Venture Capital, Innovation, and Economic Developmemt

Venture capital is a unique form of finance capital with special implications for high-technology economic development. Conventional wisdom suggests that venture capital will stimulate high-technology development. This is reflected in state policies that seek to generate local high technology by overcoming regional venture capital gaps. Here the authors report findings from a two-year study, supported by the U.S. Economic Development Administration, that resulted in a new data base on venture capital supply and investment. The findings of the research indicate that venture capital is not sufficient to stimulate high-technology development. In fact, U.S. venture capital exhibits a strong flow toward established high-technology regions such as Silicon Valley and Route 128. This fact leads to the conclusion that venture capitalists are proficient in locating high-technology investment opportunities where they exist and that, as such, capital gaps are a reflection of underlying structural weaknesses in an area's technology base. Policymakers should turn their attention away from finance capital programs and return to the basics of building a strong technological infrastructure and integrated industrial base.