Venture Capital and Innovation: Which is First?

45 Pages Posted: 22 Aug 2008 Last revised: 15 Sep 2008

See all articles by Masako Ueda

Masako Ueda

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

Masayuki Hirukawa

Setsunan University

Multiple version iconThere are 2 versions of this paper

Date Written: 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.

Keywords: Venture Capital, Innovation, Granger-Causality

JEL Classification: G24, D24, O31, O32

Suggested Citation

Ueda, Masako and Hirukawa, Masayuki, Venture Capital and Innovation: Which is First? (September 14, 2008). Available at SSRN: or

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)

United Kingdom

Masayuki Hirukawa

Setsunan University ( email )

17-8 Ikedanaka-machi
Neyagawa City, Osaka 572-8508
+81-72-839-8095 (Phone)

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