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The political and legal determinants of venture capital investments around the world

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Abstract

This paper investigates the political and legal determinants of cross-country differences in venture capital (VC) investments. Our results show strong and positive effects of a favorable sociopolitical and entrepreneurial environment on the inception and development of VC investment activity. Controlling for effects due to the legal system prevailing in each country, we find strong evidence that this factor plays an important role in explaining cross-sectional variance. This result conveys important normative implications: entrepreneurship and innovation benefit significantly from an active VC industry, which also allows the ignition of virtuous cycles. Activating this cycle, though, relies on some socioeconomic prerequisites that government and institutions should primarily address.

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Notes

  1. NY Times, “World Bank Report on Governing Finds Level Playing Field”, 5/11/2007; The Economist, “Order in the jungle”, 3/13/2008.

  2. Henceforth LLSV.

  3. EVCA (2005), Re-awakening the bear. Country Reports, European Venture Capital Journal, http://www.ventureeconomics.com/evcj/protected/ctryreps/1107338767047.html.

  4. The closest previous observation is a not further specified “late 1990” (OECD).

  5. This does not conflict with what is implied by the level of IPO: in fact, a stock market can be large due to a slow-growing number of listed companies with a low level of IPO activity. In fact, a common possible bias in financial market studies is represented by the fact that markets with relatively large stocks but low turnover should be more liquid and efficient than markets with a smaller median value for stocks traded but higher turnover.

  6. This is available on Rafael La Porta’s website at http://mba.tuck.dartmouth.edu/pages/faculty/rafael.laporta/publications/LaPorta%20PDF%20Papers-ALL/Law%20and%20Finance-All/Law_fin.xls.

  7. In unreported tests, we have performed a robustness analysis running fixed-effects regressions on a sub-sample of 15 countries, which excludes the US, at the same time the largest VC market and also the country with the highest degree of stability for all explanatory variables. However, excluding these observations does not distort our results.

  8. CPI constituents are provided by: Columbia University, Economist Intelligence Unit, Freedom House, Information International, International Institute for Management Development, Merchant International Group, Political and Economic Risk Consultancy, United Nations Economic Commission for Africa, World Economic Forum and World Markets Research Centre.

  9. To further control for multicollinearity issues, we again ran VIF tests obtaining a value of 2.29.

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Acknowledgement

The authors acknowledge financial support from Bocconi University. We are grateful to the Editor, Professor Zoltan Acs, two anonymous reviewers, Stefano Caselli, Pedro Santa-Clara, Stefano Gatti, Douglas Cumming, Marina Balboa, Juan-Carlos Gomez Sala and seminar participants at the UCLA Finance Seminar 2006, Bocconi University Seminar 2007, EFMA Meeting 2007, PFN Conference 2008 for helpful comments and suggestions We are specially indebted with Simona Zambelli for invaluable support and encouragement. This paper was developed while Stefano Bonini was a Visiting Associate Professor at NYU Stern. The ideas expressed in this paper are those of the authors and do not necessarily reflect the position of the authors’ respective institutions. Any errors remain our own.

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  1. Bocconi University, Via Roentgen 1, 20122, Milan, Italy

    Stefano Bonini & Senem Alkan

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  1. Stefano Bonini
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Correspondence to Stefano Bonini.

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Bonini, S., Alkan, S. The political and legal determinants of venture capital investments around the world. Small Bus Econ 39, 997–1016 (2012). https://doi.org/10.1007/s11187-011-9323-x

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