Abstract
In this paper we search for evidence signifying whether VC activity is demand or supply stimulated. Namely, we examine whether innovation and entrepreneurship are fostered by Venture Capital (VC) investments or whether innovative entrepreneurship is a precondition of a VC involvement. Based on a European panel of VC investments, we test the direction of causality between VC and innovation (proxied by annual patent applications at the European Patents Office). We present evidence indicating that causality runs from patents to VC suggesting that, in Europe, innovation seems to create a demand for VC and not VC a supply of innovation. In this sense, innovative ideas seem to lack more than funds in Europe. We explain our findings on the basis of information asymmetry issues and irreversibility considerations of VC investments.
Highlights
Venture capital ( Venture Capital (VC)) has emerged in the second half of the twentieth century as playing a key role in the financing of young and dynamic entrepreneurial firms
We examine whether innovation and entrepreneurship are fostered by Venture Capital (VC) investments or whether innovative entrepreneurship is a precondition of a VC involvement
In this paper we have proposed a causality testing methodology in order to investigate whether innovative entrepreneurship is an input or an output to the VC process, i.e. whether causation is direct, from innovation to VC, or reverse, from VC to innovation
Summary
Venture capital ( VC) has emerged in the second half of the twentieth century as playing a key role in the financing of young and dynamic entrepreneurial firms. According to Gompers and Lerner [1], some of the most renowned high-tech innovators in the US, such as Apple Computers, Cisco Systems, Genentech, Microsoft, Netscape, and Sun Microsystems, have been developed thanks to VC assistance and it plays an indisputable role in entrepreneurial success and technological progress in developed countries. The widely accepted view of VC to innovation causality—let us call it the direct causation hypothesis—has been challenged by Hirukawa and Ueda [7] using patent grants and Total Factor Productivity (TFP) as proxies of technological progress. When the respective proxy is patents, reverse causation is not supported
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