Venture Capital and Innovation: Evidence from European Economic Area Countries

Abstract

The paper examines the long-run relationship between venture capital and innovation in the 19 European Economic Area (EEA) countries over the period 1989–2014. We use three different indicators of venture capital (VC), such as VC at early stage investment, VC at later stage investment, and VC total investment, and seven different indicators of innovation, such as patents-residents, patents-nonresidents, patents-total, research and development expenditure, researchers in research and development activities, high-technology exports, and scientific and technical journal articles, to examine this long-run relationship. Using cointegration technique, the study warrants the support of long-run relationship between venture capital and innovation in few cases, typically with reference to a particular VC indicator and innovation indicator. Expending the Granger causality test, the study finds the presence of both bidirectional and unidirectional causality between venture capital and innovation. However, these results vary from country-to-country within the EEA countries, depending upon the types of VC indicator and innovation indicator that we use in a particular empirical exploration process. The policy implication of this study is that the economic policies should recognize the differences in the venture capital and innovation in order to maintain the sustainable development in these EEA countries.