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The economic impact of venture capital

  • Astrid Romain
  • Bruno Van Pottelsberghe

The objective of this paper is to perform a first evaluation of the macroeconomic impact of venture capital (VC). The main assumption is that VC can be considered as being similar to business R&D performed by large firms. It can therefore contribute to economic growth through two main channels. The first one is innovation, characterized by the introduction of new products, processes or services on the market that directly contribute to improve economic performances. The second one is the development of an absorptive capability. These hypotheses are tested quantitatively with a production function model. The estimates are run over a panel data set of 16 OECD countries from 1990 to 1998. The results show that the accumulation of VC is a significant factor contributing directly to Multi-Factor Productivity (MFP) growth. The social rate of return to VC is twice as high as the social rate of return to business or public R&D. VC has also an indirect impact on MFP in the sense that it improves the output elasticity of R&D. An increased VC intensity makes it easier to absorb the knowledge generated by the universities and firms, and therefore improves aggregate economic performance.

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Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 04-014.RS.

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Date of creation: 2004
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Publication status: Published by: Université Libre de Bruxelles, Solvay Business School, Centre Emile Bernheim (CEB)
Handle: RePEc:sol:wpaper:04-014
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  1. Sapienza, Harry J., 1992. "When do venture capitalists add value?," Journal of Business Venturing, Elsevier, vol. 7(1), pages 9-27, January.
  2. Rachel Griffith & Stephen Redding & John Van Reenen, 2001. "R&D and absorptive capacity: from theory to data," IFS Working Papers W01/03, Institute for Fiscal Studies.
  3. Engel, Dirk & Keilbach, Max, 2007. "Firm-level implications of early stage venture capital investment -- An empirical investigation," Journal of Empirical Finance, Elsevier, vol. 14(2), pages 150-167, March.
  4. Samuel Kortum & Josh Lerner, 1998. "Does Venture Capital Spur Innovation?," NBER Working Papers 6846, National Bureau of Economic Research, Inc.
  5. Romain, Astrid & Pottelsberghe de la Potterie, Bruno van, 2003. "The Determinants of Venture Capital: A Panel Data Analysis of 16 OECD Countries," IIR Working Paper 03-25, Institute of Innovation Research, Hitotsubashi University.
  6. Hellmann, Thomas & Puri, Manju, 2000. "The Interaction between Product Market and Financing Strategy: The Role of Venture Capital," Review of Financial Studies, Society for Financial Studies, vol. 13(4), pages 959-84.
  7. Paul M Romer, 1999. "Endogenous Technological Change," Levine's Working Paper Archive 2135, David K. Levine.
  8. Dominique Guellec & Bruno van Pottelsberghe de la Potterie, 2001. "R&D and Productivity Growth: Panel Data Analysis of 16 OECD Countries," OECD Science, Technology and Industry Working Papers 2001/3, OECD Publishing.
  9. Hellmann, Thomas F. & Puri, Manju, 2000. "Venture Capital and the Professionalization of Start-up Firms: Empirical Evidence," Research Papers 1661, Stanford University, Graduate School of Business.
  10. Allen N. Berger & Gregory F. Udell, 1998. "The economics of small business finance: the roles of private equity and debt markets in the financial growth cycle," Finance and Economics Discussion Series 1998-15, Board of Governors of the Federal Reserve System (U.S.).
  11. Bruno Van Pottelsberghe & Frank Lichtenberg, 2001. "Does foreign direct investment transfer technology across borders?," ULB Institutional Repository 2013/6221, ULB -- Universite Libre de Bruxelles.
  12. Audretsch, David B & Keilbach, Max, 2003. "Entrepreneurship Capital and Economic Performance," CEPR Discussion Papers 3678, C.E.P.R. Discussion Papers.
  13. van Pottelsberghe Bruno & Guellec Dominique, . "From R & D to Productivity Growth: the Sources of Knowledge - Spillovers and their Interaction," EcoMod2002 330800067, EcoMod.
  14. Samuel Kortum & Josh Lerner, 2000. "Assessing the Contribution of Venture Capital to Innovation," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 674-692, Winter.
  15. Paul Gompers & Josh Lerner, 2001. "The Venture Capital Revolution," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 145-168, Spring.
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