Individualism and Venture Capital: A Cross-Country Study

The prosperity of economies depends on the commercialization of ideas. The transformation from innovative ideas into new products often originates from start-ups (see Kortum and Lerner 2000) that require financial resources in the form of venture capital (see, e.g., Jeng and Wells 2000). In this respect, the definition of venture capital used in this paper is broad and includes all types of equity financing provided to young companies by a variety of investors, such as family members, friends, and ‘fools’ (3F-Hypothesis), business angels, foundations, pension funds, or venture-capital funds. On the contrary, start-ups cannot typically rely on either internal financing or external debt, because they lack both (stable) cash flows and tangible assets to be pledged as collateral.

Unfortunately, venture-capital financing tends to be scarce for several reasons. First, it is intrinsically risky due to the large number of potential pitfalls that can jeopardize a steady growth path of start-ups and which ultimately results in very high failure rates (Cochrane 1981; Stinchcombe 1965). Second, venture-capital investments are characterized by a material asymmetric distribution of information (also due to a relatively low level of transparency) and serious conflict of interests between investors and start-up founders (see Amit et al. 1998; Jensen and Meckling 1976; Sahlman 1990). In particular, venture-capital investors often have to overcome an information disadvantage with respect to the technology, the founders’ skills, and their commitment. Further, the entrepreneurs are often emotionally bounded to the firm, whereas the venture capitalists mainly focus on the return on investment.

The entrepreneurs’ creativity and innovations are key drivers of economic development. While lasting peace or open economies are basic conditions for economic growth and good laws can act as a transmitter, Cooter and Schäfer (2012) point out that the economic development of a country affects the provision of (non-relational) venture capital. Several studies show that the countries’ (formal) institutional environment, e.g., their political and legal framework (see Armour and Cumming 2006), financial-markets development (see Black and Gilson 1998), tax system (see Da Rin et al. 2006), labor-market regulations (see Jeng and Wells 2000), and public spending on R&D, correlates with venture-capital activities (see Lerner and Tag 2013). For instance, the financial risk investors are facing can be mitigated through tax-system provisions that favor risky start-up investments (e.g., by granting tax-loss carryforwards over several years). Especially in developed countries with their saturated economies, new ideas enhance productivity and therefore economic growth. For this reason, in the last decades, governments around the World have aimed at fostering entrepreneurial activity. In particular, they have improved the legal environment (e.g., by the Small Business Act for Europe, a framework for the EU policy on Small and Medium Enterprises (SMEs) introduced in 2008), promoted the exchange between universities and business, and created so called techno parks for hosting start-ups (see, e.g., Haufler et al. 2014; Markman et al. 2008). However, there are still significant differences in venture-capital investments across countries that raise fundamental questions on these governmental initiatives.

New institutional theorists, such as North (1990, 1994), argue that the ‘rules of the game’ according to which individuals and organizations interact consist of both formal institutions (e.g., regulations or law enforcement) and informal institutions (e.g., culture). In the economics literature, culture has been argued to affect economic outcomes in a variety of situations and dimensions.² Fukuyama (1995, p. 103) states that “non-rational factors like culture, religion, tradition, and other pre-modern sources, will be key to the success of modern societies in a global economy”. According to Hofstede (1980) and Schwartz (1999), culture comprises shared values, norms, beliefs, and practices within a society that change only slowly from one generation to the next. In the case of venture capital, both entrepreneurs’ willingness to start an enterprise and investors’ propensity to invest in risky projects may depend on their cultural heritage (see, e.g., Bruton et al. 2005; De Clercq et al. 2012). Hofstede et al. (2010) (HHM) describe a nation’s culture along six dimensions³ that stem from people’s values and preferences within a country. As documented in the excellent review articles of Beugelsdijk et al. (2017) and Kirkman et al. (2006), HHM’s work has triggered an extraordinary fruitful avenue of research in the field of international business and management to which we would like to contribute with this paper.

Hofstede (1980) defines individualism as a “preference for a loosely-knit social framework in which individuals are expected to take care of only themselves and their immediate families”. Individualism emphasizes individual freedom, personal responsibility, self-reward, and self-orientation. In this paper, we argue that the effect of individualism on venture-capital investments is positive because of the following reasons.

First, and most importantly, individualism fosters the entrepreneurial attitude as it is closely related to pro-market attitudes, risk-taking, entrepreneurship, and innovation (see, e.g., Ang 2015; Chui et al. 2010; Li et al. 2013; Morris et al. 1994; Shane 1992, 1993; Shao et al. 2013; Taylor and Wilson 2012; Tiessen 1997; Yamagishi et al. 1998; Yamagishi and Yamagishi 1994). For this reason, the feature of a very high level of individualism in the American culture may very well be one reason for the extraordinary success of venture capitalism in the US. In contrast, collectivism characterizes societies in which group affiliation (families, clans, personal relations, networks, and loyalty) and in-group thinking are important, and forms of nepotism may occur. Such an ‘insider’-system is rather counterproductive for innovative and ‘out-of-the-box’ ideas which often accompany start-ups.

Second, a higher level of individualism within a country is also associated with conditions that favor venture-capital investments. For example, Han et al. (2010) and Zhang et al. (2013) show that individualism is related to investor protection and thereby increases the willingness to provide capital to start-ups (see also Lerner and Schoar 2005). Individualism also improves accountability and transparency (Griffin et al. 2014), which, in turn, decreases the information asymmetry between the entrepreneur and the venture capitalist, reduces capital costs, and fosters venture-capital investments. Finally, empirical evidence also suggests that individualism leads to better corporate governance (Haxhi and van Ees 2010) and thus reduces agency costs arising from conflict of interests between the venture capitalist (the principal) and the entrepreneur (the agent).

Third, several researchers also argue that individualism is positively related to generalized trust (e.g., Allik and Realo 2004; Huff and Kelley 2003, 2005; Realo et al. 2008; Yamagishi et al. 1998; Yamagishi and Yamagishi 1994). In contrast to particularized trust, generalized trust refers to the interpersonal relationships between people outside their group, which turns out to be particularly important for economic transactions (Banfield 1958).^4,5 Generalized trust has been argued to affect economic outcomes, such as trade, growth, cross-border investments, development of stock markets, and overall economic activity (see, e.g., Algan and Cahuc 2010; Ang et al. 2015; Franks and Mayer 2017; Guiso et al. 2009; Sapienza and Zingales 2012).⁶ Individualistic societies (e.g., European and Anglo-Saxon countries, such as the United States, Australia, the United Kingdom, and Canada) with the exception of China (Bjornskov 2007; Steinhardt 2012) exhibit higher levels of generalized trust than collectivistic societies (e.g., countries in Asia, Africa or Latin America). Trust reduces transaction costs in principal-agent situations (Nannestad 2008; Williamson 1975) and, therefore, potentially fosters venture-capital investments (see, e.g., Bottazzi et al. 2016; Duffner et al. 2009; Fairchild 2011). Further, Kwon and Arenius (2010) find that generalized trust (or social capital) increases the perception of entrepreneurial opportunities and that investors in countries with higher generalized trust are more likely to invest in entrepreneurs with whom they have only weak personal ties. Our hypothesis is therefore stated as follows.

Hypothesis: Individualism is positively related to venture-capital investments.

The dependent variable of this study is venture capital. It measures the total amount of risk capital received by young companies in a given country during a given year. This amount includes all investments in seed, early-stage, expansion, or later-stage start-ups that are classified as venture capital in Thomson ONE Banker. In consequence, it includes all private-equity transactions except leverage buyouts. Thereby, financing is provided from various economic actors: individuals, business angels, corporations, governments, pension funds, and venture-capital funds.⁷ Figure 2 depicts the cross-sectional variation of total venture-capital investments around the World.

We use data on individualism from Geert Hofstede’s homepage on culture (http://​geert-hofstede.​com). Individualism can take values from 0 to 100. Countries with scores below 50 are considered ‘collectivist’ and those with scores above 50 are considered ‘individualist’.

We account for several country characteristics that may affect venture-capital investments. GDP growth is computed as the one-year lagged annual change in Gross Domestic Product (GDP). We control for this variable because Jeng and Wells (2000), among others, argue that growing countries create more investing opportunities. GDP per capita is the GDP scaled by the population. Rule of law measures the quality of contract enforcement, property rights, police, and courts, as well as the likelihood of crime and violence. This variable stems from the Worldwide Governance Indicators (WGI) project. A stronger rule of law should increase the willingness of investors to provide money to start-ups. Exports is the percentage of exports of goods and services to GDP. Population growth is computed as the annual population growth rate lagged by one year. GDP is the Gross Domestic Product in US Dollars and is an indicator for a country’s economic importance and size. Definitions of baseline variables and summary statistics are provided in Tables 2 and 3, respectively.

Table 4 shows the correlation matrix among all variables used in the baseline regressions.

The regression results of our baseline model provide first empirical evidence that individualism is positively related to venture capital (Table 5, column II). Importantly, the variance inflator factors never exceed 5, which indicates that multicollinearity is not a serious issue for our regression results. In addition, the regression in column III indicates that individualism explains one third of the variation of venture-capital investments across countries. Conversely, only two thirds of the variation of venture capital around the world are not explained by this single variable.

This relationship is also depicted in Fig. 3: in panel (a) for the total sample and in panel (b) and panel (c) for high- and low-income countries, respectively.

As individualism may also affect other economic and institutional factors which in turn may influence venture-capital investments, we include a battery of additional control variables in the next step. All the data is provided by the World Bank. Unemployment is the percentage of labor force without jobs and is lagged by one year. A higher rate of unemployment may increase the pool of (necessity-based) entrepreneurs. Market capitalization/GDP is market capitalization of listed companies in a country divided by GDP and lagged by one year. It is used as a proxy for the development of financial markets and the venture capitalists’ opportunities to exit their investment via an IPO, which increases their willingness to invest in the first place (see Black and Gilson 1998; Jeng and Wells 2000; Nahata et al. 2014). Foreign direct investments is the ratio of foreign direct investment net inflows (FDI) to GDP. It measures a countries’ openness to foreign capital (see Kim and Lu 2013; Nahata et al. 2014). Trade is the ratio of the sum of exports and imports to GDP. Real interest rate (lagged by one year) proxies both financing costs and the economic conditions of a country. Inflation is also lagged by one year and proxies for the general financial stability of a country. Company taxes are taxes on income, profits, and capital gains in percent of revenue. Higher taxes potentially curb investments (Da Rin et al. 2006; Popov and Roosenboom 2013). As Zak and Knack (2001) argue that income equality fosters generalized trust within a society and potentially affects individualism, we further include the Gini coefficient which assumes a value of 0 for perfect income equality and 100 for perfect inequality. Tertiary education is the fraction of labor force with tertiary education. Dearmon and Grier (2011) show that trust fosters education and education could thereby be interrelated with individualism. R&D expenditures is used as a proxy for the capacity of innovation of a country (Lerner and Tag 2013). Finally, life expectancy measures the number of years a newborn infant can expect to live. However, by adding these additional control variables, our sample is reduced to 924 country-year observations.⁸

In Table 6, column I, we first include economic factors, such as the unemployment rate, market capitalization to GDP or company taxes, which have been argued to affect venture-capital investments (see, e.g., Jeng and Wells 2000). In column II, we include variables that may capture the propensity to start an enterprise, such as tertiary education or R&D expenditures. In column III both sets of variables are integrated. The empirical evidence shows that individualism does not lose its strongly significant and positive relationship with venture-capital investments.

Groups that speak the same language or believe in the same religion often share the same values. Therefore, language and religion have been used as proxies for culture. As an example, Stulz and Williamson (2003) measure culture by language and religion when examining the effect of culture on investor rights. Several other authors use also a country’s language and religion as a proxy for culture (see, e.g., Grinblatt and Keloharju 2001; Guiso et al. 2003, 2006).⁹ The advantage of this approach is that it allows researchers to aggregate countries along clearly defined dimensions (language and religion) (see Gupta et al. 2002; Ronen and Shenkar 1985; Schwartz 2014).

According to Hofstede (1980), language is the most important and recognizable element of culture. He argues that people speaking the same language within a specific territory share a common culture. Stulz and Williamson (2003) suggest that a common language facilitates the exchange of information. Similarly, Grinblatt and Keloharju (2001) track back the home bias to language. Finally, Kashima and Kashima (1998) find that languages in which pronouns are not dropped (e.g., English, French, and German) are more often spoken in countries with higher individualism than languages in which pronouns are dropped (Arabic, Spanish, Italian, and most Asian languages).

As language is an important expression of culture, we include six main languages in our analysis: Arabic, Chinese, English, French, German, and Spanish. Unfortunately, we are not able to include languages that are only spoken in one country (e.g., Swedish, Finnish, and Norwegian), because this variable would capture all other institutional factors of this specific country, i.e., it would act as a fixed effect for those countries.

Bjornskov (2007), Delhey and Newton (2005), and Knack and Keefer (1997) suggest that ethnic diversity within a country lowers trust and could therefore simultaneously affect individualism and curb venture-capital investments. It is possible that the cohabitation of people that speak different languages has a similar effect. Therefore, we include the variable linguistic index in the model, which measures fractionalization of languages within countries by using Herfindahl index from Alesina et al. (2003).

Table 7, columns I and II show that Chinese and French are positively related to venture-capital investments, whereas Arabic is negatively related to it. However, the inclusion of a country’s language does not reduce the strong relation between individualism and venture capital.

Religion is another important expression of culture (Tarakeshwar et al. 2003). It influences norms, beliefs, and rules for behavioral relationships and creates identity. Several empirical studies document that religion influences economic performance (Glahe and Vorhies 1989; Noland 2005), the level of creditor rights (Stulz and Williamson 2003), the quality of government (La Porta et al. 1999), and corporate decisions (Hilary and Hui 2009). The values attributed to different religions have been argued to influence the society’s perception of markets. According to Weber (1930), the Protestant work ethic has laid ground to capitalism and economic wealth. In fact, Hayward and Kemmelmeier (2011) find evidence that Protestant countries and Protestant people within countries have particularly pronounced pro-market attitudes. There is also strong empirical evidence that beliefs, values, and attitudes associated with religion, rather than religion itself, affect economic outcomes (see Arrunada 2010; Barro and McCleary 2003; Guiso et al. 2006; Hayward and Kemmelmeier 2011; La Porta et al. 1997). Protestants can also be seen as being more individualistic in their characteristics of pursuing economic success (Bjornskov 2007).

We include five major religions in our empirical analysis: Buddhism, Catholicism, Islam, Orthodox Christianity and Protestantism. According to several sources, Protestantism is expected to be positively related with venture-capital investments. Again, we do not include religions that are country-specific, such as Hinduism, because they would capture all other aspects of a given country. Similar to the use of a Linguistic index, we include the variable religious index that measures religious heterogeneity within a country (see Alesina et al. 2003).

Interestingly, the results in Table 7, columns III and IV indicate that all religions have a negative influence on venture-capital investments relative to the reference category ‘other’ which includes Daoism (in China), Hinduism, Judaism, Syncretism (in Zimbabwe), and local beliefs. Furthermore, the results also suggest that religious diversity is positively related to venture-capital investments, which, however, does not affect the positive relationship of individualism with venture capital.

An efficient legal system that ensures abidance of contract provisions is vital for trade and economic development (see, e.g., Levine 2005). For example, in a well-functioning legal system, an entrepreneur who steals money will get prosecuted. In this respect, a functioning legal system will promote the transmission from ideas to products and services and, in consequence, lead to economic growth. Law (e.g., the protection of (intellectual) property rights) therefore is seen as a driver of innovation and growth; the lack of it may explain why some economies have failed to experience a positive development. Property rights increase financing available to firms and decrease their cost of capital (Hail and Leuz 2006; Rajan and Zingales 1998). Using a sample of 41 countries, Zak and Knack (2001) show that national growth rises with an increase in trust. One reason for this finding could be that countries with lower levels of trust create an unfavorable institutional environment for entrepreneurship and economic growth. For instance, Aghion et al. (2010) show that low-trust countries are characterized by higher regulation. Several authors find evidence that individualism is positively related to investor protection (Han et al. 2010; Zhang et al. 2013), accountability, transparency (Griffin et al. 2014), and corporate governance (Haxhi and van Ees 2010).

The theory of legal origins has been used to explain differences in economic systems and performance around the world. In a series of papers, La Porta et al. (1997, 1998, 2000, 2008) provide empirical evidence that French civil law offers lower investor protection in contrast to Common law which favors a more efficient allocation of capital and higher economic performance. The Legal Origins Hypothesis states that differences in legal rules and regulations can be attributed to the jurisdictions’ legal origins (common-law countries are more focused on market-supporting regulations, such as investor protection, whereas civil-law countries rely on state-centered capitalistic policies) and that these differences have an effect on economic outcomes. It is important to note, however, that also the level of investor protection might be a consequence of a country’s culture or level of individualism (see, e.g., Roe 2003).

In addition to the variable rule of law of our baseline model, we also include in our regressions the dummy variables Common law, French civil law, German civil law, Nordic civil law, and Socialistic law (mixed law serves as reference variable). We obtain information on the origin of the legal system from Djankov et al. (2007) and NYU’s GlobaLex.

To account for the positive relationship between formal institutions and venture-capital investments documented in Li and Zahra (2012), we include in the regressions the overall score of worldwide governance indicator (World Bank),¹⁰ strength of legal rights index (World Bank; 0 = weak to 10 = strong), economic freedom overall score (Heritage Foundation), and corruption perceptions index (Transparency International). For all indicators, a higher number stands for a better score.

Table 8 shows the regression results controlling for the possible effect of formal institutions. All indices measuring the quality of formal institutions except for Economic freedom overall score are positively and significantly related to venture-capital investments. In column I Nordic civil law has a positive and significant coefficient. However, once the other formal institution variables are included (column IV), the significance of Nordic civil law vanishes.

Beside the dichotomy individualism-collectivism, Hofstede (1980) mentions power distance, uncertainty avoidance, and masculinity-femininity as other important cultural dimensions. Licht et al. (2005) show that power distance (i.e., greater tolerance for hierarchy) is negatively related to investor protection, which may restrain people to invest. Gupta et al. (2004) argue that higher power distance is detrimental to entrepreneurship. Shane (1992, 1993) suggests that higher power distance is negatively related to innovation. Finally, also negotiations have been argued to suffer in case of higher power distance (Chan and Cheung 2016). In countries with a high level of uncertainty avoidance, people may worry more about the unknown future. A culture of uncertainty avoidance has been argued to be an obstacle to venture-capital investments (Hofstede 1980) and has been associated with Continental European countries rather than Anglo-Saxon countries. Shane (1993, 1995) finds a negative relationship between uncertainty avoidance and innovation or entrepreneurship. Research also suggests that higher uncertainty avoidance scores relate to higher risk-aversion (Beugelsdijk and Frijns 2010; Chui and Kwok 2008; Frijns et al. 2013; Kwok and Tadesse 2006; Rieger et al. 2015). Finally, masculinity describes a society’s preferences for achievement and material rewards for success.

We include power distance, uncertainty avoidance, masculinity as well as the newer dimensions of culture by Hofstede (long-term orientation and indulgence, see HHM 2010) into our model. The results in Table 9 indicate that uncertainty avoidance and masculinity are negatively related to venture capital, while long-term orientation is positively related to it. Furthermore, and surprisingly, the additional variable trust¹¹ is not linked to venture capital. Importantly, in all these models, individualism remains strongly and significantly related to venture-capital investments.

Research also suggests that the geographical location of a country and health conditions within countries affect economic outcomes, such as economic growth (see, e.g., Acemoglu et al. 2001; Gorodnichenko and Roland 2017; Sachs and Malaney 2002). Therefore, we include internal distance of country, landlocked, and latitude from GeoDist Database by CEPII, and malaria infections from Geography Datasets by Gallup et al. (1999). Our results suggest, however, that geography plays a minor role in explaining differences in venture-capital investments across countries (results not reported).

Based on the insights from new institutional theory (North 1990, 1994; Scott 1995; Williamson 2000) that formal and informal institutions affect economic outcomes in both a direct and indirect way, in this section we aim at shedding light on the nature of the previously established relationship between individualism and venture-capital investments. In particular, we investigate whether the influence of individualism on venture capital is moderated and/or mediated by formal and informal institutions as suggested by institutional theorists.

With respect to possible moderating effects of this relationship, we consider variables related to economic conditions as well as countries’ formal and informal institutions and interact them with individualism. In Table 10, we report the results for selected variables that, based on the theoretical considerations presented in Sect. 2.3, we deem as particularly plausible moderators of the effect of individualism on venture-capital investments because they are related to entrepreneurial attitudes (uncertainty avoidance), the quality of formal institutions (rule of law), generalized trust (trust), and economic conditions (GDP per capita). Specifically, we create dummy variables that take the value of 1 if the values of the related continuous variables are either in the highest or in the lowest quartile, respectively. In all models, individualism has a positive and significant effect on venture capital. Furthermore, in Table 10, Regression I, the interaction of GDP per capita high with individualism is positive and significant, which indicates that the influence of individualism on venture-capital investments always exists but that it is particularly strong in more-developed countries with higher GDP per capita. Interestingly, no moderating effect could be found in the data with respect to entrepreneurial attitudes, formal institutions, and generalized trust. Additionally, we have tested in the same fashion (not reported) moderating effects related to religion (Buddhism, Catholicism, Orthodox, Protestant, and other) and Hofstede’s other cultural variables (masculinity, power distance, long-term orientation, and indulgence). In all regressions, individualism remained positive and significant. Further, only in the case of long-term orientation, the interaction term with individualism was negative and significant (t-value −2.05), which may indicate that individualism and long-term orientation are partial substitutes in promoting venture-capital investments. No other moderating effect was detected.

In Fig. 4, we provide interaction-effect graphs for the moderating effects of the variables (a) GDP per capita, (b) rule of law, (c) uncertainty avoidance, and (d) trust by showing the relation between individualism and the marginal linear predictions of venture-capital investments for high and low values of the corresponding moderating variable. Remarkably, the slopes are positive in all graphs, which indicates a consistent and positive cross-country relation between individualism and venture-capital investments. Further, countries with higher GDP per capita, stronger rule of law, lower uncertainty avoidance, and higher trust display a more pronounced relationship between individualism and venture-capital investments. However, only in the case of high-income countries (panel (a)), this difference is statistically significant (as previously shown in Table 10).

To test for the presence of mediating effects, we follow Baron and Kenny’s (1986) established three-step procedure. First, we estimate the influence of individualism on the mediating variable (by including controls). Second, we regress venture-capital investments on individualism (with controls but without the mediating variable). Third, we estimate a model to explain venture-capital investments that includes both individualism and the mediating variable. To exert a mediating effect, a variable should (1) be significantly related to individualism in the first-step regression, (2) affect venture-capital investments in the third-step regression, and (3) lead to a significant reduction of the coefficient of individualism when moving from the second-step regression to the third-step regression (we follow Hicks and Tingley (2012) and measure the indirect effect by means of bootstrapping).

Based on the theory presented in Sect. 2.3, entrepreneurial attitudes (uncertainty avoidance), the quality of formal institutions (rule of law), generalized trust (trust), and economic conditions (GDP per capita) are likely to mediate the effect of individualism on venture-capital investments. As shown in Table 11, out of the four main variables, uncertainty avoidance and rule of law are actually found to partially mediate the effect of individualism on venture-capital investments. Their mediation is, however, not complete because the coefficient of individualism on venture-capital investments decreases from the second-step to the third-step regression but it remains positive and significant also when including any of these mediators in the third-step regression. In particular, the indirect effects of individualism on venture-capital investments mediated by uncertainty avoidance and rule of law amount to 27.08% and 35.94% of the total effect (i.e., direct plus indirect effect), respectively (results unreported). On the contrary, GDP per capita and trust cannot be mediators because they are both unrelated to individualism (see Table 11, first equation).

Endogeneity caused by omitted variables and simultaneity may flaw our empirical analysis. We therefore tackled the omitted-variable bias by including numerous control variables. Simultaneity may not present a significant issue in our analysis because culture and the prevailing system of beliefs, values, and norms that affect individualism are deeply rooted within a society and evolve only very slowly (Hofstede 1980). In this respect, Licht (2001) defines culture as the ‘mother of all path dependencies’. However, in order to exclude the potential issues of endogeneity, we employ an instrumental-variable approach.

In particular, we use the Revised Combined Polity Score (polity score) from the Polity IV Project ‘Political Regime Characteristics and Transitions, 1800–2014’ as an instrument for individualism.¹² The score ranks political systems on a scale from − 10 (strongly autocratic) to + 10 (strongly democratic) by subtracting the score of ‘Institutionalized autocracy’ from ‘Institutionalized democracy’. We use the average of this score from 1816 (just after Congress of Vienna) to 1913 (just before World War I).¹³ For example, during this period Thailand obtained a value of − 10 (strongly autocratic) while Switzerland received a value of + 10 (strongly democratic). The Congress of Vienna has set many long-lasting territorial borders and has stabilized Europe for almost 100 years until World War I, despite the revolutions of the mid-nineteenth-century. Considering earlier historical eras appears inappropriate because, from a historical perspective, the modern concept of individualism has become important for the first time in history during the Renaissance (fourteenth to seventeenth century) (Burckhardt 1867). It is reasonable that the political settings in the period from 1816 to 1913 have influenced peoples’ attitudes toward individual freedom, personal responsibility, reward attitude, and self-orientation—traits which are all associated with individualism. As some countries did not exist at the time (e.g., Croatia or Ukraine) or were not covered by polity score, the choice of this instrument reduces the sample to 782 country-year observations.

First-stage regressions in Table 12 show that polity score is relevant as it is positively and significantly related to individualism. The F test of 23.6 exceeding the rule of thumb threshold of 10 shows that the instrument is relevant (see Staiger et al. 1997). As we have only one instrument for our endogenous variable and the model is therefore exactly identified, we cannot test the exogeneity of the instrument. However, reduced-form regressions indicate that our instrument is not directly related to venture-capital investments (the same is true if individualism is also included in the regression). We are therefore confident that our instrument is valid. Importantly, no direct impact of the political system 200 years ago can be expected on today’s venture-capital investments, which offers a strong argument for the exogeneity of the instrument (see, e.g., Wooldridge 2010). The results of the two-stage-least square regression indicate that individualism is still positively related to venture-capital investments.

We round off the analysis by performing a battery of robustness checks. First, in Table 13 we re-run the baseline models by using different specifications of venture-capital investments: venture capital/GDP, number of transactions/population, and seed. Seed is the volume of seed capital, i.e., the first stage of venture capital invested in start-ups.

With all three dependent variables (Table 13, columns I–III), the relationship between individualism and venture capital remains positive and significant. Also, when running Logit (column IV), Tobit (column V), and Random effects models (column VI), the results are qualitatively equivalent.

Higher venture-capital investments may also depend on the existence of specific providers of risk capital within a country, namely individuals and governments. As Brander et al. (2015) show, venture capital sponsored by governments increases total venture-capital investments within a country. Our results show that also the existence of such particular groups of investors does not affect the relationship between individualism and venture-capital investments (results not reported). Additionally, we use supply rather than demand of venture capital as our dependent variable. However, also in this case the results do not change.

We also run regressions on a variety of subsamples to check whether the findings are driven by specific countries. As shown in Table 14 (and depicted in Fig. 3b, c), individualism remains positively and significantly related to venture-capital investments across different sets of income groups even when excluding large countries, such as the United States and China that account for 67.3% and 8.6% of total venture-capital volume in the sample, respectively. Finally, individualism remains strongly related to venture-capital investments during the two periods of financial crises, 2000–2003 and 2007–2009 (results not reported).