Working Paper Links VC to Employment Growth

Conventional wisdom in the technology-based economic development community is that increased access to risk capital is critical for building competitive economies. Establishing a causal relationship between early-stage capital and employment growth external to the companies receiving the funds has been difficult, however.

A new working paper from the University of Vienna presents a model linking venture capital investment and job growth on the national level. Does Venture Capital Investment Spur Employment Growth?, written by Ansgar Belke, Rainer Fehn and Neil Foster, finds "a one unit increase in venture capital will increase employment growth by 1.8 percentage points."

Looking at data on a sample of 20 member countries of the Organisation for Economic Cooperation and Development (OECD) over the period of 1986-1999, the authors conclude an increase of one standard deviation in early-stage capital alone is associated with a positive change in employment ranging between 1.1 and 1.4 percent.

Five policy recommendations – some of which may have value for U.S. states – suggest ways Europe can help stimulate venture capital investment and employment growth:

• The pension system could be capitalized to a greater extent so that pension funds could invest part of their assets in venture capital firms.
• A well functioning market for initial public offerings such as NASDAQ needs to be created as an exit route for venture capitalists.
• Stronger patent rights might be beneficial in promoting venture capital markets because innovative entrepreneurs might be less fearful of disclosing their ideas to a venture capitalist who could steal them.
• The education system must work toward a system for transforming innovative ideas into new business ventures. And,
• The tax system should provide adequate incentives for risk-taking entrepreneurs.

Does Venture Capital Investment Spur Employment Growth? is available at: http://mailbox.univie.ac.at/Papers.Econ/RePEc/vie/viennp/vie0303.pdf