Venture Capital and Innovation: Which is First?

45 Pages Posted: 13 Oct 2011

See all articles by Masayuki Hirukawa

Masayuki Hirukawa

Setsunan University

Masako Ueda

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

Multiple version iconThere are 3 versions of this paper

Date Written: October 2011

Abstract

Policy‐makers typically interpret positive relations between venture capital (VC) investments and innovations as evidence that VC investments stimulate innovation (VC‐first hypothesis). This interpretation is, however, one‐sided because there may be a reverse causality that innovations induce VC investments (innovation‐first hypothesis): an arrival of new technology increases demand for VC. We analyze this causality issue of VC and innovation in the US manufacturing industry using both total factor productivity growth and patent counts as measures of innovation. We find that, consistent with the innovation‐first hypothesis, total factor productivity growth is often positively and significantly related with future VC investment. We find little evidence that supports the VC‐first hypothesis.

JEL Classification: G24, D24, O31, O32

Suggested Citation

Hirukawa, Masayuki and Ueda, Masako, Venture Capital and Innovation: Which is First? (October 2011). Pacific Economic Review, Vol. 16, Issue 4, pp. 421-465, 2011. Available at SSRN: https://ssrn.com/abstract=1943353 or http://dx.doi.org/10.1111/j.1468-0106.2011.00557.x

Masayuki Hirukawa (Contact Author)

Setsunan University ( email )

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

Masako Ueda

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)

London
United Kingdom

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