Public Policy and the Creation of Active Venture Capital Markets

Abstract

We study how public policy can contribute to increase the share of early stage and
high-tech venture capital investments, thus helping the development of active venture
capital markets. A simple extension of the seminal model by Holmstrom and Tirole
(1997) provides a theoretical base for our analysis. We then explore a unique panel of
data for 14 European countries between 1988 and 2001. We have several novel findings.
First, the opening of stock markets targeted at entrepreneurial companies positively
affects the shares of early stage and high-tech venture capital investments; reductions
in capital gains tax rates have a similar, albeit weaker, effect. Second, a reduction in
labor regulation results in a higher share of high-tech investments. Finally, we find no
evidence of a shortage of supply of venture capital funds in Europe, and no evidence
of an effect of increased public R&D spending on the share of high-tech or early stage
venture capital investments.