Venture Capital in Germany and Its Impact on Innovation

Abstract

A commercial exploitation of innovative ideas is the driving force of the market economy. Due to their structure and internal organization, young small firms may be more innovative than large and established enterprises. New firms with pioneering ideas and with a flexible structure can react to the concerns of the customers more appropriately. A special instrument venture capital can solve the problems young innovative firms face: a lack of capital and managerial experience. In the past few years, we have experienced a venture capital boom in Germany. The question that I investigate in my paper is the following: Can the growth of the German venture capital market impose a wave of innovation similarly to the innovation boom in the USA? I show that venture capital has a significant positive influence on the number of patent applications in Germany. A doubling of the volumes of the venture capital investments (in real terms) causes a 12 percent increase in the number of patent applications. A doubling of the number of venture capital financed firms produces 21 percent more patent applications. JEL Codes: G24, L22, O31.