Comment: How government funding can help or hinder growth

The gap in public and private research and development (R&D) spending is reputed by policymakers to be one of the main factors that is responsible for the slower growth rate that European economies have been experiencing with respect to international competitors. Although the relationship between R&D and economic growth is far from finding full support in the scientific literature and cannot be considered to be automatic, the need to increase R&D spending has been at the centre of the European Council’s policies since the Lisbon 2000 strategy. In this respect, one important cause that is individuated by the European Commission for explaining the European R&D gap is the low presence of high-tech rapid-growth entrepreneurial firms on the old continent. In the words of the Europe 2020 agenda (European Commission, 2010:p.10), “R&D spending in Europe is below 2% [of gross domestic product, GDP] compared to 2.6% in the US…. Our smaller share of high-tech firms explains half of our gap with the US.” One widely shared belief is that the creation of a florid pan-European venture capital (VC) market is a fundamental pre-requisite to bridging the above-mentioned gap and increasing the European Union (EU) performances in terms of innovation, job creation and economic growth. However, the development of VC markets in the EU member states has been dramatically different from the development that is experienced in the US. The overall value of the VC investments over the GDP is nearly three times higher in the US than in Europe. The recent financial crisis has further weakened the EU VC fundraising ability in the subsequent years. The need for an efficient EU VC market to spur economic growth is well understood at the policy level and has resulted in a series of initiatives (the most important one is the Risk Capital Action Plan in 1998) at various playing field-levels, for example measures that aim at increasing stock market openness and/or labor market flexibility or tax incentives, which targeted both the supply of and the demand for VC. According to market operators, even though some structural problems remain, such as thin and fragmented exit markets and limited fundraising ability due to different national regulatory regimes, these attempts contributed to strengthening the EU VC markets, especially after the dot-com bubble, according to the European Private Equity and Venture Capital Association in 2010. Such policy initiatives also led to a specific peculiarity of the EU context: the relative importance compared to other geographical contexts (the US primarily) of governmental VC (GVCs) funds. GVCs are not indirect government support programs to stimulate the supply of VC funds managed by independent companies (IVCs), and they are not public subsidies that are directed toward the assistance of high-tech entrepreneurial firms. Instead, GVCs are defined as funds that are managed by a company that is entirely possessed by governmental bodies. Public initiatives that fall into the definition of GVC are quite typical in many European contexts, for example Belgium, Finland, France, Germany, Italy, Spain and UK, and they share the same mission of nurturing through public equity(-like) investments the development and growth of interesting business projects. Using the VICO dataset, a novel firm-level longitudinal dataset sponsored by the European Union under the 7th Framework Program, we assess the impact of GVCs in comparison (and in conjunction) with IVCs on the growth of European high-tech entrepreneurial firms. Our results show that the main statistically robust and economically relevant positive effect is exerted by IVC investors on firm sales growth: +38% in the short term, +60% in the long term. Conversely, the impact of GVC alone appears to be negligible. We also find a positive and statistically significant impact of syndicated investments by both types of investors on firm sal