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Venture Capital and Innovation: Which is First?

Masako Ueda

University of Wisconsin, Madison - School of Business; Centre for Economic Policy Research (CEPR)

Masayuki Hirukawa

Department of Economics, Northern Illinois University

September 14, 2008

Policy makers typically interpret positive relations between venture capital investments and innovations as an evidence that venture capital investments stimulate innovation ("VC-first hypothesis"). This interpretation is, however, one-sided because there may be a reverse causality that innovations induce venture capital investments ("innovation-first hypothesis"): an arrival of new technology increases demands for venture capital by driving new firm startups. We analyze this causality issue of venture capital investments and innovation in the US manufacturing industry using both total factor productivity (TFP) growth and patent counts as measures of innovation. Using a panel AR regression as well as industry-by-industry AR regressions, we find that TFP growth is often positively and significantly related with future VC investment, which is consistent with the innovation-first hypothesis. We find little evidence that supports the VC-first hypothesis. More surprisingly, one-year lagged VC investments are often negatively and significantly related with both TFP growth and patent counts.

Number of Pages in PDF File: 45

Keywords: Venture Capital, Innovation, Granger-Causality

JEL Classification: G24, D24, O31, O32

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Date posted: August 22, 2008 ; Last revised: September 15, 2008

Suggested Citation

Ueda, Masako and Hirukawa, Masayuki, Venture Capital and Innovation: Which is First? (September 14, 2008). Available at SSRN: http://ssrn.com/abstract=1242698 or http://dx.doi.org/10.2139/ssrn.1242698

Contact Information

Masako Ueda (Contact Author)
University of Wisconsin, Madison - School of Business ( email )
975 University Avenue
Madison, WI 53706
United States
608-262-3656 (Phone)
608-265-4195 (Fax)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Masayuki Hirukawa
Department of Economics, Northern Illinois University ( email )
Zulauf Hall 515
DeKalb, IL 60115
United States
815-753-6434 (Phone)
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