Patterns of Cross-Border Venture Capital Flows in Europe

A well-functioning and efficient Venture Capital (VC) market is one of the key pillars to enhance European medium- and long-term economic growth, through the creation of new businesses and sustainable employment, the improvement of managerial practices and increased capital investments, which boost innovation, productivity and competitiveness. These conditions are enhanced in the presence of an integrated VC market, which improves capital allocation, generates economies of scale and spurs competition and diversification of financing sources.This paper analyses cross-border VC flows in Europe in the 2007-2020 period, highlighting the deep fragmentation of the European market, with each country featuring its own peculiarities and evident disparities, and Northern European countries, the UK, and Ireland witnessing significantly higher cross-border volumes than Eastern-European and Mediterranean countries. Overall, the analysis of cross-border investments in the industry confirms that they are still rather infrequent, mainly due to local bias, with the domestic component accounting on average for 64.0% of the total VC activity and cross-border investments within Europe accounting on average for only 23.1%. Using a Grubel-Lloyd index, we find that the highest values of two-way flows of venture capital are concentrated in the major financial centres, with a prominent role of the United Kingdom. Furthermore, theory-grounded gravity equations investigate the determinants of cross-border VC flows, exploring, inter alia, the role of different financial structures across countries. Besides GDP (or market capitalisation) and distance, the quality of institutions and especially the degree of global financial integration do play a role in shaping cross-border VC flows. The uneven development of the financial market within Europe ‒ with a market-based country cluster distinct from a bank-based country cluster ‒ appears to matter little for cross-border VC flows.