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Explaining Cross-Country Variations in Venture Capital Investments: Theory and Empirical Evidence
Credit and Capital Markets – Kredit und Kapital, Vol. 37 (2004), Iss. 3 : pp. 297–328
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Andrea Schertler, Kiel
References
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Abstract
This paper investigates why venture capital investments substantially vary across countries. Using a general equilibrium model, I show that the development of venture capital finance depends on the dominance of the banking market because bank finance determines a lower boundary of firms’ user costs of capital. Moreover, this model shows that the level of venture capital investments is affected by the venture capitalists’ costs of management support and monitoring services and the price for raising new funds from uninformed capital providers. Using dynamic panel techniques and a data set of 16 European countries, I test the implications of the model. I find, inter alia, that the lending rate has a positive and significant impact on early-stage investments. (JEL G24, O16, 041)