Skip to main content
SpringerLink
Log in

Financial System and Innovations: Determinants of Early Stage Venture Capital in Europe

  • Chapter
  • First Online:
Financial Market Integration and Growth

Abstract

From the 1990s until now, the most developed economies in Europe have significantly lower GDP growth rates than the US. These considerable lower growth rates go along with lower productivity growth and a poor development on the labour markets in the most European countries, especially in the large economies like Germany, France and Italy.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 84.99
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 109.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD 109.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Notes

  1. 1.

    Eurobarometer: http://europa.eu.int/comm/enterprise/entrepreneurship/financing/surveys.htm.

  2. 2.

    http://epp.eurostat.ec.europa.eu/extraction/retrieve/en/theme9/inn/inn_cis4_ham?OutputDir=EJOutputDir_428&user=unknown&clientsessionid=36B5ACB284DB9EF789B3402F5C84B21D.extraction-worker-1&OutputFile=inn_cis4_ham.htm&OutputMode=U&NumberOfCells=28&Language=en&OutputMime=text%2Fhtml&

  3. 3.

    Along DiMasi et al. (2003) e.g. the development process of biopharmaceuticals demands on average 12 years and 100 million US $ R&D expenditures with only one out of 5,000 initial drug candidates reaching market launch (Evans and Varaiya 2003).

  4. 4.

    Private Equity includes beside VC also management buyins (MBI) and management buyouts (MBO). A management buyout (MBO) is a form of acquisition where a company’s existing managers acquire a large part or all of the company and a MBI occurs when a manager or a management team from outside the company raises the necessary finance, buys it, and becomes the company’s new management. In general MBIs and MBOs are financed by debt and occur in less risky and therefore often less innovative industry sectors which are characterized by relative stable cash flows.

  5. 5.

    Business angels are wealthy private persons with normally successful experience as an entrepreneur or a manager. They contribute their network of personal contacts in business and company finance circles. In addition to their experience, they also provide capital for young entrepreneurs with convincing business ideas. The European Business Angel Network (EBAN) reports that in the US, 250,000 angels invested $24 billion in 2005 in comparison to 75,000 angels who invested only €2-3 billion in Europe (http://www.eban.org/download/Standard%20EBAN%20Presentation_2007.).ppt#287,18,Benchmarking angel activity

  6. 6.

    For a more detailed data definition see Appendix.

  7. 7.

    http://epp.eurostat.ec.europa.eu/tgm/web/table/description.jsp.

  8. 8.

    It needs time before R&D expenditures as well as patent applications become marketable products.

  9. 9.

    Hellmann et al. (2008) simply show that the probability is higher that independent VCs invest in early stage deals in comparison to bank dependent VCs. In absolute terms early stage VC deals or investments can increase with an increasing number of bank depending VCs.

References

  • Alesina, A., Ardagna, S., Nicoletti, ‚G., Schiantarelli, F. (2003). Regulation and Investment. NBER Working Paper No. 9560.

    Google Scholar 

  • Allen, F. (1993). Stock markets and resource allocation. In C. Mayer & X. Vives (Eds.), Capital markets and financial intermediation (pp. 81–108). Cambridge: Cambridge University Press.

    Google Scholar 

  • Ang, J. (2008). A survey of recent developments in the literature of finance and growth. Journal of Economic Survey, 22(3), 536–576.

    Article  Google Scholar 

  • Audretsch, D., & Lehmann, E. (2004). Debt or equity, the role of venture capital in financing high-tech firms in Germany. Schmalenbach Business Review, 56, 340–357.

    Google Scholar 

  • Baumol, W. J. (2002). Free market innovation machine: analyzing the growth miracle of capitalism. NJ, USA: Princeton University Press.

    Google Scholar 

  • Beck, T., & Levine, R. (2002). Industry growth and capital allocation, does having a market- or bank-based system matter? Journal of Financial Economics, 64, 147–180.

    Article  Google Scholar 

  • Becker, R., & Hellmann, T. (2005). The genesis of venture capital: lessons from the German experience. In C. Keuschnigg & V. Kanniainen (Eds.), Venture capital, entrepreneurship, and public policy (pp. 33–67). Cambridge: MIT Press.

    Google Scholar 

  • Berger, A., & Udell, G. (1998). The economics of small business finance: the roles of private equity and debt markets in the financial growth cycle. Journal of Finance, 22, 613–673.

    Google Scholar 

  • Berger, A., & Udell, G. (2002). Small business credit availability and relationship lending: the importance of bank organizational structure. Economic Journal, 112, 32–53.

    Article  Google Scholar 

  • Berlin, M. (1998). That thing venture capitalists do business review. january/february (pp. 15–27). Philadelphia: Federal Reserve Bank of Philadelphia.

    Google Scholar 

  • Black, B., & Gilson, R. (1997). Venture capital and the structure of capital markets: banks versus stock markets. Journal of Financial Economics, 47, 243–277.

    Article  Google Scholar 

  • Boot, A., Greenbaum, S., & Thakor, A. (1993). Reputation and discretion in financial contracting. American Economic Review, 83, 1165–1183.

    Google Scholar 

  • Boyd, J., & Smith, B. (1998). The evolution of debt and equity markets in economic development. Economic Theory, 12, 519–560.

    Article  Google Scholar 

  • Carlin, W., & Mayer, C. (2000). How do financial systems affect economic performance? In X. Vives (Ed.), Corporate governance: theoretical and empirical perspectives (pp. 137–168). Cambridge: Cambridge University Press.

    Google Scholar 

  • Carpenter, R., & Petersen, B. (2002). Capital market imperfections, high-tech investment, and new equity financing. The Economic Journal, 112, 54–72.

    Article  Google Scholar 

  • Clarysse, B., Knockaert, M., Lockett, A. (2005). How do early stage high technology investors select their investments? Working Paper 2005/297, Ghent University.

    Google Scholar 

  • Czarnitzki, D. (2006). Research and development in small- and medium-sized enterprises: the role of financial constraints and public funding. Scottish Journal of Political Economy, 53(3), 257–335.

    Article  Google Scholar 

  • Davila, A., Foster, G., & Gupta, M. (2003). Venture capital financing and the growth of startup firms. Journal of Business Venturing, 18, 689–708.

    Article  Google Scholar 

  • Davis, E. (2000). Pension Funds, Financial Intermediation and the New Financial Landscape, Discussion Paper PI-0010. The Pension Institute, UK, London.

    Google Scholar 

  • DiMasi, J., Hansen, R., & Grabowski, H. (2003). The price of innovation: new estimates of drug development costs. Journal of Health Economics, 22, 151–185.

    Article  Google Scholar 

  • Engel, D. (2002). The Impact of Venture Capital on Firm Growth: An Empirical Investigation. ZEW Discussion Paper No. 02-02.

    Google Scholar 

  • Engel, D., & Keilbach, M. (2007). Firm-level implications of early stage venture capital investment – an empirical investigation. Journal of Empirical Finance, 14(2), 150–167.

    Article  Google Scholar 

  • European Commission (2005a). SME Access to Finance. Flash Eurobarometer 174.

    Google Scholar 

  • European Commission (2005b). Best practices of public support for early-stage equity finance, Final report of the expert group. Resource Document. Directorate-General for Enterprise and Industry. http://ec.europa.eu/enterprise/entrepreneurship/financing/docs/report_early-stage_equity_finance.pdf. Accessed 20 May 2008.

  • European Commission (2006). SME Access to Finance in the New Member States, Flash Eurobarometer 184. The Gallup Organization.

    Google Scholar 

  • Evans, A., & Varaiya, N. (2003). Assessment of a biotechnology market opportunity. Entrepreneurship Theory and Practice, 28(1), 19. 87–105.

    Article  Google Scholar 

  • Fenn, G., Liang, N., & Prowse, S. (1995). The economics of the private equity market. Stuff study 168. Washington, DC: Board of Governors of the Federal Reserve System.

    Google Scholar 

  • Gebhardt, G., & Schmidt, K. (2001). Der Markt für Venture Capital: Anreizprobleme, Governance Strukturen und staatliche Interventionen. Perspektiven der Wirtschaftspolitik, 3(3), 235–255.

    Article  Google Scholar 

  • Gerschenkron, A. (1963). Economic backwardness in theoretical perspective. Cambridge: Harvard University Press.

    Google Scholar 

  • Gompers, P., & Lerner, J. (1998). What drives venture capital fundraising? Brookings Papers on Economic Activity Microeconomics, 1998, 149–204.

    Article  Google Scholar 

  • Gompers, P., & Lerner, J. (1999). The venture capital cycle. Cambridge, MA: The MIT Press.

    Google Scholar 

  • Goodacre, A., & Tonks, I. (1995). Finance and technological change. In P. Stoneman (Ed.), Handbook of the economics of innovation and technological change (pp. 298–341). Oxford: Basil Blackwell.

    Google Scholar 

  • Gorman, M., & Sahlman, W. (1989). What do venture capitalists do? Journal of Business Venturing, 4, 231–248.

    Article  Google Scholar 

  • Hall, B. (1992). Research and development at the firm level: Does the source of financing matter? NBER Working Paper No. 4096.

    Google Scholar 

  • Hall, B. (2002). The financing of research and development. Oxford Review of Economic Policy, 18(1), 35–51.

    Article  Google Scholar 

  • Harhoff, D. (1998). Are there financing constraints for R&D and investment in German manufacturing firms? Annales d’Economie et de Statistique, 49(50), 421–456.

    Google Scholar 

  • Hege, U., Da Rin, M., Llobet, G., & Walz, U. (2006). The law and finance of venture capital financing in Europe: findings from the RICAFE research project. European Business Organization Law Review, 7, 525–547.

    Article  Google Scholar 

  • Hege, U., Palomino, F., & Schwienbacher, A. (2009). Venture capital performance: the disparity between Europe and the United States. Revue de l’association française de finance, 30(1), 7–50.

    Google Scholar 

  • Hellmann, T., Lindsey, L., & Puri, M. (2008). Building relationships early: banks in venture capital. The Review of Financial Studies, 21(2), 513–541.

    Article  Google Scholar 

  • Hellmann, T., & Puri, M. (2002). Venture capital and the professionalization of start-up firms: empirical evidence. Journal of Finance, 57(1), 169–197.

    Article  Google Scholar 

  • Hellwig, M. (1991). Banking, financial intermediation, and corporate finance. In A. Giovanni & C. Mayer (Eds.), European financial intermediation (pp. 35–63). Cambridge: Cambridge University Press.

    Google Scholar 

  • Hicks, J. (1969). A theory of economic history. Oxford: Clarendon Press.

    Google Scholar 

  • Himmelberg, C., & Peterson, B. (1994). R&D and internal finance: a panel study of small firms in high-tech industries. Review of Economics and Statistics, 76, 38–51.

    Article  Google Scholar 

  • Hirsch, J., Walz, U. (2006). Why Do Contracts Differ between VC Types? Market Segmentation versus Corporate Governance Varieties. Center for Financial Studies, Discussion Paper No. 2006/12.

    Google Scholar 

  • Hubbard, R. G. (2008). Money, the financial system, and the economy (6th ed.). New York: Pearson.

    Google Scholar 

  • Jeng, A., & Wells, C. (2000). The determinants of venture capital funding: evidence across countries. Journal of Corporate Finance, 6(3), 241–289.

    Article  Google Scholar 

  • KfW Bankengruppe (2006). Mittelstands- und Strukturpolitik Nr. 37. Sonderband "Innovationen im Mittelstand", Frankfurt.

    Google Scholar 

  • Klapper, L., Leaeven, L., & Rajan, R. (2004). Business environment and firm entry: evidence from international data. Working Paper: World Bank Policy Research. 3232.

    Book  Google Scholar 

  • Koetter, M., Wedow, M. (2006). Finance and Growth in a Bank-based Economy: Is it Quantity or Quality that matters? Discussion Paper Series 2: Banking and Financial Studies No. 02/006.

    Google Scholar 

  • Kortum, S., & Lerner, J. (2000). Assessing the contribution of venture capital to innovation. RAND Journal of Economics, 31(4), 674–692.

    Article  Google Scholar 

  • Kukuk, M., & Stadler, M. (2001). Financing constraints and the timing of innovations in the German service sector. Empirica, 28, 277–292.

    Article  Google Scholar 

  • Levin, A., Lin, C., & Chu, C. (2002). Unit root tests in panel data: asymptotic and finite-sample properties. Journal of Econometrics, 108, 1–24.

    Article  Google Scholar 

  • Levine, R. (2001). Bank-based or market-based financial system: which is better? Journal of Financial Intermediation, 11(4), 398–428.

    Article  Google Scholar 

  • Levine, R. (2004). Finance and Growth: Theory and Evidence. NBER Working Paper No. 10766.

    Google Scholar 

  • Levine, R., & Zervos, S. (1998). Stock markets, banks, and economic growth. American Economic Review, 88, 537–558.

    Google Scholar 

  • Link, A., & Bozeman, B. (1991). Innovative behavior in small-sized firms. Small Business Economics, 3, 179–184.

    Article  Google Scholar 

  • Maddala, G., & Wu, S. (1999). A comparative study of unit root tests with panel data and a new simple test. Oxford Bulletin of Economics and Statistics, 61, 631–652.

    Article  Google Scholar 

  • Metcalfe, S. (1995). The economic foundations of technology policy: equilibrium and evolutionary perspectives. In P. Stoneman (Ed.), Handbook of the economics of innovation and technical change (pp. 409–512). London: Blackwell.

    Google Scholar 

  • Modigliani, F., & Miller, M. (1958). The cost of capital, corporation finance and the theory of investment. American Economic Review, 48, 261–297.

    Google Scholar 

  • Moore, B. (1994). Financial constraints to the growth and development of small high-technology firms. In A. Hughes & D. J. Storey (Eds.), Finance and the small firm (pp. 112–144). London: Routledge.

    Google Scholar 

  • Mueller, E., Zimmermann, V., (2006). The Importance of Equity Finance for R&D Activity – Are There Differences Between Young and Old Companies? ZEW (Centre for European Economic Research) Discussion Paper No. 06-014.

    Google Scholar 

  • Mulkay, B., Hall, B., & Mairesse, J. (2001). Investment and R&D in France and in the United States. In D. Bundesbank (Ed.), Investing today for the world of tomorrow (pp. 229–273). Heidelberg: Springer.

    Google Scholar 

  • Murray, G. (1998). Early-stage venture capital funds, scale economies and public support. Venture Capital, 1(4), 351–384.

    Article  Google Scholar 

  • Myers, S., & Majluf, N. (1984). Corporate financing and investment decisions when firms have information that investors do not. Journal of Financial Economics, 13, 187–221.

    Article  Google Scholar 

  • National Venture Capital Association (2008). Venture Capital Performance. Resource Document. EVCA http://www.nvca.org/index.php?option=com_docman&task=doc_download&gid=503&ItemId= Accessed 09 January 2010.

  • OECD (2003). Venture Capital: Trends and Policy Recommendations. Science Technology Industry. Resource Document. http://www.oecd.org/dataoecd/4/11/28881195.pdf. Accessed 10 June 2008.

  • Pagano, M. (1993). Financial markets and growth: an overview. European Economic Review, 37, 613–622.

    Article  Google Scholar 

  • Petersen, M., & Rajan, R. (1995). The effect of credit market competition on lending relationships: evidence from small business data. Journal of Finance, 49, 3–37.

    Article  Google Scholar 

  • Popov, A.; Rosenboom, P (2009). Does Private Equity Spur Innovation? Evidence from Europe. ECB Working Paper Series No. 1063.

    Google Scholar 

  • Romain, A., Van Pottelsberghe, B. (2004a). The Economic Impact of Venture Capital, Deutsch Bank Discussion Paper Series 1, Studies of the Economic Research Centre No. 18/2004.

    Google Scholar 

  • Romain, A., Van Pottelsberghe, B. (2004b). The Determinants of Venture Capital: Additional Evidence. Deutsch Bank Discussion Paper Series 1, Studies of the Economic Research Centre No. 19/2004.

    Google Scholar 

  • Savin, N., & White, K. (1977). The Durbin–Watson test for serial correlation with extreme sample sizes or many regressors. Econometrica, 45, 1989–1996.

    Article  Google Scholar 

  • Schertler, A. (2002). Under What Conditions Do Venture Capital Markets Emerge? Kiel Working Paper No. 119.

    Google Scholar 

  • Schertler, A. (2003). Driving Forces of Venture Capital Investments in Europe: A Dynamic Panel Data Analysis. Kiel Institute for World Economics, Working Paper No. 03-27.

    Google Scholar 

  • Schertler, A. (2004). Explaining cross-country variations in venture capital investments: theory and empirical evidence. Kredit und Kapital, 37(3), 297–328.

    Google Scholar 

  • Schertler, A. (2007). Knowledge capital and venture capital investments: new evidence from European panel data. German Economic Review, 8(1), 64–88.

    Article  Google Scholar 

  • Schumpeter, J., (1911). Theorie der wirtschaftlichen Entwicklung, Eine Untersuchung über Unternehmergewinn, Kapital, Kredit, Zins und den Konjunkturzyklus, 7. Auflage (1987). Berlin: Dunker & Humblot.

    Google Scholar 

  • Stiglitz, J., & Weiss, A. (1981). Credit rationing in markets with imperfect information. American Economic Review, 71, 393–410.

    Google Scholar 

  • Stiglitz, J. (1985). Credit markets and the control of capital. Journal of Money, Credit and Banking, 17(2), 133–152.

    Article  Google Scholar 

  • Stoneman, P. (2001), Heterogeneity and Change in European Financial Environments, EIFC Working Paper No. 01-7.

    Google Scholar 

  • Storey, D. J. (1995). The financing of new and small enterprises in the OECD countries. Coventry: SME Centre, Warwick Business School.

    Google Scholar 

  • Stulz, R. (2000). Financial structure, corporate finance, and economic growth. International Review of Finance, 1(1), 11–38.

    Article  Google Scholar 

  • Tiwari, A., Mohnen, P., Palm, F., Van der Loeff, S. (2007), Financial Constraint and R&D Investment: Evidence from CIS. Working Paper 2007-011, Maastricht: United Nations University.

    Google Scholar 

  • Ueda, M. (2004). Banks versus venture capital: project evaluation, screening, and expropriation. Journal of Finance, 59, 601–621.

    Article  Google Scholar 

  • White, H. (1980). A heteroskedasticity-consistent covariance matrix and a direct test for heteroskedasticity. Econometrica, 48, 817–838.

    Article  Google Scholar 

  • Wooldridge, J. (2002). Econometric analysis of cross section and panel data. Cambridge, MA: The MIT Press.

    Google Scholar 

Download references

Acknowledgements

This article is part of a Jean Monnet research project (Project No.:-2006-1623/001-001-001-JMO-JMO) financed by the European Commission.

I would like to thank Prof. Dr. Paul J.J. Welfens, Prof. Dr. Werner Bönte, Jens Perret, Mevlud Islami, Thomas Domeratzki, Deniz Erdem and the participants of the FIRB-RISC conference on Research and Entrepreneurship in the knowledge-based economy in Milano at the Bocconi University in September 2009 for their useful comments. I am also grateful to Michael Agner for his patient help to correct the numerous errors in my translation.

Author information

Authors and Affiliations

  1. Researcher at the European Institute for International Economic Relations at the University of Wuppertal/Schumpeter School of Business and Economics, Rainer-Gruenter-Strasse 21, 42119, Wuppertal, Germany

    Christian Schröder

Authors
  1. Christian Schröder
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Christian Schröder .

Editor information

Editors and Affiliations

  1. Europäisches Institut für Internationale, Wirtschaftsbeziehungen (EIIW) e.V., Bergische Universität Wuppertal, Rainer-Gruenter-Straße 21, Wuppertal, 42119, Germany

    Paul J.J. Welfens

  2. Dept. Economics, University of Birmingham, Edgbaston, Birmingham, B15 2TT, United Kingdom

    Cillian Ryan

Appendix

Appendix

Fig. 4.1
figure 1_4

Stage distribution of investments in Europe Source: EVCA

Full size image
Fig. 4.2
figure 2_4

Innovation system

Full size image
Fig. 4.3
figure 3_4

Early stage VC investments in selected EU countries Source: Eurostat

Full size image
Fig. 4.4
figure 4_4

Residual plots (of the regression presented in Table 4.2)

Full size image
Fig. 4.5
figure 5_4

Residual plots (of the regression presented in Table 4.3)

Full size image
Table 4.1 Descriptive statistic of used variables
Full size table
Table 4.2 Regression results model 1
Full size table
Table 4.3 Regression results model 2 (including lags)
Full size table
Table 4.4 Data definitions and sources
Full size table
Table 4.5 Common pool unit root test results/LEVIN, LIN, CHU method
Full size table
Table 4.6 Common pool unit root test results/LEVIN, LIN, CHU method (first differences)
Full size table
Table 4.7 Durbin-Watson statistic: 1% significance points of dL and dU (models with an intercept)
Full size table

Rights and permissions

Reprints and permissions

Copyright information

© 2011 Springer-Verlag Berlin Heidelberg

About this chapter

Cite this chapter

Schröder, C. (2011). Financial System and Innovations: Determinants of Early Stage Venture Capital in Europe. In: Welfens, P., Ryan, C. (eds) Financial Market Integration and Growth. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-16274-9_4

Download citation

  • DOI: https://doi.org/10.1007/978-3-642-16274-9_4

  • Published:

  • Publisher Name: Springer, Berlin, Heidelberg

  • Print ISBN: 978-3-642-16273-2

  • Online ISBN: 978-3-642-16274-9

  • eBook Packages: Business and EconomicsEconomics and Finance (R0)

Publish with us

Policies and ethics

Search

Navigation