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A Drop in an Empty Pond: Canadian Public Policy towards Venture Capital

Journal of Industrial and Business Economics, Forthcoming

26 Pages Posted: 7 Nov 2016  

Douglas J. Cumming

York University - Schulich School of Business

Sofia Johan

York University - Schulich School of Business; Tilburg Law and Economics Center (TILEC)

Jeffrey G. MacIntosh

University of Toronto - Faculty of Law

Date Written: November 1, 2016

Abstract

This paper presents evidence about the shortfall of venture capital in Canada relative to comparable regions in the United States, despite massive government spending on governmental venture capital programs in Canada. The Government of Canada committed $500 million towards venture capital in 2013 through the Venture Capital Action Plan. The Government of Ontario committed $29 million to the Investment Accelerator Fund in 2007, $105 million to the Ontario Venture Capital Fund in 2008, and up to $50 million per year through the Ontario Emerging Technologies Fund in 2009. We present data that shows Ontario’s expenditures would have to be higher by $4.4 billion per year to achieve levels of VC/GDP that are comparable to Massachusetts. Similarly, federal expenditures would have to be higher by $1.6 billion per year higher to achieve levels of VC/GDP that are comparable to the U.S. We attribute the shortfall in Canadian venture capital to two major policy failures. First, there is a persistent government venture capital support program that crowds out private investment. Second, other government programs favor established businesses. In Ontario in 2012, $4.1 billion in expenditures were allocated towards businesses, and the vast majority of these expenses are targeted towards the largest and oldest companies and the companies with the greatest revenues. We discuss the impact of such policies on the venture capital ecosystem in Canada.

Keywords: Venture Capital, Government Programs, Public Policy

JEL Classification: G23, G24, G28, G32, G38, K22

Suggested Citation

Cumming, Douglas J. and Johan, Sofia and MacIntosh, Jeffrey G., A Drop in an Empty Pond: Canadian Public Policy towards Venture Capital (November 1, 2016). Journal of Industrial and Business Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2864956

Douglas J. Cumming

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

HOME PAGE: http://booksite.elsevier.com/9780124095373/

Sofia A. Johan (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Jeffrey G. Macintosh

University of Toronto - Faculty of Law ( email )

78 and 84 Queen's Park
Toronto, Ontario M5S 2C5
Canada
416-978-5795 (Phone)
416-978-2648 (Fax)

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