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Venture capital adds economic spice – Deutsche Bank Research
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Deutsche Bank Research — Venture capital injects economic dynamism: An increase in VC investments of 1‰ of GDP is statistically associated with an increase in real GDP growth of 0.30 pp. Early-stage investments have an even bigger — The direction of causality is not always easy to establish. Yet, tests for Granger-causality in the biggest market, the US, suggest that causality runs from VC-investments to growth. There is also substantial microevidence that supports this view. — Exuberances drive much of the correlation. Taking account of the dotcom boom and bust as well as of the financial crisis leads to lower coefficients. Venture capital (VC) is an important professional source of financing for innovative startups. It backs some of the most interesting and daring business ventures. The importance of young innovative firms is undisputed. They are often first to embrace new technologies and to turn them into commercially successful products. It is no coincidence that many of today’s leading IT and internet firms have been financed by venture capitalists. Currently, a number Besides money, venture capitalists help with practical management knowhow, business networks and sales expertise. The backing of a well-known VC fund is also a powerful endorsement that helps to sway business partners and attracts employees. The downside, in the view of many entrepreneurs, is the loss of control (the venture capitalists get a powerful voice) and a much stronger focus on implementation and profits. By backing innovative startups, a vibrant VC market boosts aggregate productivity and thus economic growth. This is one of our previous results which were published first in 2006 in the Journal of Financial Transformation and refined later. In this Research Briefing, we will revisit some of these older estimates to see how they have stood the test of time. In particular, we are interested in how the investment period in the run-up to the financial and economic crisis and the crisis itself have affected the relation between VC and growth. Moreover, we draw on recent samples of the growing body of economic literature related to VC for supporting evidence. Read the full Research Briefing About the Research Deutsche Bank Research |
