A Panel Analysis of Venture Capital’s Impact on Innovation Performance in Europe :: European Economy, Debt Crisis

The sovereign debt crisis hits heavily European economy. Policymakers are desperately searching for solutions. But resolving the crisis would be much harder if the economies continue to stall or shrink. The key driver for modern economic growth is entrepreneurial innovation (Schumpeter, 1911, 1934; Romer, 1990; Grossman and Helpman, 2002; and Aghion and Howitt, 1992, 1998). Innovation requires constant investments in entrepreneurial firms. Entrepreneurial financing, however, is too risky and too costly for traditional prudent investors. Financial problems are particularly acute in high-growth entrepreneurial firms due to their inherent uncertainty (Hall, 2002). The Community Innovation Survey (2002) reports that the lack of appropriate sources of finance and the high costs of innovation are the most cited hampering factors in European companies. The financial constrains force almost one out of three innovative or potentially innovative Dutch firms to abandon or to slow down their inn ovative projects (Mohnen, Palm, van Der Loeff, and Tiwart, 2008). Savignac (2006) also finds that 17.25 percent of innovative firms are financially constrained in France. The Venture Capital (VC) market provides the unique link between financial surplus and innovation, and mitigates the problem of under-investment in innovative activities by small and new firms (Hall, 2002). The structure of VC firms seems to be designed specifically to light fires under scrappy and ambitions startups, to materialize new business ideas and to maximize return on investment in true innovation projects (Stuck and Weingarten, 2005). There are both ad hoc and academic evidence suggesting that VC boosts American innovation, for example, NVCA (2010), Hellmann and Puri (2000), Kortum and Lerner (2001), and Ueda and Hirukawa (2003). The empirical finding in Europe, however, is not unanimous. On the one hand, Tykvova (2000) finds that VC investments have a highly significant positive effect on patenting activity in Germany. Engel and Keilbach (2002) reveal that the average number of patents in the German VC-backed group is weakly higher than in the control group. Bertoni et al. (2009) report that VC investments promote Italian firms’ patenting activity. And Colombo et al. (2009a) find that VC investments have a positive impact on the productivity of 222 Italian firms operating in high-tech manufacturing and services. On the other hand, Peneder (2010) finds that the Austrian VCs have a positive impact on firm growth, yet not on innovation output. Pinch and Sunley (2009) find that there is little evidence that th e British VCs promote the innovation performance of their investees.