Knowledge Capital and Venture Capital Investments: New Evidence from European Panel Data

Abstract

Countries with a high amount of knowledge capital are likely to have higher volumes of venture capital (VC) investments because more researchers come up with innovative business ideas that require venture capital finance. Using panel data techniques, the paper finds evidence that VC investments depend strongly on the countries' knowledge capital measured by the number of patents, or the number of R&D researchers, or gross domestic expenditures on R&D. In addition, the paper analyzes whether government-financed knowledge capital fulfills a special role for VC investments. It finds only weak evidence that VC investments depend, with a delay of several years, on government-financed knowledge capital. Copyright Verein für Socialpolitik and Blackwell Publishing Ltd. 2007.

The Venture Capital Industry in Europe

“…Employing the panel unit root tests developed by Levin et al (2002), which assumes identical coefficients of the lagged endogenous variable across countries, and the test developed by Im et al (2003), which allows heterogeneous coefficients of the lagged endogenous variables across countries, Schertler (2005b) has shown that the hypothesis of non-stationarity for the volume of various types of private equity investments relative to GDP or the number of various types of private equity investments relative to the population cannot be rejected. Therefore, levels of private equity investments relative to GDP are not stationary, while first differences of investments relative to GDP and the percentage changes in investments are stationary.…”

“…In order to capture developments in stock market segments for fast-growing firms, I created a variable of annual stock market returns calculated from daily return indexes of Europe's stock markets for fast-growing firms (see also Schertler 2005b). For Germany I used the share index of the Neuer Markt founded in 1997, for France I used the share index of the Nouveau Marché founded in 1996, for Spain I used the share index of the Nuevo Mercado founded in 2000, and for the United Kingdom I used the share index of the Alternative Investment Market founded in 1995.…”

“…As I have argued in Schertler (2005b), countries with a high amount of human capital are likely to have higher volumes of venture capital investments because more innovative ideas are developed for businesses that require venture capital finance for their start-up. The reason for this is that founders of high-technology start-ups must be highly skilled, and because they need employees who are also highly skilled.…”

“…Thus, the solution to this financing problem is to demand capital combined with high-quality monitoring provided by experienced venture capital companies. In the empirical analysis, I capture the countries' human capital by using the growth rate in the number of patent applications to the European patent office (for alternative measures of human capital, see Schertler 2005b). According to the average growth rates presented in Table 6.1, some countries, such as Finland, Portugal, Spain and Ireland had high growth rates in patenting during the observation period, while other countries, such as France and Switzerland had only moderate growth rates.…”

The role of accounting in high-technology investments

“…Different measures of patenting activity, such as patent count, patent families, and so on, were discussed next (cf. Hand, 2005;Schertler, 2007;Conti et al, 2011;Munari & Toschi, 2008). We hoped thereby to discover whether patenting would affect the size of the investment, and so opened this up for debate (Cockburn & MacGarvie, 2009;Mann & Sager, 2007;Baum & Silverman, 2004).…”