Institutional Determinants of Venture Capital Activity: An Empirically Driven Literature Review and a Research Agenda

Abstract

Venture Capital (VC) was born and has flourished in the United States, yet it has only modestly developed in other geographical areas. A vast body of research has been carried out to investigate the factors which are conducive to VC activity, and that may better explain the differences in the degree of development and performance of VC industry across different geographical contexts. However, there has only been a limited effort in the literature to systematize what we know (and what we do not know) about the institutional factors that spur VC activity. This paper tries to close that gap, through a systematic survey of the existing literature on the institutional and related determinants of VC activity. Grounding on the seminal work of North (1990), we consider formal (e.g. laws and formal rules) and informal (e.g. cultural norms and tacit codes of behaviour) institutions which are found in the extant empirical economics and management literature to affect the development of the VC industry. Building on this careful review, our paper aims to propose interesting avenues for future research in this domain.

Venture capital in Europe: social capital, formal institutions and mediation effects

“…Additionally, understanding these dynamics in the European context, one of the regions with the highest potential for the creation of fast growing high-tech firms, is largely absent. Hence, in this study, we ground on the well-known Williamson's (2000) taxonomy of hierarchy of institutions and complement existing studies on VC that provide inconclusive implications regarding the institutional environment that favors VC activity, especially in Europe (Grilli et al 2017). In more detail, we propose an additional and to-date neglected institutional determinant, i.e., we test the role of social capital as an indirect driver of VC activity on a country level.…”

“…Second, instead of including only general formal components aggregated in an index of formal institutions, as done by Li and Zahra (2012), we additionally include in the model formal regulations which the literature considers most relevant for the VC industry (see the recent review of Grilli et al 2017). In particular, we include measures of three key regulations for VC activity-rigidness of labor, taxation, and minority investor protection regulations.…”

“…The European context is particularly relevant for investigation as the formal, and most importantly, informal institutions are widely heterogeneous across the continent. Moreover, despite its worldwide relevance in economic and geopolitical terms, and the well-known deficiency in fuelling the birth of high-tech rapid-growth ventures and unicorns (European Commission 2010; Grilli and Murtinu 2014), studies that investigate the institutional determinants of VC activity and, at the same time, explicitly and solely focus on the old continent, are largely absent (Grilli et al 2017). To this purpose, we collect country-level data from multiple sources on VC activity in Europe, formal and informal institutions as key explanatory variables, and an array of relevant control variables.…”

The impact and implications of SWFs: a systematic review of literature

“…Compared to traditional reviews, systematic reviews use a "replicable, scientific and transparent process" to minimize bias (Tranfield et al, 2003, p. 209). We also take inspiration from a few studies that conduct systematic reviews in other areas (Deku et al, 2019;Grilli et al, 2019;Lahiri, 2016;Pindado and Requejo, 2015;Tuch and O'Sullivan, 2007). Our SLR process has been summarized in Figure 1.…”

Legal Institutions, Social Capital, and Financial Crowdfunding: A Multilevel Perspective

“…are positively associated with the volume of venture capital in a country (Li and Zahra 2012). Grilli et al (2016) created a framework to explain how both formal and informal institutions affect venture capital activities. They divided legal institutions into fiscal policy and other legal regulations: tax rate on capital gains, fiscal regulations on investee companies, and corporate income tax are conducive to the development of venture capital activities; other legal regulations, including the legal system, labour regulations, investor protection regulations, and regulations on protection of property rights, affect venture activities as well.…”