Government roles in venture capital development: a review of current literature
| Published date | 02 November 2015 |
| Date | 02 November 2015 |
| DOI | https://doi.org/10.1108/JEPP-08-2014-0032 |
| Pages | 367-391 |
| Author | Lisa Jane Callagher,Peter Smith,Saskia Ruscoe |
| Subject Matter | Strategy,Entrepreneurship,Business climate/policy |
Government roles in venture
capital development: a review
of current literature
Lisa Jane Callagher and Peter Smith
Management and International Business Department,
The University of Auckland, Auckland, New Zealand, and
Saskia Ruscoe
NZX Limited, Wellington, New Zealand
Abstract
Purpose –Interest in venture capital markets continues to be of relevance to politicians and policy
makers, recognizing the importance of government participation in venture capita l market
development. Yet advice regarding developing venture capital markets appears increasingly
disparate. The paper aims to discuss these issues.
Design/methodology/approach –The authors engage the assumptions that underpin three
dominant policy approaches to the development of venture capital markets with regard to the role of
governmentsin that process. The authors categorizeexisting empirical studies againstthree approaches
and give examples of the different government policies associated with the various approaches.
Findings –Direct and indirect approaches recognize the importance of active stock markets but
largely ignore the dynamic processes of markets, asserting that the provision of capital, institutional
changes, and financial incentives ex ante will cause a positive market reaction, regardless of the
market’s context. The recent timed approached is purported as being more comprehensive in its
awareness of the need to adapt to countries’contexts and the need for varying policies at the different
stages of market emergence.
Research limitations/implications –Limited empirical research tests the voracity and limitations
of the timed approach. The challenge in doing so is that evolutionary theories typically explain an
event after it has occurred, thus its predictive power is often limited. Future research might investigate
the efficacy of policy levers based on the timed approach.
Practical implications –The authors highlight the need for the development of venture capital
markets, rather than a venture capital industry.
Originality/value –The authors extend the existing venture capital market development categories
and evaluate each approach in terms of the efficacy of government’s roles in venture capital market
development in light of the existing evidence of economic development and entrepreneurial activity.
Keywords Venture capital, Development policy, Financing, Policy
Paper type Literature review
1. Introduction
Interest in venture capital markets continues to be of relevance to policy makers and
scholars in the context in entrepreneurship and regional innovation systems
(Lindgaard Christensen, 2011; Ribeiro-Soriano and Galindo-Martín, 2012). Venture
capital, the “independently managed dedicated pools of capital that focus on equity or
equity-linked investments in privately held high growth companies”(Gompers and
Lerner, 1999, p. 349) is important in today’s economies. Governments are increasingly
aware of the impact that venture capital can make to economic growth (Murray, 2007).
In particular, the lack of seed-capital or early-stage finance to foster internal growth in
private firms (Metrick and Yasuda, 2010) is a concern to countries with embryonic
venture capital markets (Avnimelech and Teubal, 2006).
Journal of Entrepreneurship and
Public Policy
Vol. 4 No. 3, 2015
pp. 367-391
©Emerald Group Publis hing Limited
2045-2101
DOI 10.1108/JEPP-08-2014-0032
Received 25 August 2014
Revised25February2015
2 March 2015
Accepted 3 March 2015
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
367
Venture
capital
development
This paper reviews some of the current literature to identify and describe the
dominant public policy approaches to venture capital market development with the aim
of identifying gaps and problems in our current understanding of venture capital
market development. In doing so we offer a research agenda that can guide future
research in the economic development-entrepreneurship nexus. Venture capital
markets do not develop in isolation. It is commonly accepted that the transition of
venture capital from an intermediary solving finance-specific problems to providing
financial and non-financial resources (Gulinello, 2005) is inefficiently facilitated by
free-market philosophy (Rosiello et al., 2011). The significant increase in government-
initiated and financed venture activity underscores governments’commitment to
nascent venture capital markets (Bottazzi and Da Rin, 2002; Bruton et al., 2002;
Cumming, 2007; Da Rin et al., 2006; del-Palacio et al., 2012; Gilbert et al., 2006; Lerner,
2010, 2002). Nonetheless, variable rates of organic growth in domestic venture capital
markets have prompted various governmental actions to develop immature local
venture capital infrastructure (Murray et al., 2012).
We offer three contributions about the role of governments in venture capital
market development derived from us “organising previous contributions in a useful
way to advance the conversation”(Huff, 2009, p. 24). First, we contribute a review of
current knowledge about venture capital development. Two valuable features of our
review are: first, the review is built on a market-based definition of venture capital
market development that responds to the dominance of supply-side policy
prescriptions that seem out of kilter with empirical evidence on the importance of
demand-side factors (Da Rin et al., 2006); second, our organizing framework utilizes
three existing approaches to venture capital –the direct, indirect, and timed approaches
(Avnimelech et al., 2010; Avnimelech and Teubal, 2008; Lerner and Tåg, 2013; Rosiello
et al., 2011) to summarize and review governments’role.
Second, we discuss each approach in terms of the efficacy of governments’roles in
venture capital market development, finding that the direct and indirect approaches are
the most conspicuous with their focus on government involvement in capital markets
as manager or investor-manager. Recent studies argue for direct and indirect
government policies at different stages of venture capital market development. While
the supply of capital is vital in venture capital markets, empirical evidence about
economic freedom and entrepreneurial activity supports the agreement that
institutional issues in the form of monetary, fiscal, regulatory, and legislative
policies are more likely to impact market development, and are best facilitated through
the timed approach. Third, we recommend a number of future research opportun ities to
develop the evolutionary models of venture capital markets, including the need for
exploratory (qualitative) and explanatory (quantitative) studies in a wider range of
contexts than is currently available.
2. Venture capital, markets, and development: foundations for a
literature review
Venture capital investment is generally recognized as a three-stage process: fundraising,
investing, and exiting (Gompers and Lerner, 2006; Silveira and Wright, 2010). During
investment, venture capitalists select and allocate equity into new “untried firms
pursuing complex, innovative technologies or novel business strategies”(Gompers and
Lerner, 2001,p. 87). Unlike traditionalfinancial intermediaries, venture capitalists provide
organizational, managerial, and industry advice, assisting entrepreneurs to mitigate
complications such as uncertainty, knowledge gaps, inexperience, and volatile market
368
JEPP
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