capital market and capital gains tax is crucial for the growth of venture capital industry and hence entrepreneurial growth. Finally, the study had identified few specific areas for further research in venture capital industry both in Europe and India.