Government Venture Capital Research: Fake Science and Bad Public Policy

Venture Capital: An International Journal of Entrepreneurial Finance, Forthcoming

16 Pages Posted: 27 Dec 2018

See all articles by Douglas J. Cumming

Douglas J. Cumming

Florida Atlantic University

Sofia Johan

Florida Atlantic University - Finance; Tilburg Law and Economics Center (TILEC)

Date Written: November 9, 2018

Abstract

We review statistical methods used to estimate the impact of crowding out of private venture capital by government venture capital. We review three types of failures that have plagued the venture capital literature and resulted in policy implications that are precisely the opposite of what the data actually indicate. The first failure involves the mistaken use of measures that give rise to country rankings where the best venture capital markets in the world are countries like Austria and Hungry, and the worst venture capital market in the world is the U.K. The second and more recent failure involves the use of data that does not pre-date the creation of government venture capital. The third type of failure involves not accounting for the non-random matching between entrepreneurs and government venture capital programs. We show that statistical inference in recent work that makes some of these mistakes can give rise to remarkably incorrect conclusions; including, for example, a bizarre and clearly false inference that a market with more than 89% investment by government funds exhibits no evidence of displacement of private funds. In view of these issues, we offer suggestions for future research and raise some new questions that could guide policymakers in the future.

Keywords: Government Venture Capital; Crowding Out; Science and Public Policy

JEL Classification: G24, G28, L26

Suggested Citation

Cumming, Douglas J. and Johan, Sofia A., Government Venture Capital Research: Fake Science and Bad Public Policy (November 9, 2018). Venture Capital: An International Journal of Entrepreneurial Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3298460

Douglas J. Cumming

Florida Atlantic University ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

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

Sofia A. Johan (Contact Author)

Florida Atlantic University - Finance ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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