Does Private Equity Investment Spur Innovation? Evidence from Europe
Alexander A. Popov
European Central Bank (ECB)
Rotterdam School of Management, Erasmus University; Erasmus Research Institute of Management (ERIM)
June 15, 2009
ECB Working Paper No. 1063
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.
Number of Pages in PDF File: 48
Keywords: private equity, venture capital, innovation
JEL Classification: C23, G15, O16working papers series
Date posted: June 19, 2009
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