Ebook Venture Capital in Europe and the Financing of Innovative Companies
The ability to encourage and sustain technological innovation is one of the main sources of economic growth. In the last decade, the increasingly rapid pace of innovation induced by entrepreneurial firms has substantially contributed to the strong competitiveness and protracted growth of the US economy. Several studies have documented the ability of US venture capitalists to select promising companies, provide adequate financing, and spur innovative firms to behave aggressively and emerge as market leaders (see Hellmann (2000) for an overview). A wide consensus among economists, business leaders, and policy-makers exists that a vibrant venture capital industry is a cornerstone of America’s leadership in the commercialization of technological innovation, and that the lack of venture capital hinders European firms from competing on an equal footing (European Commission (1994)).
Several official documents of European governments and institutions suggest bolstering venture capital and revamping the regulation of stock markets as remedies to Europe’s economic slugginesh and dismal unemployment. For instance, the European Commission’s 1998 Risk Capital: A Key to Job Creation in the European Union Communication states as its main message that ‘[d]eveloping risk capital in the European Union, leading towards the development of pan-European risk capital markets is essential for major job creation in the EU’ (European Commission (1998) p.1). As the title of the Communication indicates, the creation of a pan-European equity market for innovative companies was identified by the Communication as a crucial step not only for providing risk capital to companies, but also for the creation of a substantial number of new jobs.
More recently, the ’Final Report of the Committee of Wise Men on the Regulation of European Securities Markets,’ ’urges governments and the European institutions to pay particular attention to ensuring that there is an appropriate environment for the development of the supply of risk capital for growing small and medium sized companies, given the crucial importance of this sector for job creation’ (Committee of Wise Men (2001) p.10). The Committee goes on to argue that ’[t]oday there is still an inadequate supply of risk capital in the EU with venture capital only one fifth of US per capita levels. However, if the European Union’s financial markets can integrate (...) European venture capital financing will be encouraged from the bottom up’ (p.78).
Other official documents and reports identify the immaturity of Europe’s venture capital industry and the hostility of its stock exchanges towards young firms as powerful obstacles to the growth of European entrepreneurial firms (see for instance Bank of England (2000)). In turn, entrepreneurial firms are viewed as major contributors to economic growth and to the creation of new jobs (see German Federal Ministry of Economic and Technology (1999a,b)), and venture capital as an important tool for job creation, technological innovation, export growth, and regional development (European Investment Bank (2001)). There is a growing perception that Europe’s growth problems may be caused not as much by rigidities in labour markets, as by weakensses in capital markets, and in particular in the access to risk capital.
These documents raise important policy issues. In particular, it is crucial to understand how policy can actually contribute to the growth of a dynamic venture capital industry in Europe. European official documents, but also industry reports like the White Paper of the European Venture Capital Association (EVCA (1998)), tend to focus on the supply of funds and on the creation of favorable structural conditions for entrepreneurship. However, it is far from evident which policy measures would be most appropriate to nurture venture capital in Europe. Here the lack of rigorous investigation is felt most.
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