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Does private equity investment spur innovation? Evidence from Europe

Author

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  • Popov, Alexander
  • Roosenboom, Peter

Abstract

We provide the first cross-country evidence of the effect of investment by private equity firms on innovation, focusing on a sample of European countries and using Kortum and Lerner's (2000) empirical methodology. Using an 18-country panel covering the period 1991-2004, we study how private equity finance affects patent applications and patent grants. We address concerns about causality in several ways, including exploiting variation in laws regulating the investment behaviour of pension funds and insurance companies across countries and over time. We also control for the standard determinants of innovation like R&D, human capital, and patent protection. Our estimates imply that while private equity investment accounts for 8% of aggregate (private equity plus R&D) industrial spending, PE accounts for as much as 12% of industrial innovation. We also present similar evidence from the biotech industry to alleviate concerns that our results are biased by aggregation. JEL Classification: C23, G15, O16

Suggested Citation

  • Popov, Alexander & Roosenboom, Peter, 2009. "Does private equity investment spur innovation? Evidence from Europe," Working Paper Series 1063, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20091063
    Note: 861282
    as

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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1063.pdf
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    References listed on IDEAS

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    1. Josh Lerner & Morten Sorensen & Per Strömberg, 2011. "Private Equity and Long‐Run Investment: The Case of Innovation," Journal of Finance, American Finance Association, vol. 66(2), pages 445-477, April.
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    4. Da Rin, Marco & Nicodano, Giovanna & Sembenelli, Alessandro, 2006. "Public policy and the creation of active venture capital markets," Journal of Public Economics, Elsevier, vol. 90(8-9), pages 1699-1723, September.
    5. Zvi Griliches, 1998. "Issues in Assessing the Contribution of Research and Development to Productivity Growth," NBER Chapters, in: R&D and Productivity: The Econometric Evidence, pages 17-45, National Bureau of Economic Research, Inc.
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    7. Zvi Griliches, 1998. "Productivity, R&D, and Basic Research at the Firm Level in the 1970s," NBER Chapters, in: R&D and Productivity: The Econometric Evidence, pages 82-99, National Bureau of Economic Research, Inc.
    8. Paul A. Gompers & Josh Lerner, 1998. "What Drives Venture Capital Fundraising?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1998 Micr), pages 149-204.
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    10. Hellmann, Thomas & Puri, Manju, 2000. "The Interaction between Product Market and Financing Strategy: The Role of Venture Capital," The Review of Financial Studies, Society for Financial Studies, vol. 13(4), pages 959-984.
    11. Furman, Jeffrey L. & Porter, Michael E. & Stern, Scott, 2002. "The determinants of national innovative capacity," Research Policy, Elsevier, vol. 31(6), pages 899-933, August.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Matthew Beacham & Bipasa Datta, 2013. "Who Becomes the Winner? Effects of Venture Capital on Firms’ Innovative Incentives - A Theoretical Investigation," Discussion Papers 13/33, Department of Economics, University of York.
    2. Kraeussl, R. & Krause, S., 2011. "Has Europe Been Catching Up? An Industry Level Analysis of Venture Capital Success over 1985 - 2009," Working papers 327, Banque de France.
    3. Matthew Crail Johnson, 2015. "The Effect of Initial Public Offerings on Firm Innovation," Working Papers 22, Birkbeck Centre for Innovation Management Research, revised Feb 2015.
    4. Daniele Coin & Valerio Vacca, 2014. "Non-bank finance for firms. The role of private equity funds in north-western Italy," ERSA conference papers ersa14p119, European Regional Science Association.
    5. Santos, Anabela M. & Cincera, Michele & Cerulli, Giovanni, 2024. "Sources of financing: Which ones are more effective in innovation–growth linkage?," Economic Systems, Elsevier, vol. 48(2).
    6. Pavlova, Elitsa & Signore, Simone, 2021. "The European venture capital landscape: An EIF perspective. Volume VI: The impact of VC on the exit and innovation outcomes of EIF-backed start-ups," EIF Working Paper Series 2021/70, European Investment Fund (EIF).
    7. Tykvová, Tereza & Borell, Mariela, 2012. "Do private equity owners increase risk of financial distress and bankruptcy?," Journal of Corporate Finance, Elsevier, vol. 18(1), pages 138-150.
    8. Da Rin, Marco, 2016. "Financing Growth through Venture Capital in Asia and the Pacific," Other publications TiSEM 9fb91a28-6b54-41ce-a01d-9, Tilburg University, School of Economics and Management.
    9. Rin, Marco Da & Hellmann, Thomas & Puri, Manju, 2013. "A Survey of Venture Capital Research," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 573-648, Elsevier.
    10. Dutta, Sourish, 2015. "Financing Innovation: A Complex Nexus of Risk & Reward," MPRA Paper 75584, University Library of Munich, Germany.
    11. George A Shinkle & Jo-Ann Suchard, 2019. "Innovation in newly public firms: The influence of government grants, venture capital, and private equity," Australian Journal of Management, Australian School of Business, vol. 44(2), pages 248-281, May.
    12. Katarzyna Szkuta & Blagoy Stamenov & Anna Ianshyna, 2017. "Improving access to finance for young innovative enterprises with growth potential: evidence of impact on firms' outputs: Part 1. Equity instruments: lessons learned from policy evaluations," JRC Research Reports JRC109163, Joint Research Centre.
    13. Daniel Ferreira & Gustavo Manso & André C. Silva, 2014. "Incentives to Innovate and the Decision to Go Public or Private," The Review of Financial Studies, Society for Financial Studies, vol. 27(1), pages 256-300, January.
    14. Sorin Gabriel ANTON, 2013. "Development Financial Institutions And Their Role In Supporting Emerging Markets Private Equity Funds," Journal of Public Administration, Finance and Law, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 4(4), pages 126-133, December.
    15. Gonzalez-Uribe, Juanita, 2020. "Exchanges of innovation resources inside venture capital portfolios," LSE Research Online Documents on Economics 100924, London School of Economics and Political Science, LSE Library.
    16. González-Uribe, Juanita, 2020. "Exchanges of innovation resources inside venture capital portfolios," Journal of Financial Economics, Elsevier, vol. 135(1), pages 144-168.
    17. Chuanrong Wu & Xiaoming Yang & Veronika Lee & Mark E. McMurtrey, 2019. "Influence of Venture Capital and Knowledge Transfer on Innovation Performance in the Big Data Environment," JRFM, MDPI, vol. 12(4), pages 1-13, December.
    18. Roman Kraussl & Stefan Krause, 2013. "Has Europe Been Catching Up? An Industry Level Analysis of Venture Capital Success over 1985-2009," DEM Discussion Paper Series 13-6, Department of Economics at the University of Luxembourg.
    19. Porumboiu Cristina, 2022. "The Need of Venture Capital Investors in Life Sciences Clusters: a Comparison between Romania and Germany," Proceedings of the International Conference on Business Excellence, Sciendo, vol. 16(1), pages 1038-1046, August.
    20. Bertoni, Fabio & Tykvová, Tereza, 2012. "Which form of venture capital is most supportive of innovation?," ZEW Discussion Papers 12-018, ZEW - Leibniz Centre for European Economic Research.
    21. Kraeussl, Roman & Krause, Stefan, 2010. "Are particular industries more likely to succeed? A comparative analysis of VC investment in the US and Europe," CFS Working Paper Series 2010/02, Center for Financial Studies (CFS).

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    More about this item

    Keywords

    innovation; private equity; venture capital;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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