Assessing the strongcontributionstrong of venture capital to innovation.pdfVIP

RAND Journal of Economics Vol. 31, No. 4, Winter 2000 pp. 674–692 Assessing the contribution of venture capital to innovation Samuel Kortum* and Josh Lerner ** We examine the influence of venture capital on patented inventions in the United States across twenty industries over three decades. We address concerns about causality in several ways, including exploiting a 1979 policy shift that spurred venture capital fundraising. We find that increases in venture capital activity in an industry are as- sociated with significantly higher patenting rates. While the ratio of venture capital to RD averaged less than 3% from 1983–1992, our estimates suggest that venture cap- ital may have accounted for 8% of industrial innovations in that period. 1. Introduction Governments around the globe have been eager to duplicate the success of the fast-growing U.S. venture capital industry. These efforts share a common rationale: that venture capital has spurred innovation in the United States, and can do so elsewhere (see, for instance, European Commission (1995)). The purported relationship between venture capital and innovation, however, has not been systematically scrutinized. We address this omission by exploring the expe- rience of twenty industries covering the U.S. manufacturing sector over a three-decade period. We first examine in reduced-form regressions whether, controlling for RD spending, venture capital funding has an impact on the number of patented innovations. We find that venture capital is associated with a substantial increase in patenting. The results are robust to a variety of specifications of how