Venture capital investment, financial development, and economic growth: the case of European single market countries

Venture capital (VC) is a key catalyst for nurturing start-up firms with high-growth potential to undertake innovative endeavors that contribute to national wealth. Existing literature concentrates on the impact of venture capital on firm-level performance. Unlike much of the earlier work, we conduct a macro study examining short-term and long-term relationships between VC investment, the state of the financial sector, and economic growth in 20 European single market countries between 1989 and 2015. We show that major transformations (political, economic, financial and institutional) over the sample period in the Eurozone region have resulted in the data series used in the study (economic growth, financial sector development, and VC investment) to be non-stationary. As such, the vector error-correction model (VECM) and Granger-Causality test are used to examine short-term and long-term relationships between VC investment, financial development, and economic growth for the sample countries. The findings suggest that economic growth strategies and financial sector reforms are critical for a vibrant venture capital industry. In the short term, there are bi-directional relationships between some of the variables. These results suggest that plans to create a vibrant venture capital industry will reinforce financial sector development and economic development, creating a more sustainable economic development model for countries in the Eurozone region.

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