Does Venture Capital Investment Spur Innovation? A Cross-Countries Analysis

Abstract

This article examines venture capital composite impact on innovation. For this purpose, we made venture capital index using principal component analysis methodology to test the composite impact of venture capital impact on innovation. We constructed our sample of 41 countries on the basis of venture capital fundraising from 2006 to 2016. First, we empirically tested index individual component, for which we used ordinary least square regression with robust standard error. In the second stage, we made VC index using principal component analysis methodology to analyze the composite effect of VC on patents generation. Empirical results show strong significant venture capital investment impact on patents generations. Overall, our findings suggest that venture capital investment significantly spur innovation, when we analyzed the individual factors of the index as well as compositely. These results encourage governments and policy makers to promote innovation through facilitating venture capital investment which provide an alternative source of finance to startups which find hard to raise fund in conventional fund market. This also suggest that policy maker should consider the composite effect of the venture capital in an economy to robustly encourage innovation.