Venture Capital and Innovation in Europe

George Geronikolaou, George Papachristou

Department of Economics, Aristotle University of Thessaloniki, Thessaloniki, Greece.
Department of International Economic Relations and Development, Democritus University of Thrace, Komotini, Greece.

DOI: 10.4236/me.2012.34058                

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.

Keywords

Innovation; Patents; Venture Capital; Entrepreneurship; Dynamic Panel Data

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	P. Gompers and J. Lerner, “The Venture Capital Revolution,” Journal of Economic Perspectives, Vol. 15, No. 2, 2001, pp. 145-168. doi:10.1257/jep.15.2.145
[2]	J. A. Timmons and W. D. Bygrave, “Venture Capital’s Role in Financing Innovation for Economic Growth,” Journal of Business Venturing, Vol. 1, No. 2, 1986, pp. 161-176. doi:10.1016/0883-9026(86)90012-1
[3]	T. Hellman and M. Puri, “The Interaction between Product Market and Financing Strategy: The Role of Venture Capital,” The Review of Financial Studies, Vol. 13, No. 4, 2000, pp. 959-984. doi:10.1093/rfs/13.4.959
[4]	S. Kortum and J. Lerner, “Assessing the Contribution of Venture Capital to Innovation,” Rand Journal of Economics, Vol. 31, No. 4, 2000, pp. 674-692. doi:10.2307/2696354
[5]	J. Lerner, “Boom and Bust in the Venture Capital Industry and the Impact on Innovation,” Federal Reserve Bank of Atlanta Economic Review, Vol. 2002, No. Q4, 2002, pp. 25-39.
[6]	L. Bottazzi and M. Da Rin, “Venture Capital in Europe and the Financing of Innovative Companies,” Economic Policy, Vol. 17, No. 34, 2002, pp. 229-265. doi:10.1111/1468-0327.00088
[7]	M. Hirukawa and M. Ueda, “Venture Capital and Innovation: Which Is First?” Pacific Economic Review, Vol. 16, No. 4, 2011, pp. 421-465. doi:10.1111/j.1468-0106.2011.00557.x
[8]	C. W. J. Granger, “Investigating Causal Relations by Econometric Models and Cross-Spectral Methods,” Econometrica, Vol. 37, No. 3, 1969, pp. 424-438. doi:10.2307/1912791
[9]	B. Nooteboom, “Innovation and Diffusion in Small Firms: Theory and Evidence,” Small Business Economics, Vol. 6, No. 5, 1994, pp. 327-347. doi:10.1007/BF01065137
[10]	B. S. Tether, “Small and Large Firms: Sources of Unequal Innovations?” Research Policy, Vol. 27, No. 7, 1998, pp. 725-745. doi:10.1016/S0048-7333(98)00079-1
[11]	A. Pakes and Z. Griliches, “Patents and R&D at the Firm Level: A First Report,” Economic Letters, Vol. 5, No. 4, 1980, pp. 377-381. doi:10.1016/0165-1765(80)90136-6
[12]	B. H. Hall, Z. Griliches and J. A. Hausman, “Patents and R&D: Is There a Lag?” International Economic Review, Vol. 27, No. 2, 1986, pp. 265-283. doi:10.2307/2526504
[13]	M. Cincera, “Patents, R&D, and Technological Spillovers at the Firm Level: Some Evidence from Econometric Count Models for Panel Data,” Journal of Applied Eco- nometrics, Vol. 12, No. 3, 1997, pp. 265-280. doi:10.1002/(SICI)1099-1255(199705)12:3<265::AID-JAE439>3.0.CO;2-J
[14]	B. Crepon and E. Duguet,. “Estimating the Innovation Function from Patent Numbers: GMM on Count Panel Data,” Journal of Applied Econometrics, Vol. 12, No. 3, 1997, pp. 243-263. doi:10.1002/(SICI)1099-1255(199705)12:3<243::AID-JAE444>3.0.CO;2-4
[15]	R. Blundell, R. Griffith and F. Windmeijer, “Individual Effects and Dynamics in Count Data Models,” Journal of Econometrics, Vol. 108, No. 1, 2002, pp. 113-131. doi:10.1016/S0304-4076(01)00108-7
[16]	W. A. Sahlman, “The Structure and Governance of Venture Capital Organizations,” Journal of Financial Economics, Vol. 27, No. 2, 1990, pp. 473-521. doi:10.1016/0304-405X(90)90065-8
[17]	A. K. Dixit and R. S. Pindyck, “Investment under Uncertainty,” Princeton University Press, Princeton, 1994.
[18]	Eurostat, Eurostat Database. epp.eurostat.ec.europa.eu
[19]	B. H. Hall, A. B. Jaffe and M. Tratjenberg, “The NBER Patent Citation Data File: Lessons, Insights and Methodological Tools,” NBER Working Paper 8498, NBER, Cambridge, 2001.
[20]	OECD, Glossary of Patent Terminology. http://www.oecd.org/dataoecd/5/39/37569498.pdf
[21]	European Patents Office (EPO), European Patent Convention. http://www.epo.org/patents/law/legal-texts/html/epc/1973/e/ma1.html
[22]	D. Holtz-Eakin, W. Newey and H. S. Rose, “Estimating Vector Autoregressions with Panel Data,” Econometrica, Vol. 56, No. 6, 1988, pp.1371-1395. doi:10.2307/1913103
[23]	M. Arellano and S. Bond, “Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations,” Review of Economic Studies, Vol. 58, No. 2, 1991, pp. 277-297. doi:10.2307/2297968
[24]	Y. Uchida and P. Cook, “Innovation and Market Structure in the Manufacturing Sector: An Application of Linear Feedback Models,” Oxford Bulletin of Economics and Statistics, Vol. 69, No. 4, 2007, pp. 557-580. doi:10.1111/j.1468-0084.2007.00450.x