Does Venture Capital Spur Entrepreneurship?
A new paper by Steven Kreft and Russell Sobel, “Public Policy, Entrepreneurship, and Economic Freedom”(Cato Journal, Fall 2005), examines the causal relationship between venture capital (VC) and entrepreneurship. Do increases in venture funding lead to increases in entrepreneurial activity, or does VC flow to areas in which entrepreneurship is already taking place? Kreft and Sobel apply Granger causality testing to state-level panel data from 1992 to 2001 and conclude that VC follows, rather than leads, entrepreneurial activity.
I’m largely in agreement with the second part of their paper, showing that economic freedom (measured by a version of the Gwartney et al. index) is the primary determinant of state-level entrepreneurship. I have reservations about the main part, however. First, knowing the direction of Granger causality doesn’t necessarily tell us much about (what Roger Garrison calls) “Webster-causality.” Is there a reasonable explanation for the finding? One interpretation suggested by Kreft and Sobel is that VC is more mobile than labor, so the binding constraint on entrepreneurial is the availability of human, rather than financial, capital. But VC is heavily concentrated geographically (in the US, primarily on the East and West coasts), as isinnovation more generally, and it’s not clear that VC can flow freely to those areas that need it. Location matters, for obvious Hayekian and other reasons. Second, state-level measures of entrepreneurship and VC (and, for that matter, economic freedom) miss the within-state variation in entrepreneurship and VC, both of which are heavily concentrated in urban, rather than rural areas.
Third, the results contradict those in Samuel Kortum and Josh Lerner’s influential paper on the causal relationship between VC and innovation (“Assessing the Contribution of Venture Capital to Innovation,” Rand Journal of Economics, Winter 2000). Kortum and Lerner use a 1979 law allowing pension plans to invest in venture funds as an instrument for VC and find a significant effect of VC on patent rates. I find their instrumental-variables approach more convincing than Kreft and Sobel’s Granger causality test.
Tahir Masood
11K-3043
Tahir Masood
11K-3043
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ReplyDeletexohair Ahmed(11-3029)
DeleteDoes Venture Capital Spur Entrepreneurship?
i do thing that Venture capitalism is one of the most adequate principles through which a person can change his/her ideas into realities.
but this en counts to many if and buts. these may include how much background has already been done. if it is a experimentation project then how much successful in fact fruitful the initial results are. then one may also need to insure that how much effort for creating ground to attract sponsors and supporters. then of course one may need to put efforts in overall present-ability of the entrepreneurial activity.
yes it is an established fact that if there is an increase in flow of the funds in Venture capitalist then entrepreneur has high amount of probability for getting funds easily. but on the contrary if we look it from the other aspect it is inquired that lager amounts of Venture capitalism lead to involvement of bigger companies which have very high standards of evaluations. for this it may put a negative impact impact for novice entrepreneurs; put on parallel markets would be seeing more and more competition which is in fact for the market on the whole a positive sign.