The Determinants of Venture Capital Activity - Empirical Evidence and Policy Implications

Acknowledgements
I would like to express my sincere gratitude to the supervisor of this dissertation,

Professor Stefano Caselli, for his guidance and his essential assistance in reviewing the
contents of this dissertation. His clear explanations and his helpfulness during both Private
Equity classes and during our meetings have been of great value for me and have deepened
my knowledge on corporate finance, financial regulation and investments. I am also grateful
to Professor Corielli for his constructive criticism and guidance on the econometric techniques
used in my analysis.
My thanks go to both Bocconi University and Scuola Superiore SantAnna for the
exceptional life experience that has provided me during the last five years. Without their
stimulating environments and without the example of their brilliant students and motivated
professors, I would have never had so many studying, working and travelling opportunities in
such a short amount of time.
I owe my most sincere thanks to all the university friends who have strongly supported
me during my studying and working path over the last five years, and in particular to
Alessandro, Mario, Mattia, Marcello, Nicol, Luka and Rushabh. Without their daily
encouragement and understanding it would have been impossible for me to keep pace with all
the challenges of the recent years. My special gratitude goes to Francesca Larosa and to
Andrea Castiglione, who have always been present as both exceptional friends and team-mates
in the most important moments in these years. I am extremely grateful to all my closest
friends from Florence, who have never made me feel guilty for my absence and who continue
stay close to me as brothers. My warm gratitude goes to Lorenzo Fattorini, one of the most
generous people I have ever met, and to Lorenzo Perego for their profound and loyal
friendship.
I am extremely grateful to all those who made it possible for our Start-up Kiwi Local
to grow from a simple idea into a fast growing technology company over the last three years.
Not only my partners have contributed to nurture my passion for entrepreneurship, but also
they have helped me growing as a person. I am particularly grateful to my colleagues and
partners Giulia, Massimo, Mario, Roberto and their exceptional skills, motivation and
entrepreneurial spirit. Building company with them and pursuing a common project is not
only an incredible business challenge, but also a unique human experience.
My last and greatest thanks go to Lisa, for her unconditional support, generosity,
presence and vitality, and to my family. I feel extremely lucky and grateful for all the love,
support, motivation and suggestion received since I was a child from my family and, in
particular, from my parents Antonella and Stefano, and I owe most of the present and future
results of my life to their presence, education and motivation.
Table of Contents
Table of Contents
Abstract ..................................................................................................................... 3
1. Introduction ......................................................................................................... 4
1.1 Why is VC and Policy support important? ....................................................... 4
1.2 VC in Italy: why is the market so small? ........................................................ 10
2. The determinants of VC: literature review and research hypotheses .. 14
2.1 Theoretical Background ................................................................................... 14
2.2 The Determinants of VC .................................................................................. 20
2.2.1 Government Investment Schemes .............................................................. 21
2.2.2 Market Dynamism and Funds availability ................................................ 25
2.2.3 Education & Innovation stock ................................................................... 32
2.2.4 Cultural and Social Factors ....................................................................... 45
2.2.5 Regulation & Ease of Doing Business ........................................................ 50
2.2.6 Law System: Common Law vs. Civil Law ................................................. 61
3. Econometric Model and Sample .................................................................... 62
3.1 Our Model ........................................................................................................ 62
1
Table of Contents
3.2 Our Sample ...................................................................................................... 68

4. Empirical Results.............................................................................................. 72
4.1 F-stats and coefficients of Determination ........................................................ 72
4.2 Coefficients Results .......................................................................................... 78
4.3 Empirical Analysis Results Summary .............................................................. 87
4.4 Limitations and Acknowledgements ................................................................. 88
5. Implications for Policy-Makers ...................................................................... 90
5.1 The need for an Ecosystem .............................................................................. 91
5.2 Demand Side Intervention................................................................................ 93
5.3 Supply Side Intervention ................................................................................ 100
Conclusions .............................................................................................................. 104
Bibliography ............................................................................................................ 107
Abstract
Abstract
The promotion of early-stage entrepreneurship and venture capital is of critical
importance to stimulate innovation, jobs creation and economic growth in modern
economies. This work analyses the international determinants of venture capital to
shed light on the relationship between macro variables and the different levels of VC
investments across OECD and EU countries. In particular, we focus on the Italian
market, which shows a 2012 VC/GDP ratio 5 times smaller than the European Union
average. The main novelty of this research is the holistic approach used in the choice
of the explanatory variables. While controlling for a large set of factors already
addressed in previous literature such as GDP growth, stock market activity, labor
frictions and legal systems, we argue that also cultural factors, start-up initial costs
and educational variables have an impact on the cross-country level of VC activity.
The dissertation is organized as follows. The first section explains why VC is relevant
for policy makers through a literature review of the sector. The second chapter
continues the review with a focus on individual determinants of VC activity,
highlighting for each variable the specificities of the Italian market. Factors related to
public intervention, financial market dynamism, education and innovation, culture,
ease of doing business and legal systems are discussed. The third section introduces
our regression methodology, using both OLS and GLS models, and data sources. After
presenting our empirical results, we acknowledge limitations and finally discuss about
policies that could have an impact on both the demand and supply-side of venture
capital and contribute to the development of a more dynamic entrepreneurial
ecosystem.
1. Introduction
1. Introduction
1.1 Why is VC and Policy support important?
Even though some forms of venture capital (from now on VC) have existed
since ancient times as a way to finance risky, innovative and high-potential projects,
modern VC is a relatively recent phenomenon. Combining theoretical insights from
both managerial and financial economics studies, over the last 20 years both policy
makers and researchers have been analyzing the industry from micro and a macro
perspectives. While from a micro-perspective the main areas of investigation are the
analysis of returns and best practices in funds management, macro researchers1 focus
more on understanding which are the impacts of VC on economies and how policymakers can shape laws and design interventions aimed at stimulating the industry. In
this dissertation, we follow this second line of research to investigate which are the
determinants of VC activity at an international level, and how policy makers could
stimulate the sector on both its supply and demand sides. But why should policymakers care about stimulating the VC industry? In this section, we briefly review the
main literature contributions on the subject.
These include Gompers, Lerner, Cumming, Jeng, Wells and others.
1. Introduction
Although there is still much to be studied, a large part of the literature believes that
the answer to the above question is based on three pillars.
1. Technological innovation and entrepreneurship are key for economic growth

and jobs creation;
2. VC can stimulate innovation and entrepreneurship;
3. Government Policies can have an impact on both Entrepreneurial environment
and VC industry development, and can help societies achieving a higher level
of welfare.
(1) First of all, the role of progress and technological innovation as a key driver of
economic growth is widely recognized. Other things being equal, innovation enables
economies to produce goods and services in greater volumes and quality. In its 1957
work, the Nobel price Robert Solow was claiming that the total factor productivity
residual, representing the part of growth that could not be explained by higher level
of labor and capital inputs, accounted for about 85% of economic growth (Solow,
1957). On the same line, the OECD argues that entrepreneurship and innovation will
be crucial for the economic development and competitive advantage of 21st century
nations. In Figure 1, Kauffman foundation clearly shows how start-ups, regardless of
financial crises, have been responsible for most of the U.S. net job creation during the
last 30 years (Kane, 2010).
1. Introduction
U.S.A. Net Job Change - Million Jobs (Startups)

4
3
2
1
0
U.S.A. Net Job Change (Startups)

Figure 1 - The Importance of Startups in Job Creation and Job Destruction. Data on the y-axis representing Net
jobs changes in million units. Report written for the Ewing Marion Kauffman Foundation. Data by Kane, T (2010).
There is considerable evidence, moreover, that small high-tech companies are among
the most important drivers of economic growth, contributing disproportionately to the
creation and diffusion of innovative goods and services (the World Bank, 1994, 2002;
Kane, 2004; Kauffman Foundation, 2010). Indeed, small firms have a higher growth
potential than larger firms as, with smaller and more flexible organization structures,
they encourage experimentation and reward new ideas through equity and incentivebased compensation (Almus and Nerlinger, 2000). Based on a wide sample of all
available countries in the World Bank database, Cummings analysis concludes that
entrepreneurship has a significantly positive impact on GDP/capita, exports/GDP,
and patents per population and, moreover, to a negative impact on unemployment2.
(2) Secondly, academics have highlighted the role of VC as the most
appropriate source to finance technology-based firms and their innovations (Gompers
& Lerner, 2001; Denis, 2004; Colombo et Al., 2011). Venture Capitalists not only can
leverage on their sector knowledge to decrease information asymmetries and perform
In particular, Cummings recent study claims that on average, 1% increase in new business started
in one year improves GDP/capita in the subsequent year by 0.24%, reduces unemployment by 0.13%,
and increases patents per population by 0.29% (Cumming, 2013)
1. Introduction
better due diligences and investment decisions, but also can add significant value to
their target companies. Through their strategic support, network of contacts and
positive signaling effect to outsiders, VC funds can thus increase success probabilities
of promising, high-risk projects (Colombo et Al., 2011; Hsu, 2006). Hellman and Puri
(2000) estimate that, because of these special characteristics, a dollar of VC could
generate as much innovation as three dollars of traditional corporate research and
development. In the activities associated with tech start-ups and VC, moreover,
innovations usually have deep positive externalities on the surrounding context.
Examples are represented by partnerships between companies, technology licensing
and former entrepreneurs re-investing in new ventures: in each of these cases, the
impact on the system of a successful venture is much higher than its stand-alone
benefits. If this is the case, the promotion of new high-potential business ventures and
VC becomes critically important for economic growth. Gompers, and Lerner (2001),
however, claim that Hellmans and Puris results could be biased, since the real causal
relation between start-ups, innovation, and VC, is unclear. If on the one side a greater
availability of VC enhances growth perspectives of local entrepreneurs, it is also true
that entrepreneurs and innovative ideas seek capital, and that a dynamic
entrepreneurial ecosystem could be the cause of increased VC activity too (Jeng and
Wells, 2000; Hirukawa and Ueda, 2011). Looking at U.S. sector-level data, Hirukawa
and Ueda (2011) argue that it may be innovation activity to lead the development of
VC, and not vice-versa. The same reasoning was applied to patents by Audretsch and
Feldman (1996): patenting activities may both cause and be caused by new VC
investment. In an attempt to assess causal relations, however, Di Giorgio and Di
Odoardo measured a positive effect of VC supply increases on GDP growth. Despite
the lack of an ultimate consensus on the matter, we can probably claim that both
causal relations have some elements of truth: in a virtuous cycle of cross-fertilization,
7
1. Introduction
high-potential entrepreneurship and VC availability positively influence each-other.

Whatever the main direction of the causal relation, concrete examples from the U.S.
about the importance of VC are quite paradigmatic. Over time, the US VC market
has been financing companies which have disrupted entire industries, such as Apple,
Intel, Microsoft, Facebook, Google and Cisco. Analyzing the results of a survey,
EVCA3 reported that 94.5 % of these disruptive firms said they would not exist if they
had not received VC funding (Felix et Al. - 2007). Moreover, literature shows how not
all VC is equal, as 80% of the industry returns, and arguably of the innovation impact,
is concentrated in the top quartile funds (Cumming & Johan, 2013). In the specific
case of Italy, in 2009 PWC showed how VC-Backed companies in the 2003-2008 period
registered, on average, higher revenue growth than their peers (16,4% vs 5,7%), higher
EBITDA growth and higher employment growth (7,5% on a yearly base) (AIFI4, Libro
Bianco, 2011). We hence believe that, although causals relations are still unclear,
presented evidence is sufficient to support the hypothesis that VC activity is a positive
element for a country.
(3) In order to claim that the VC industry should be a key point on policymakers agenda, however, we need to support a last argument: that governments
stimulus of the industry is socially optimal, and that policy-makers have the
appropriate tools to accomplish the task. In broad terms, government stimulus can
occur through either direct government subsidy programs or legislative changes that
affect the institutional setting. From an historical perspective, there is evidence that
Policy can effectively support VC industries. According to Lerner (2010) almost all of
the global hubs of entrepreneurial activity, such as Silicon Valley, Singapore, Tel Aviv,
3
4
European Private Equity and Venture Capital Association.

Associazione Italiana del Private Equity e Venture Capital.
1. Introduction
bear the marks of government investment. In these cases, in particular, governments

played a very positive role as catalysts and supporters of the ecosystem. In its 2010
work, however, Lerner also stated that for every successful public intervention
spurring entrepreneurial activity, there are many failed efforts, wasting untold billions
in taxpayer dollars. It becomes hence relevant to understand which policies can be
effective and which should be avoided. From a theoretical perspective, government
intervention in the industry can be a reasonable response to both market failures and
mismatches between current investment and socially optimal levels. As to market
failures, many researchers have claimed that a relevant equity gap is often present in
the financing of new technology-based firms, who are usually discriminated in getting
access to external sources of financing (Colombo et Al., 2011). The presence of capital
market imperfections, however, is not the only reason why government support to
high-tech entrepreneurship and VC may be socially optimal. As previously mentioned,
R&D projects are usually characterized by the presence of positive externalities that
may be beneficial for the whole environment. As innovators are not able to capture
all the advantages generated by their ventures, companies incentives to invest in
R&D are often lower than the social optimum (Colombo et Al., 2011). According to
Feldman & Kelley (2003) in order to maximize social welfare, governments should be
particularly supportive of initiatives with the highest potential level of spillovers and
where the gap between private and social returns is higher. Which is the appropriate
role for public policy for stimulating VC and the creation and development of startup ecosystems, in any case, is still a widely debated theme in Entrepreneurial Finance
(Jeng & Wells, 2000; Denis, 2004). Agreeing with Lerner, we support the thesis that
far-seeing policies that foster the development of VC should be key on policy-makers
agendas. Our paper is at a broad level related to recent scholarship such as Bonini
(2011) and Felix et Al. (2011), but also to Jeng & Wells (2000) who compare VC
9
1. Introduction
levels and VC to GDP ratios to assess the importance of different determinants and
understand potential policy implications. In the next paragraphs, after showing the
critical differences in VC levels between countries, we will address the subject by
highlighting which macro variables have a significant impact on VC activity levels.
1.2 VC in Italy: why is the market so small?

In the majority of countries for which data are available, organized VC
investments5 into national companies represent a very small percentage of GDP,
usually well below 0.1% of GDP. Even though these numbers are extremely small
when compared to major national expenditures, such as health care and education,
the relationships explored in the last paragraph show how these figures can have a
0,4
VC Investments as a % of GDP - 2012
0,35
Later Stage Venture Capital
(%GDP)
0,3
0,25
Seed Venture capital (% GDP)
0,2
0,15
0,1
0,05
Israel
United States
Canada
Hungary
Sweden
Ireland
Finland
United Kingdom
Switzerland
Denmark
Netherlands
Norway
France
Japan
Luxembourg
Belgium
Australia
Germany
Spain
Austria
Portugal
Estonia
Slovenia
Greece
Italy
Czech Republic
Poland
Figure 2 - VC Investments in Local Countries as a percentage of GDP. Seed and Later stage breakdown. OECD data,
2012.
VC investments include seed investments, start-up investments and later-stage investments by VC

funds, both foreign and national, in national companies.
5
10
1. Introduction
deep impact on national prosperity over the long run. The worldwide level of
investments in VC has grown spectacularly over the last three decades, but the
observed rates of growth have been extremely different across countries. Figure 2
shows the level of venture investments in national companies scaled by GDP (we will
call this measure VC/GDP) and highlights how 2012 VC activity has dramatically
different relative sizes from country to country. Israel and the United States lead in
terms of VC activity, representing respectively 0.35% and 0.12% of GDP (OECD
Entrepreneurship Data 2013). We then find a large group of countries, including
France, Germany, Belgium, United Kingdom and others which, although not
comparable to Israel levels, have yearly investments between 0,02% and 0,05% of
GDP. On the right side on the chart, with 2012 activities below 0,01% of GDP, we
then find industry laggards. In OECD statistics, Italy ranks as the third last country
by VC industry development. This means that Israel VC_GDP in 2012 was 78,8 times
the Italian one, while U.S., Canada and UK ratios were respectively 25.3x, 17.6x and
VC Investment level (Compared to 2007)
Total VC Investment trends in Europe - 2007-2012 (2007 level = 1)
1,4
1,3
1,2
Germany
1,1
France
1
0,9
Italy
0,8
United Kingdom
0,7
European Union
0,6
0,5
0,4
2007
2008
2009
2010
2011
2012
Figure 3 - Total VC Investments in Italy, France, Germany, UK and UE. 2007=1. EVCA 2014 data.
11
1. Introduction
8.9x. What is even more worrying, however, is that even in countries with more similar
fundamentals, differences with Italy are dramatic. France VC/GDP ratio in 2012 was
5,96 times larger than Italy, Netherlands 6,4x, Belgium 5,25x and even Portugal and
Spain VC markets were respectively 2,1 and 2,4 times larger relatively to GDP. In
general, with 71mm invested in Italian Companies from VC funds in 2012, the Italian
VC_GDP ratio is 5 times smaller than the European Union average.
These figures have very negative consequences on the probability of Italian companies
to be funded and promote innovative projects. In 2012, in Italy only one company out
of 73,000 got VC funding from either local or foreign funds, compared to one out of
637 in Israel, one out of 2,118 in Germany and one in 4,540 in United Kingdom. While
these last figures probably reflect the higher presence of SME in Italy, it is hard not
to see this situation as a strong limitation for Italian innovative companies. Figure 3,
moreover shows how such dramatic differences in investment relative levels are not to
be attributed significantly to the recent financial crises, which affected in a rather
comparable (minus 40% between 2007 and 2012, on average) way most of OECD
countries. In addition to yearly fluctuations of VC, which certainly contribute to the
long term development of countries industries, it becomes hence interesting to study
the structural differences that have determined these differences in investments levels
across high-income countries. The aim of this dissertation is to explore the structural
reasons for the Italian VC Market underdevelopment by analyzing, from a crosscountry perspective, which are the main determinants of the VC Industry in European
Union and OECD countries.
12
1. Introduction
2012 Data - OECD

VC Investments in Local
Absolute Size
Companies ( mm)
Compared to Italy
% of GDP
Compared to Italy
Austria
Belgium
33,81
90,15
0,5x
1,3x
0,0109%
0,0239%
2,4x
5,2x
Bulgaria
0,09
0,0x
0,0002%
0,0x
Czech
5,23
0,1x
0,0034%
0,8x
Germany
549,41
7,7x
0,0208%
4,6x
Denmark
79,12
1,1x
0,0323%
7,1x
8,66
0,1x
0,0513%
11,3x
115,20
1,6x
0,0110%
2,4x
Finland
79,06
1,1x
0,0406%
8,9x
France
552,79
7,7x
0,0272%
6,0x
Hungary
64,23
0,9x
0,0645%
14,2x
Ireland
88,33
1,2x
0,0544%
11,9x
Italy
71,38
1,0x
0,0046%
1,0x
4,28
0,1x
0,0132%
2,9x
11,06
0,2x
0,0254%
5,6x
2,04
0,0x
0,0093%
2,0x
176,26
2,5x
0,0289%
6,3x
9,08
0,1x
0,0024%
0,5x
Portugal
15,86
0,2x
0,0095%
2,1x
Romania
3,06
0,0x
0,0023%
0,5x
222,18
3,1x
0,0541%
11,9x
1,30
0,0x
0,0036%
0,8x
722,83
10,1x
0,0378%
8,3x
European
2.905,40
40,7x
0,0227%
5,0x
Euro area
1.793,26
25,1x
0,0189%
4,1x
Estonia
Spain
Lithuania
Luxembourg
Latvia
Netherlands
Poland
Sweden
Slovenia
United
VC Investments as a Relative Size to GDP
Table 1 VC investments: absolute values, ratios over GDP and relative sizes compared to Italy. Personal
elaboration based on OECD Entrepreneurship Database 2012.
13
2. The determinants of VC: literature review and research hypotheses
2. The determinants of VC: literature

review and research hypotheses
2.1 Theoretical Background
A relatively small number of papers have directly investigated the determinants of
VC across countries (Felix et Al., 2007). These contributions, however, have already
shed light on the impact of variables belonging to different families. In particular:
1. macroeconomic variables (inc. GDP growth, expectations, interest rates)

2. financial market variables (inc. Book to Market index, Stock Market and IPO
volumes, M&A activity, Pension Funds presence)
3. competitiveness and regulation (inc. capital gain taxes, labor taxes, corruption
levels, legality indexes)
4. government policies (inc. direct investments, co-funding of hybrid VC funds)
5. legal structures (law systems)
Some of these factors impact on entrepreneurship and have a prevailing effect of

the demand side of capital, while others have either a supply side effect (such as
14
government co-funding or VC capital gains tax reductions) or an effect on both sides

(such as GDP growth and Stock Market activity). In most of the studies, researchers
have been analyzing panel data including both cross-series and historical series
dimensions, but focusing on different perimeters, periods of analysis and explanatory
variables.
(1) Macroeconomic factors have been shown to have a relevant impact on yearly
VC investments fluctuations. The U.S. macroeconomic expansion in the 1969-1994
period led to an increase in the number of start-ups, which in turn increased VC
demand (Gompers & Lerner, 1998, Jeng & Wells, 2000). Better expectations for the
economy, similarly, are associated with higher expected profits from new start-ups and
thus more entrepreneurial activity, while a higher interest rate increases the cost of
capital and should decrease entrepreneurship and VC activities (Poterba 1989).
Analyzing the investments supply side, moreover, Romain and La Potterie claim that
economic expansions are also related to periods of more profitable divestments
(Romain & La Potterie, 2004).
(2) Book to Market, Stock Capitalization, IPOs and M&A activity have been the
main financial market explanatory variables used to understand VC variations. Felix
et Al. (2007) use the market-to-book ratio as a measure of the degree of information
asymmetry and conclude that, coherently with theoretical research a higher ratio leads
to higher VC activity (Felix et Al., 2007).
(3) As one may think, also economies level of competitiveness and policy-maker
regulations have been found to be related to VC activities as well. Cumming et Al.
(2010) use the legality Index introduced by Berkowitz to examine the effects on
different governance structures in 39 countries. Literature has also highlighted the
importance of regulations conformity to global standards in attracting investments.
According to Lerner (2010), international institutional investors are likely to be
15
discouraged if preferred stock structures cannot be employed in a given nation. As one

may expect, taxes also play a crucial role on both the demand side and the supply
side, with higher profit tax rate, for instance, likely to decrease entrepreneurs
incentives to work (Poterba, 1989). Research has been also focusing on bankruptcy
law (Cumming, 2013) and limits to entrepreneurial flexibility (Lerner, 2010), showing
how
entrepreneurs-friendly
regulation can impact both the entrepreneurial
environment and the VC industry activity.

(4) Government Intervention policies have been studied from both a qualitative
and quantitative way, although cross-country data availability often represents a
major concern. Da Rin et Al. (2006) studied the role of various public policy tools in
the development of dynamic VC markets, focusing on so-called innovation ratios and
using data from a panel of 14 European countries between 1988 and 2001. The study,
however, was heavily criticized by Cumming (2010), who claimed that many of their
measures and conclusions were flawed. Lerner (2010) studies cross-national
government investment schemes and finds out that hybrid PPP schemes are usually
the most effective public mechanisms in the development of target markets. Direct
venture investments by government officials, as opposed to hybrid schemes, have been
widely criticized for their risk of conflict of interest, market distortions and private
investment crowding-out (Lerner, 2010). Due to the fact that due-diligence and
monitoring costs involved for organized Venture Capitalists are too high for seed
investments to be worthwhile, researchers have also focused their attention on the
relevance of Government support to informal VC activities (Dubocage & RivaudDanset, 2002).
(5) Lastly, juridical systems have also been proven to have an impact. In its 2011
study, Bonini classifies countries depending on their proximity to UK, German, French
or Scandinavian juridical system, finding out that UK systems where more suitable
16
for early-stage companies development, while Scandinavian systems provided a more

consistent environment for later stage VC.
In the next chapter we will further investigate individual determinants, investigating
the specific conditions of the Italian market and formulating the research hypothesis
for our further study.
Supply and Demand Side

While studying the determinants of VC, a critical issue that researchers and
policy-makers have been trying to address is whether limitations in the VC activity
of a given country are more on the demand or offer side of capital.
The demand for VC comes from innovators who need to finance their ventures.
The supply of VC corresponds to the risk capital injected into funds. Which of the
abovementioned factors influences demand for and the supply of VC to a greater
extent? And is it more demand or supply of capital the main constraint VC levels in
a given country? The existing academic debates reveal there is no consensus on this
issue, both because of difficulties in isolating the explanatory factors and a mutual
interdependence of the two sides (Felix et Al., 2007). VC activity is linked to the
entrepreneurial environment, but also the other way round is true. From a theoretical
perspective, the demand for VC depends on factors that influence the innovation
Demand of VC
Innovation Potential
Availability of
Skilled Labour Force
Ease of doing
business and of
expansion
Propensity to create
a venture
Ease of completion of
a profitable exit
Figure 4 - Demand of VC: possible determinants classification. Personal Model.
17
potential of the country and the set of incentives for entrepreneurship. As shown in
Figure 4, these can include factors that impact the availability of innovative ideas and
skilled labor force, the decision of prospective entrepreneurs to create a venture, the
difficulties of expansions and the ease of completion of a profitable exit. While VC can
certainly support the creation of high potential early stage companies, if a demand
side deficit is present, it is likely that a massive fund injection will not directly
translate into a significantly larger number of successful companies (Da Rin, 2006). In
a similar way to a proverb used in monetary economics, you can lead a horse to
water, but cant make it drink. Several authors argue that the lack of funds might be
more due to the lack of attractive entrepreneurial ideas, rather than of institutional
investors. Coherently with a potential demand-side issue, one of the most consistent
findings in research on informal VC is that business angels are often opportunity
constrained, with the majority unable to find sufficient investment opportunities
(Mason & Harrison, 2002). If we consider the Italian case, several demand side issue
can be mentioned. These include cultural issues, low level of tertiary education
attainment, low university-industry collaboration on R&D, high startup costs, labour
rigidity, bureaucratic and tax burden and a lack of convergence with international
standards, companies difficulties in reaching the minimum scale necessary for VC
investors and a family governance of a large number of companies.
The supply side of VC, on the other hand, depends on how the VC risk-return
profile compares with other assets allocation. Modern portfolio theory suggests that,
as an asset class, VC should be present in a diversified portfolio, but that its optimal
size is affected by return on alternative investments, taxes, regulation and the ease of
exit from their investment. Constraints in the supply of finance can be of two different
natures.
18
In the first case (a), they may be the result of market inefficiency or high
information asymmetries, thus calling for government intervention to alleviate market
failure and close the equity gap. The equity gap can be linked to stock market
underdevelopment, to the lack of appropriate institutional investment structures such
as pension funds and insurance companies, to cultural aversion to financing companies
which are not backed by guarantees (Di Giorgio et Al., 2008), and to the inability to
mitigate information asymmetries. In this last case, as entrepreneurs possess more
information about their own abilities and the prospects of their firm than the providers
of finance, they may misrepresent this information, which creates an adverse selection
risk that can only be mitigated by sectorial experience and long due diligence
processes. The equity gap can be present either across all or just some of the
investment stages. For example, if its true that Italian startups find difficulties in
finding seed capital, the issue becomes even more severe for Series A funding. In these
cases, we can talk about a secondary equity gap, i.e. the situation where no additional
capital providers are prepared to follow-on from the original external investor
(Cumming, 2013).
In the second case of supply-side constraints (b), on the other hand, limited
investments can be the result of rational and well informed decisions by an efficient
market about unattractively priced proposals. The consistency of low VC returns in
Europe over the last decade has been so strong to make institutional investors question
whether the continent has, on the demand side, an attractive early-stage activity (EY,
2004). The debate over the nature of supply-side limitations remains open.
By looking at cross-section aggregate data on European countries, contrary to
what assumed by the prevailing policy approach and coherently with a potential
demand side issue, Da Rin did not find evidence of VC funds shortage. If accepted,
the consequences of such a result for policy makers would be relevant, implying that
19
additional VC injected by governments without a simultaneous stimulus on the

demand side would have little effect on entrepreneurial environment, with the
additional risk of crowding out private investments. Looking at the Italian levels of
VC/GDP, however, we still find it puzzling to attribute the issue exclusively on the
demand side. Is the offer of attractively priced innovative projects really so limited to
justify a VC/GDP level 5 times smaller than the European Average and 78 times
smaller than Israel? The following paragraphs will investigate more on the issue.
2.2 The Determinants of VC

Drawing from previous literature and adding new insights on the impact of
cultural and educational determinants, this chapter investigates more deeply the VC
industry potential determinants. Variables, as shown in Figure 5, have been
clustered into Government Schemes, Market Dynamism, Education & Innovation
Stocks, Cultural and Social Factors, Ease of Doing Business and Legal Systems
categories.
VC Level
Government
Investment
Schemes
Market
Dynamism &
Funds
Availability
Education &
Innovation
Stock
Cultural and
Social
Factors
Figure 5 VC Level Determinant Variables Families
20
Ease of Doing
Business &
Regulation
Legal System
2.2.1 Government Investment Schemes

Whether the main limitations of VC are present on the supply or demand side
of capital, it is instructive to observe that all VC markets of which we are aware were
initiated with some form of government support (Lerner et Al. 2005). For every
successful public intervention enhancing entrepreneurial activity, as we have already
mentioned, however Lerner (2010) claims that there were also many failed efforts
wasting untold billions in taxpayer dollars. In this paragraph, we briefly analyze
some of the main examples that VC literature has considered as unsuccessful and
successful. Government investment schemes can be classified under two main
categories.
(1)
Direct interventions, where governments directly acts as a Venture

Capitalist, undertaking the roles that would otherwise be the
responsibility of a professional intermediary.
(2)
Hybrid schemes: where governments co-invest with professional Venture

Capitalists to increase both their incentives and funds availability.
Research shows how direct interventions raise a number of issues related to

market distortion, inefficiencies and private capitals crowding out. Deficiencies of these
schemes include the potential lack of business competences of public officials, publicprivate conflict of interests and political pressures, together with a lack of appropriate
incentive schemes for officials to perform well. Moreover, government funding can
distort private markets by offering funds which do not reflect the appropriate risk
premium (Maula & Murray, 2007), which means that, thanks to the received subsidies,
similarly to zombie banks, underperforming and inefficient firms may survive and
21
operate in a market where they would have disappeared otherwise. In its 2009 book,
Lerner described a number of negative real examples.
The Small Business Investment Company program in the early 1960s,

the US Small Business Administration charteredand funded
hundreds of funds whose managers were incompetent or crooked.
Malaysia opened a massive BioValley complex in 2005 with little
forethought about whether there would be demand for the facility. Norway
squandered much of its oil wealth in the 1970s and 1980s propping up
failing ventures and funding ill-conceived new businesses begun by
relatives of parliamentarians and bureaucrats.
(Lerner, 2009)
According to Cumming (2003), another exemplary case of inefficient use of

government money is represented by the Canadian Labor-Sponsored VC Corporations
scheme. By offering massive tax incentives to private investors that only cared about
decreasing their tax rate without regards to economic rates of returns, LSVCCs
accumulated so much capital that fund managers started to overpay for any
investment and outbid private investors. Cumming claims that the key learning for
policy-makers from these examples is that badly designed schemes, such as the
creation of LSVCCs, does crowd out private investment and supports entrepreneurial
activity in a much less efficient way than hybrid co-investment schemes (Cumming &
MacIntosh, 2003; Cumming, 2013). To have a more complete overview of the issue,
however, it is worth mentioning that not all researches have shown a negative impact
of direct-grant schemes. Started in USA in 1982, the Small Business Innovation
Research (SBIR) awards grants to small companies with fewer than 25 employees.
22
Analyzing SBIR investment flows, which amounted to over $1bn out of $23.3bn in
2010, Lerner concluded that SBIR promotes US entrepreneurship, VC and innovation
without crowding out of private investment. Lerner (2009) claims that this was the
case because of the proper design of the program which, by basing funding on research
and not on market potential, was not in direct competition with the private market.
Moreover, SBIR-awarded companies were shown to be more attractive for private
investors, which considered the grant as a quality signal decreasing information
asymmetries. It remains a widespread belief, however, that direct investment schemes
are subject to higher risks than indirect ones.
Indirect government investment schemes, on the other hand, have gradually
emerged as an international element of best-practice. The OECD used the term hybrid
to describe structures where governments and private investors work in concert as
limited partners with asymmetric rights in a fund. Such equity enhancement schemes
better recognize that professional investment skills and proper incentives are key for
the efficiency of these programs (Gilson, 2003; OECD, 2004). A key example in the
history of VC is represented by the establishment of the Yozma VC scheme by the
Israeli government in 1992. Starting from a 100 million dollars fund wholly owned by
the public sector, the goal of the program was to attract foreign Venture Capitalists,
and not local ones, investment knowledge, strategic support abilities and network of
contacts. Yozma was encouraged by a government study showing that 60% of the
entrepreneurs involved in prior public programs had been successful in developing
their technologies but had failed because of lack of go-to-market and funding
experience. Foreign expertise and the adoption of global standards for limited
partnership creations6 were identified as key solutions to this problem. In order to
Yozma LP were modeled after the Delaware and had flow-through tax status.
23
attract foreign investors, Yozma not only committed co-investments in the new funds
through a matching scheme, but also gave to private fund the right to buy-back
government stakes by paying a fixed interest rate between 5 and 7%. In this way,
through a sort of call-option, the government was enhancing the returns of the general
partner in order to reach aggregate investment levels closer to the perceived social
optimum.
According to Lerner (2010), most of the successful VC incentive schemes
worldwide have been shaped on the Yozma model and share a central element: they
use matching funds to leverage private sector returns, co-invest with professional
operators and determine where public subsidies should go. Another notable example
is represented by the European Investment Fund, transformed in 2001 by the
European Commission into Europes largest venture investor with an injection of more
than 2bn.
Lastly, it is worth mentioning that another relevant part of governments
investment schemes has been historically dedicated to funding advisory services, aimed
at supporting the demand side of VC. Partially or fully publicly funded advisory
services and business incubation programs are undertaken in most developed countries
but, unfortunately, evidence on the success of these programs is difficult to track due
to endogeneity issues, and lack of performances data (Cumming & Fischer, 2012). For
the past decade, moreover, government have also attempted to enhance the informal
VC market, i.e. business angels, as a mean to enhance the supply of early stage VC.
The rationale for supporting business angels activities is based on their lower cost
structures compared to those of VC funds7, their ability to address regional gaps in
the availability of finance through their territorial distribution and their experience
These lean structures makes them more suitable for seed-investing and low-size deals
24
and contacts contribution to seed-stage startups. The lack of comprehensive data on

angel investing, however, means also in this case that there is relatively little evidence
on the impact of these forms of intervention (Mason, 2009).
A complete classification of the existing policies at a cross-section level goes beyond
the objectives of this dissertation and, hence, we do not formulate any hypothesis on
government schemes. Previous literature, however, shows the impact of policies on the
industry, and we will come back to the point in the specific considerations for the
Italian government.
2.2.2 Market Dynamism and Funds availability

2.2.2.1 GDP per Capita and GDP Growth
When we scale VC investments by GDP to compare the activity levels of
different countries, we are implicitly saying that we expect the size of the economy to
have a large impact on the absolute size of invested funds. As VC is an activity that
Venture Capital Funding Sources Breakdown: 2007 vs 2013.
Europe Aggregate Values (% of Total Funding for the year).
40%
35%
30%
25%
20%
15%
10%
5%
0%
2007
34%
2013
16%
8%
2%
7%9%
6%7%
3%
0%
1%2%
4%
2%
8%
3%3%
8%
3%
7%
8%
2%
Figure 6 Major VC funds funding sources. Aggregate values for all Europe. Each column represent the % of total
funding represented by that specific source in Europe. Data for 2007 and 2013 from EVCA.
25
deeply involves advanced technologies and services, however, it is also reasonable to

expect that VC_GDP ratio will be higher in more developed economies. Even inside
the EU-OECD high-income cluster, indeed, large differences in countries development
do exist, which can be captured through GDP per capita. Figures 7 and 8 show two
relevant pieces of information. Figure 7 shows how, in international comparisons of
OECD countries, Italy is located close to the averages of both OECD and European
GDP per Capita - 2012 - Current USD
120.000
100.000
80.000
60.000
40.000
20.000
Poland
Estonia
Portugal
Czech Republic
Slovenia
Greece
Spain
Italy
United Kingdom
France
Germany
Belgium
Finland
Ireland
Netherlands
Japan
Austria
Canada
United States
Sweden
Denmark
Australia
Switzerland
Norway
Figure 7 - GDP per Capita - Current USD - 2012. Source: World Bank
GDP per Capita (USD, x-axis) and VC/GDP (%, y-axis) (2012)
VC activity (% of GDP)
0,14
United States
0,12
0,1
Canada
0,08
United KingdomIreland Sweden
0,06
Finland
Denmark
Switzerland
France Netherlands
Japan
Australia
Belgium
Germany
Greece Spain
Italy
Austria
Slovenia
Portugal
0,04
Estonia
Poland
0,02
0
-
Czech Republic
20.000
40.000
60.000
80.000
Norway
100.000
120.000
GDP per Capita

Figure 8 VC/GDP ratio (y-axis, in %) and GDP per Capita correlation. GDP per Capita in Current US Dollars.
Sources: World Bank and OECD.
26
Union countries8. If its true that VC_GDP is higher in some countries with higher
GDP per capita (USA, Canada, Netherlands, Germany etc.), however, we can already
see from Figure 8 how GDP per capita is not the sole determinant of the ratio: with
a relatively close level of GDP per capita, UK and France levels are respectively 8,3
and 5,9 times higher than Italy, while Portugal and Spain, both with lower GDP per
capita, have VC_GDP twice the size of the Italian one. Even though the variable is
interesting, we decided to exclude it from our analysis. GDP per Capita is highly
correlated with other of our selected explanatory variables, including Tertiary
Education Share of the population and corruption freedom and an inclusion, hence,
would have increased the risk of multicollinearity in the analysis.
In addition to GDP per capita, and coherently with previous research (Gompers &
Lerner, 1998), we find realistic to expect that national growth levels may represent a
relevant determinant of year-on-year fluctuations. Entrepreneurs take their business
decisions also depending on both the current state of the economy and their future
expectations. Inevitably, hence, a fast-growing economy impacts their choices as well
as the investment decisions of their financiers. Gompers & Lerner (1998), analyzing
Unites States investments between 1972 and 1994, confirmed such a hypothesis. Jeng
and Wells (2000), however, in their cross-country analysis of 21 countries claimed that
the relation could not be statistically proven. In this study, we attempt to test the
hypothesis again on a more recent panel data and formally test the following
Hypothesis.
Hypothesis 1: Yearly variations of VC Activity relatively to GDP are positively

correlated with GDP growth.
Data from World Bank.
27
2.2.2.2 Exit Markets Dynamism: Equity Market

Excluding other potentially important incentives such as prestige and learning,
entrepreneurs and investors are motivated by high returns expectations. Returns can
take the form of distributed net income or of capital gains upon exit. One important
difference between the European and the U.S. economies is the different importance
of the various exit strategies. In Europe, trade sales and secondary sales have always
been the most commonly exit route, while in the U.S., until 1996, Initial Public
Offerings (IPOs) have been more frequent. Since 1996, however, acquisitions have
started to be the most important exit route in the States as well (Felix et Al., 2007
EVCA and NVCA data). When we talk about new technology-based companies,
divestments through IPO and M&A are usually considered as a more incentivizing
perspective than dividend distributions for companies shareholders. IPO and M&A
markets development, hence, are expected to have an impact on both Venture
Capitalists decision to invest (Black and Gilson, 1998) and on innovators willingness
to pursue an entrepreneurial journey. It comes to no surprise that the link between
Listed Market Capitalization on GDP (2012)
1,8
1,6
1,4
1,2
1
0,8
0,6
0,4
0,2
0
Figure 9 Total Capitalization of Listed companies (ratio over of GDP). Source: World Bank (2012).
28
the Stock market activity and VC investment has been one of the most studied in the
field.
Gompers and Lerner (1998) and Jeng and Wells (2000) find a positive
correlation between IPO activity and VC investment. Being the listing on a stock
market the exit vehicle with the greatest average return for both entrepreneurs and
investors, the existence of strong stock markets has been associated to more dynamic
VC industries (Black & Gilson 1998, Gompers & Lerner 1998). A strength of the US
VC market has been the existence of well-functioning stock markets across different
listed business sizes. The creation in 1971 of the NASDAQ, which has outpaced all
other US markets by IPO listings, and of the Small Cap Market in 1992, have been
particularly supportive for this development. Many other economies have tried to
follow the US direction. Dubocage and Rivaud-Danset (2002), for instance, claim that
the French Nouveau March, created in 1996, has played a key role in VC
development, with a major cultural impact on the players involved in the industry.
Other studies also suggest that the stock index level, by making exit strategies more
attractive, has a higher effect on high-tech VC investments than on buyout operations
MarketCapitalization/GDP (x-axis) vs VC/GDP (y-axis) - 2012
14
United States
12
10
Canada
8
6
4
2
Sweden
Denmark
Netherlands United Kingdom
Finland
Germany
Slo
Norway
Austria
Belgium France
Greece
Australia
Spain
Estonia
Portugal
Japan
Italy
Poland
Ireland
Switzerland
0
0,00%
20,00%
40,00%
60,00%
80,00%
100,00%
120,00%
140,00%
160,00%
180,00%
Figure 10 2012 Listed Market Capitalization on GDP ratio vs 2012 tot. VC investments over national GDP
(1=0,01% of GDP, 14=0,14%). Source: World Bank and OECD.
29
(Di Giorgio & Di Odoardo, 2001). This study includes the Stock Market Capitalization
variable and tests the following hypothesis:
Hypothesis 2: The level of VC Activity relatively to GDP is positively correlated

with the size of a country stock market capitalization relatively to GDP.
It is worth to note that recent studies have also shown that M&A exits are important
in explaining U.S. funds performance and that a more vibrant M&A market provides
a favorable environment for VC and tech-entrepreneurs exits (Metrick & Yasuda
2010). M&A market development is usually associated to both the presence of large
corporations willing to target local companies to pursue inorganic growth, and to the
diffusion of market intermediates and specialized advisors such as investment banks
and law firms that make it easier to increase high-potential firms visibility.
2.2.2.4 Local Presence of Large Institutional Investors

The U.S. VC Market development showed how large institutional investors,
such as pension funds and insurance companies, can make the difference on the supply
180
160
140
120
100
80
60
40
20
0
Figure 11 - Autonomous pension funds assets as percentage of GDP, 2012. Source: OECD.
30
Belgium
Korea
Austria
Italy
Germany
Czech Republic
Spain
Norway
Estonia
Portugal
Slovak Republic
Mexico
Sweden
New Zealand
Poland
Ireland
Israel
Denmark
Chile
Canada
United States
Finland
Australia
Switzerland
United Kingdom
Iceland
Netherlands
Autonomous pension funds assets (as a % of GDP) - 2012
side of VC funds. Even a minimal reallocation of the assets managed by pension funds
and insurance companies, indeed, can generate a massive flow of capital directed
toward innovative companies. Before 1979, US pension funds were constrained in their
assets allocation decisions, with VC firms being excluded from their potential choices.
By introducing the prudent man rule and enabling a higher extent of diversification,
however, the US Employment Retirement Investment Security Act abolished these
limits and by supported a large boost of venture investments across the country.
Charts 11 and 12 show how Italy is characterized by a structural lack of pension funds
(Di Giorgio et Al., 2008), but also how numbers makes it hard to think about the
Italian issue as a problem connected only to the lack of institutional funds. Across all
VC funding sources, indeed, including Pension funds and Insurance Companies, but
also Government agencies, family offices and private individuals, Italian VC
fundraising over the last 7 years has widely underperformed selected peers. Arguably,
chart 12 supports the theory that deficiencies of Italian VC fundraising are either
Total Funds (bn) raised by VC funds - Sources Breakdown

(2007-2013 totals)
2,5
2
1,5
United Kingdom
France
Spain
Italy
1
0,5
0
Figure 12 Total funds raised by VC funds by residence of the fund. Sources Breakdown. Reported values are
cumulative values for the period 2007-2013 for United Kingdom, France, Spain and Italy. Source: EVCA
31
connected to factors having an impact on the whole supply of VC, rather than or
single sources, or to problems in the ecosystem and on the demand side. Nevertheless,
it is reasonable to expect that an increased size of national institutional investors
assets under management can play a relevant role in the national development of
VC/GDP ratios. Hence, we formally test the following hypotheses:

with local pension funds asset under management volumes scaled by GDP.

with local insurance companies asset under management volumes scaled by GDP.
2.2.3 Education & Innovation stock

Tertiary Education Attainment
Early stage entrepreneurs core business is to combine innovative ideas, funds
and human capital to create high-potential ventures. At the same time, VC general
partners are in the business of employing highly skilled professionals with the right
mix of business, investment and technology background, to look for the most
attractive projects and strategically support them in their business development. In
both cases, skilled human capital availability plays a key role. Thus, a lack of skilled
people could constitute a significant bottleneck to the development of the industry. It
is surprising, however, that relatively little attention has been dedicated to human
capital and education in VC determinants studies. Very few authors have stressed and
empirically tested the importance of human capital in financial intermediation. More
attention, however, has been dedicated to the relation between entrepreneurship and
32
educational barriers to starting a new firm (Autio, Levie et Al., 2008). These studies
claim that, in countries where educational levels are deficient, entrepreneurs may lack
the necessary skills to both grow a business and to access to information that would
increase their success probabilities. Moreover, anecdotal evidence related to
interactions with Start-uppers, shows how co-founders and skilled employees scouting
is among the most challenging tasks for an entrepreneur. The share of the population
that has attained a tertiary level qualification, yearly issued by OECD, is a
key indicator of how well countries are placed to profit from technological and
scientific progress (OECD). Tertiary education includes both theoretically and
research-based programs9 and those designed to provide more vocational-oriented
competences. The tertiary attainment profiles are based on the percentage of the
population aged 25 to 64 that has completed that level of education.
Share of 24-65yrs pop. with tertiary qualification attainment

(2012)
60
50
40
30
20
10
0
Figure 13 Share of population aged 24-65 with tertiary qualification attainment 2012. Source: OECD.
These are referred to as A programs, and include different categories of Bachelors.
33
Chart 13 shows a particularly worrying picture of Italy compared to OECD peers.

With only 20,4% of the 24-65 years population who has attained a tertiary
qualification as of 2012, compared to 39,2% in Spain, 42,8% in France of 56,5% in
Canada, the differences are pretty impressive. It is worrying to think about how a
country with such a low level of advanced education can compete in a sector where
research and specialized skills are one of the main sources of competitive advantage.
While aggregate percentages for all kind of studies are interesting, it is also important
to analyze more specifically what is the diffusion of tertiary studies in fields that are
more directly related to VC and Start-up creation. In this case, we briefly focus on
the relevance of Business-related studies. As a proxy of high-quality tertiary business
education, we hereby use the AACSB certification for business and accounting schools
and, in particular, the number of AACSB accredited schools per million people in the
country. As the AACSB certification may well have a diffusion in different countries
regardless of the presence of good universities, and as there is no scientific proof about
the correlation between AACSB indicator and the real quality of business education
in the country (Sweden, for example, has no AACSB accredited business schools), we
acknowledge the strong limitations of such a measure. We still believe, however, that
the measure does reflect to some extent the penetration of business schools in most of
the selected countries and, for explanatory reasons, we present it here. It is interesting
to note the difference between Italy, where SDA Bocconi is the only certified school,
and France or United States, with respectively 0,3 and 1,5 certified business schools
per million people. Lastly, it is also worth to notice that what is important is not only
education quantity, but also its appropriateness with industry needs. According to
EY, Italy spends more than the average G20 on its education system, but it is not
delivering the kind of work-oriented skills needed to foster a more dynamic
entrepreneurial sector and innovation (EY, 2013).
34
Correlation between 2012 VC investments and Population with

Tertiary Education Attainment
VC investments as a % of GDP
0,14
United States
0,12
0,1
Canada
0,08
Sweden
0,06
Ireland
Finland
United Kingdom
Switzerland Netherlands
0,04
Norway
Denmark
France
Germany
Estonia
0,02 Austria Portugal
Belgium Australia
Greece Poland
Italy
Spain
Slovenia
Czech Republic
0
20
25
30
35
40
45
50
Japan
55
60
% of Population with tertiary education attainment

Figure 14 Correlation between Population Share that has attained tertiary education and total VC investments as
a % of GDP. Source: OECD.
2
1,5
AACSB Accredited Business School per million people
1
0,5
0
Figure 15 Accredited Business Schools per Million people by Country Association to advance Collegiate
Schools of Business 2014. Source: AACSBa.
The same results are shared by McKinsey (2013), which claims that almost 40% of
youth unemployment in Italy is due to a mismatch between competences supply
coming from schools and the demand of the market. As we believe that advanced
35
education does play a critical role in VC development, in our study we formally test
the following hypothesis:

with the share of the population that has attained tertiary education.
R&D, Patents and Scientific journals

Several studies have claimed that the spectacular growth of VCs in the late
1990s can be attributed to the opportunities derived from a boost in technology
discoveries in the same period (Gompers & Lerner, 1998). Innovations, and especially
platform-innovations, give rise to a number of new entrepreneurial opportunities
through spillovers and spin-offs. Acs (2009) and Bonini (2011) also measure the impact
of country-level R&D expenditures on VC activity. The main aggregate used for crosscountry comparative studies of R&D is gross domestic expenditure on R&D (GERD)10.
The measure includes R&D activities by business enterprise, higher education,
government and private not-for-profit institutions. It is important to acknowledge,
however, that such aggregate numbers may be subject to biases related to divergent
accounting methodologies cross-country, including different coverage of national
surveys on R&D across sectors, use of different sampling and estimation methods.
Gompers and Lerner (1998) claim that, if expenditure on R&D rises, the number of
potential entrepreneurs with promising ideas may increase. Based on the assumption
that a higher R&D can spur innovation and economic growth in the Union, the
10
GERD data is compiled by OECD on the basis of the Frascati methodology, which defines R&D as:
Creative work undertaken on a systematic basis in order to increase the stock of knowledge, including
knowledge of man, culture and society, and the use of this stock of knowledge to devise new applications
(OECD).
36
Israel
Finland
Sweden
Japan
Denmark
Switzerland
Germany
United States
Austria
Slovenia
OECD Total
France
Australia
Belgium
Netherlands
EU27
Czech Republic
Canada
Ireland
Norway
Portugal
Spain
Italy
Poland
Greece
5
4,5
4
3,5
3
2,5
2
1,5
1
0,5
0
United
R&D (GERD) as a % of GDP
Figure 16: Research and Development investment as percentage of national GDP. Source: OECD.
Barcelona European Council of March 2002 set the objective to increase the average
investment in R&D in Europe from 1.9% to 3.0% by 2010. Since research activities
come with an embedded high level of risk, we would also expect VC to be particularly
suited for follow-on investments in the field and, hence, to be positive affected by
increased R&D expenditures. Figure 16 shows how Italy still ranks well below the
European Council goal, positioning itself as one of the last countries in both the
European Union and OECD in terms of R&D expenditures over GDP. According to
EY (2013) it should come to no surprise that Italian small businesses apply for fewer
patents than their international peers. At the same time, we note how some of the
countries with the most developed VC markets in the world, such as Israel and United
States, are well above both EU and OECD average expenditures. Another valid
measure of Innovation activity inside an economy is represented by the number of
patent applications by residents yearly published by the WIPO11. Two advantages of
Patent applications are worldwide patent applications filed through the Patent Cooperation Treaty
procedure or with a national patent office for exclusive rights for an invention--a product or process
that provides a new way of doing something or offers a new technical solution to a problem. Data
provided by World Bank and collected by World Intellectual Property Organization.
11
37
0,13
R&D spending as a % of GDP and VC as % GDP - 2012
0,11
United States
Canada
0,09
0,07
Sweden
Denmark
Finland
United Kingdom
Switzerland
Norway
France
Japan
Australia
Germany
Spain
Belgium
Austria
Portugal
Italy Czech Republic Estonia
Slovenia
0,05
0,03
0,01
-0,01 0
Netherlands
Ireland
Greece
0,5
Poland
1
1,5
2,5
3,5
R&D expenditure as a % of GDP
Figure 17 VC activities as percentage of GDP (y-axis in %) and R&D spending as percentage of GDP (x-axis)
correlation. 2012. Data from OECD.
this measure compared to R&D/GDP are that it is less dependent on national

accounting practices, and that it measures the output of R&D activity, rather than
just the capital input. In this study, we hence decide to use the ratio between patent
applications by residents and national population as an explanatory variable.

with the number of scientific publications scaled by total population
Innovations can be nurtured in a variety of different environments, including large

company laboratories, startups and Universities. In this respect, it is also interesting
to measure the impact of academic research on entrepreneurship and VC. Cumming
(2013) shows how academic R&D is positively associated in a statistically significant
way with VC deals and dollars, as well as patents. A potential measure of Academic
contribution to R&D in scientific subject is represented by the OECD scientific and
38
Scientific and Technical papers per million people (OECD)

1400
1200
1000
800
600
400
200
0
Figure 18 Scientific and Technical papers per million people. Source: OECD.
technical journals index, measuring the number of papers published in business,

engineering and scientific subjects by academic researchers12. In our analysis, we will
refer to this index to measure academic impact on VC. Even in this case,
unfortunately, we see how the number of publications in Italy (437 per million people)
Scientific and Technical Journals per million people (x-axis) and

VC/GDP (y-axis) - 2012
0,13
0,11
United States
Canada
0,09
0,07
0,05
0,03
0,01
-0,01 0
Estonia
Japan
Poland
200
400
Sweden
Ireland
Portugal
United Kingdom Finland

Norway Denmark
France
BelgiumNetherlands
Germany
Spain Austria
Slovenia
Australia
Italy 600
800
1000
Switzerland
1200
1400
Czech Republic Scientific

Greece and Technical Journals per million people
Figure 19 VC/GDP (y axis in %) and Scientific and Technical Journals per million people ratio in 2012. OECD data.
12
The index includes, in particular, articles published in physics, biology, chemistry, mathematics, medicine,
engineering, earth and space sciences. Data provided by OECD.
39
is relatively small compared to other developed economies (670 in USA, 855 in Canada,
736 in UK, 931 in Netherlands), even though relatively close to the French, Spanish
and Portuguese ones (respectively 486, 496 and 434 in 2012). In order to try to capture
the impact of academic research on VC activity, we formally test the following
hypothesis.

with the number of scientific publications scaled by total population.
Although they are more difficult to measure, it is finally worth to mention that
academic research without appropriate technology transfer mechanisms, such as techtransfer offices in charge of licensing and academic entrepreneurs education, have
much more limited implications on national entrepreneurial ecosystems. According to
Lerner (2010) many regions in the world experience a strong mismatch between the
low activity of entrepreneurs and VC funds and, on the other hand, the strength of
the scientific and research base. In the Italian case, for instance, Di Giorgio & Di
Odoardo (2008) claim that the country has historically experienced a structural
University-Industry cooperation rank (1=best) - 2012 - W.E.F.
140
120
100
80
60
40
20
Greece
Poland
Italy
Slovenia
Spain
Hungary
Estonia
France
Czech Republic
Portugal
Austria
Denmark
Luxemburg
Canaza
Ireland
Australia
Germany
Netherlands
Israel
Sweden
Belgium
Switzerland
United Kingdom
United States
Finland
Figure 20 University-Industry cooperation index World Economic Forum Global Competitiveness Report. 1=best.
40
inability to stimulate VC capital demand though a well-designed interaction between

Universities, R&D centers, entrepreneurs and financiers. Attempting to capture the
level of cooperation between universities and corporations, we hereby refer to the
Universities-industry collaboration in R&D index, published every year by the World
Economic Forum in its Global Competitiveness Report13. Even in this case,
unfortunately, Italy ranks in the last positions across OECD countries. With Finland,
Unites States and United Kingdom leading in this index, W.E.F. shows how there is
still much to be done in Italy to increase the impact of academic research on the
surrounding entrepreneurial environment. With respect to this index, we formally test

with the level of Cooperation in R&D between Universities and Industries.
Internet Penetration (% of population) - 2012

100
80
60
40
20
0
Figure 21 Internet Penetration (% of population) World Bank data, 2012.
13
http://www.weforum.org/issues/competitiveness-0/gci2012-data-platform/
41
Internet Users and Digital diffusion

The arrival of the internet has been one of the most disruptive technological
changes in the century. Internet had a dramatic impact on the reduction of
information asymmetries in a number of fields: from education to capital markets,
knowledge sharing and tele-working, is hard to think about economic activities that
have not been affected by the revolution. In the entrepreneurial ecosystem, we believe
that the internet penetration can have impacts on both the demand and the supply
side of VC. From the supply side, internet and digitalization dramatically help deal
flows, make market research more accessible, and increase the transparency on
information sharing. From the demand side, a higher internet penetration makes it
easier to match demand and offer of talents, perform market research, access to
entrepreneurial knowledge and products best practices. Since a significant share of
new ventures are related to the web-industry, moreover, a higher internet penetration
facilitates the entrance in the industry of a larger part of the population. Having said
that, we would hence expect higher internet penetrations to be associated to higher
Internet users (% population, x-axis) vs VC/GDP (y-axis) - 2012
VC activity (% of GDP)
0,14
United States
0,12
0,1
Canada
0,08
Sweden
Ireland
0,06
United Kingdom
Finland
Switzerland
Norway
France
Belgium
Denmark
Spain
Portugal
Germany
Greece Italy
Poland Slovenia Japan
Austria Australia
0,04
0,02
0
50
55
60
65
70
75
80
85
90
95
100
% of internet penetration
Figure 22: Correlation between Internet penetration and VC Investments as a % of GDP. Data on the y axis in %.
OECD and World Bank data.
42
Figure 23 Web queries on Google related to Start Up. Regional Data for June 2010, July 2011, July
2012, June 2013, June 2014 and 2005-2013 time series provided by Google Trends.
VC/GDP ratios. Even in this case, Italy has unfortunately to be considered a laggard.
Despite its very high smartphone penetration among the younger part of the
population, in terms of aggregate internet penetration, Italy is the second worst
performing country after Greece. In terms of trends, however, we can luckily express
less dramatic considerations. Not only, in line with global trends, the Italian
penetration is growing, but also, more specifically, the number of web queries related
to Start-up and Early Stage entrepreneurship in Italy has been increasing substantially
over the last 3 years (see Picture 23). It is puzzling, however, to see how over the
same period the number of researches related to VC has been declining (see Picture
24). From a Start-upper perspective, we can speculate that this phenomenon may be
linked to an increased awareness of the entrepreneurial population about difficulties
to seek funding through local Venture Capitalists, preferring instead to look for
alternative ways of funding.
43
Figure 24 - Web queries on Google related to VC. Regional Data for June 2010, July 2011, July 2012, June
2013, June 2014 and 2005-2013 time series provided by Google Trends.
Figure 25: Google Trends Intensity of Google searches related to Start-up (left) and VC (right) as of May
2014. City-Level visualization. Data provided by Google Trends.
From a Regional perspective, moreover, it is interesting to notice how the increased

digital awareness related to Startups has not been touching all the Italian Regions at
the same time, leaving uncovered a large part of Central, Southern Italy and Sardinia.
Consistently with other evidence on the importance of clusters for startup
development, moreover, Google data also show how Startup and Venture Capital web
searches are mainly concentrated in a small amount of large cities that, with the
exception of Rome, are all in the Northern regions. Although several measures on
Internet penetration are available, most of them are unfortunately highly correlated
44
with previous chosen measures and, in this dissertation, we decided not to formally
use internet-related explanatory variables.
2.2.4 Cultural and Social Factors
Culture is the collective programming of the mind distinguishing the

members of one group or category of people from others
(Geert Hofstede)
National cultures have a fundamental role in shaping behaviors and attitudes

of the population. Geert Hofstede found that the values that distinguished country
cultures from each other could be statistically categorized into four groups, which
became the Hofstede dimensions of national culture. Namely, Hofstede classified
countries depending on their level of Power Distance, Individualism versus
Collectivism, Masculinity versus Femininity and Uncertainty Avoidance. With regards
to entrepreneurship and VC, it becomes important to understand to which extent
activity levels can be conditioned by policy-makers actionable tools, and to which
extent they are linked to structural divergences between countries cultures. The
dimension Uncertainty Avoidance has to do with the way that a society deals with
the fact that the future can never be known and with its attempt to control the future
rather than just letting it happen14. Uncertainty Avoidance also has to deal with people
openness to novelty and innovation, including new ideas, products and processes.
Entrepreneurs in Startups typically take risk in a way that is disproportionate relative
to existing firms and, at the same time, they are characterized by a high ability to
14
http://geert-hofstede.com/
45
innovate and think beyond the status quo. Risks include, but are not limited to,
spending money and time on research and development, developing new products and
services, facing reputational risk (Cumming, 2013). In 2013, Cumming claimed that
data is consistent with the fact that cultural attitudes that are associated with low
risk taking limit the effectiveness of entrepreneurship. Cumming showed that culture
can
also
have
large
impact
on
macroeconomic
performance15.
Global
Entrepreneurship Monitor publishes every year an index related to national Fear of

Failure, capturing effects that are similar to Hofstedes aversion to risk. The
advantages of such a measure for our study, however, are the specific relation with
business failure and the fact that, as the index is the result of yearly surveys, countrydata are not time-invariant.
Another potentially relevant dimension in the explanation of different levels of
VC Activities is individualism vs collectivism. In this dimension, Hofstede measures
the degree of interdependence a society maintains among its members. In
Individualist societies people are primarily supposed to look after themselves and their
direct family, whereas in collectivist societies people belong to groups where everyone
is in charge of the reciprocal care. Individualist societies are often linked to AngloSaxon cultures, where a much higher emphasis is put on individual incentives and
results. Since entrepreneurial activities are usually the result of individual initiatives
and, as well as VC investments, are strongly motivated by perspective of high
individual payoff in case of success, we find it reasonable to expect that, other things
being equal, more individualist societies should be associated to higher levels of earlystage entrepreneurship and VC activities. In our study, hence, we control for both the
In its panel, a 1 standard deviation increase in uncertainty avoidance is associated to a decrease of

GDP/capita by 1.59% and an increase of unemployment by 0.86% (Cumming, 2013).
15
46
fear of failure and individualism/collectivism dimensions and test the following

hypotheses.
Hypothesis 9: cultural factors that affect national fail of failure related to

entrepreneurship reduce the VC activity relatively to GDP.
Hypothesis 10: more individualistic societies are associated to higher levels of VC

activity relatively to GDP.
It is interesting to state that, as showed in figures 26 and 27, if our hypothesis

were confirmed Italy would both benefit and be disadvantaged by its culture. The
47
Hofstede's national individualism indexes
100
80
60
40
20
Portugal
Greece
Japan
Spain
Israel
Czech Republic
Slovenia
Poland
Estonia
Hungary
Finland
Denmark
Germany
Austria
Switzerland
Norway
Ireland
Sweden
France
Belgium
Italy
Canada
Netherlands
United Kingdom
Australia
United States
Figure 26 Level of individualism. Source: Hofstede 2014.
Fear of Failure index - G.E.M. - 2012

60
50
40
30
20
10
0
Figure 27: Fear of failure index. Source: Global Entrepreneurship Monitor, 2012
country, indeed, both shows a higher than average level of individualism (which is
supposed to help entrepreneurship), but also an extreme fear of failure (which is
supposed to go in the opposite direction).
48
Uncertainty Avoidance (x-axis) & VC/GDP activity (y-axis)
14
12
United States
VC/GDD activity
(1=0,01% of GDP)
10
Canada
8
6
Ireland
Sweden
United Kingdom
Finland
Switzerland
Denmark
Netherlands
France JapanBelgium
Germany
Norway
Spain
Portugal
Australia
Austria
Italy
Greece
Poland
Estonia
Czech Republic
4
2
0
-2
20
30
40
50
60
70
80
90
100
110
120
Hofstede Uncertainty Avoidance index
Figure 28: Uncertainty avoidance and VC Activities correlation. Data on y-axis: 1=0,01%. Hofstede and OECD
data.
14
Individualism (x-axis) & VC/GDP activity (y-axis)
12
VC/GDD activity
(1=0,01% of GDP)
10
Canada
Ireland
Sweden
Switzerland
Finland
Japan
Portugal
Denmark
Spain
Greece
20
30
40
United Kingdom
Netherlands
France
Germany Belgium
Australia
Estonia Austria NorwayItaly
Czech Republic
0
-2
United States
50
Poland
60
70
80
90
100
Hofstede Cultural Individualism index
Figure 29 Relationship between Individualism score and VC activities. Data on y-axis: 1=0,01%. Hofstede and
OECD data.
Discussing about cultural factors, we lastly believe that it is also relevant to

consider another variable that, although it cannot be directly observed, can potentially
explain why brilliant people decide to pursue an entrepreneurial career rather than
other paths. If it is certainly true that high monetary payoffs represent a high incentive
for entrepreneurs, we believe it would be a mistake to consider these as the only driver
of entrepreneurs motivation. Entrepreneurs choose their risky path also for more
49
subjective factors, including passion for challenge, desire to be independent and to

innovate and for the level of consideration of the received by the society in case of
success. We believe that being considered as smart, brave, innovative and successful
by the society, indeed, can be an extremely valid motivator for human actions too.
With its high status to successful entrepreneurship variable, Global entrepreneurship
monitor, however, shows that national perceptions of successful entrepreneurs, vary
from country to country. To which extent are the national Mark Zuckerbergs and Elon
Musks considered as national heroes? And to which extent does the society attribute
a high consideration and a high status to successful entrepreneurs? While some regions
idolize successful entrepreneurs (as it arguably happens in the San Francisco Bay
Area), others look at these figures in a more suspicious or negative way. It is reasonable
to expect that these differences may determine different propensities to start a business
in different countries, with direct consequences on the demand of venture capital. To
better understand the relation between social perceptions and VC/GDP, we test the
following:
Hypothesis 11: VC/GDP levels and yearly variations are positively correlated with
high status to successful entrepreneurship indexes.
2.2.5 Regulation & Ease of Doing Business

High tech-entrepreneurship and VC activities can be heavily influenced by
countries regulations through their impact on ease of doing business and on individual
incentives for entrepreneurs and investors. In this paragraph, we introduce the main
literature findings and present our hypotheses on the subject.
50
World Bank Ease of Doing Business Index

Barriers to doing business and entrepreneurship have a direct effect on VC
demand. From the formalities needed to establish a new business, to regulatory and
administrative opacity, tax burden and barriers to competition, the reduction of such
barriers has been advocated by many researchers and as a major step towards the
creation of dynamic entrepreneurial environments (Klapper, Laeven, and Rajan,
2004). Many other studies, more in general, have shown how most of the governmentimposed limits to the flexibility of both entrepreneurs and venture investors can be
highly detrimental to the society (Lerner 2010).
In its Doing Business series, the World Bank publishes the most complete statistics
on barriers to entrepreneurship, assessing the obstacles faced by entrepreneurs in
performing various standardized tasks across 178 countries. Of the 178 countries
studied, in 2014 Italy ranked 65th, well below most OECD countries. Italian
regulations, in particular, performed particularly badly in ranking related to starting
a business (90th place), getting credit (109th place), enforcing contracts (103rd place)
and Paying Taxes (138th place). The dramatic paying taxes result reflects not only the
cost of taxation themselves, but also the administrative burdens associated with
complying with the tax code. In Italy, entrepreneurs need to spend much more time
than OECD peers to follow procedures (269 hours an year versus 175 in OECD on
average), and, at the same time, are also subject to extreme levels of taxation: 65,8%
for total taxes (versus 41,3% in OECD) and 43,4% for labor taxes (versus 23,1% in
OECD). Theoretical work has also claimed that, as long as the general taxation is
sufficient to cover basic welfare, social security and government activities, progressive
taxation reduces the returns to entrepreneurship by lowering the marginal benefits to
additional effort, reducing the returns to risk taking. (Keuschnigg & Nielsen, 2004;
Cumming, 2013). According to EY (2013), taxation in Italy is clearly the area in
51
clearest need of reform. High taxes are a disincentive to enterprise and, in addition,
tax incentives are so complex that they dont appear to be encouraging vibrant
innovation-led entrepreneurship. Coherently with this claim, Italian entrepreneurs
surveyed pointed to an overhaul of the countrys tax system as the single most effective
way of boosting entrepreneurship and growth in Italy in the long run (EY, 2013).
Cross-Country time-series on national labor taxes, unfortunately, are not provided by
World Bank. If labor taxes are responsible for a significant part of the barriers to
doing business, the same is true for start-up costs and contracts enforcement. The cost
of setting up a business in Italy is the third highest in the G20, with the largest
individual cost being the 3,222 required to notarize a public deed of incorporation.
Enforcing commercial contracts, moreover, takes on average more than twice the
OECD median (1185 days needed versus 529 in OECD), with most of the time related
to the extremely long periods needed for trial and judgment (900 days) and
enforcement of judgment (270 days).
Among all the interesting barriers measured by the World Bank, as we believe that
Start-up initial costs represent a severe entry barrier for early stage entrepreneurship,
we decided to formally test the following hypothesis:
Hypothesis 12: Higher Start-up initial costs are associated to lower Venture Capital
activities relatively to GDP.
52
United
States
12
Strenght of Legal Rights 2012
Cost (% Income)
to Start - 2012
12
United
States
10
10
Canada
Canada
8
Ireland
Australia
United Sweden
Kingdom Finland
Netherland
4
Switzerland
s
Denmark
GermanyBelgium Japan
Norway
France
Czech
2
Portugal Austria
Estonia
Slovenia
Republic
Spain
Greece
0
0
Switzerla
nd
Sweden Ireland
Finland
United
Kingdom
Denmark
Netherlan NorwayJapan
FranceAustralia
ds
Spain
Austria
Germany
Slovenia
Portugal Greece Czech Estonia Poland
Italy
Republic
Belgium
4
2
Italy
Poland
10
0
0
15
Strenght of Investors
Protection - 2012
14
United
States
Canada
12
10
Sweden
Ireland
United
Netherlands
Finland
Kingdom
Switzerland
Denmark
France Japan
Norway
Belgium
Germany
Austria
Estonia
Australia
Spain
Portugal
Czech Greece
Italy
Slovenia
Poland
Republic
6
4
2
0
0
10
12
Average Labour Tax Rate 2012
12
10
United
States
Canada
Switzerland
Sweden
Ireland
United Kingdom
France
Finland
4 Denmark
Japan
Netherlands Belgium
Norway
Australia
Austria Estonia
2
Germany
Greece
Italy
Portugal
Poland
0
Czech
Spain 40
Slovenia 20
0
Republic 60
6
10
Figure 30 Above figures show the correlation between four Ease of Doing Business indexes (On x-axis. Namely
Cost to Start a Business as a % of mean income, Strength of Legal Rights, Strength of Investor Protections, Labor
Tax rate) and Total VC investments as a % of GDP (On y-axis. 1=0,01% GDP).
53
Labor Rigidity
Widely used in the literature, the Heritage Foundation Economic Freedom
index examines the key aspects of public policy environment. One of the key
determinants of the index is represented by the Labor Freedom Index. The Labor
Freedom component is a quantitative measure that is not directly addressed by the
previously analyzed World Bank Ease of Doing Business index, and that considers
various aspects of the legal and regulatory framework of a countrys labor market.
These include regulations on minimum wages, laws inhibiting layoffs, severance
requirements, and measurable regulatory restraints on hiring and hours worked
(Heritage Foundation). These factors may have an impact on entrepreneurship, VC
and innovation. On one hand, minimum wage legislation can create a safer and more
equal social climate that can attract a higher number of workers. On the other hand,
labor rigidities can discourage individual effort and merit, while at the same time
diminish the willingness to hire of entrepreneurs and their ability to test appropriately
workers on their skills. The rationale for a decrease in labor rigidity is that an
entrepreneur has a smaller incentive to start up a venture in countries with rigid labor
Labour Freedom Index - 2014
120
100
80
60
40
20
0
Figure 31 Labour Freedom Index. Source: Heritage Foundation, Economic Freedom - 2014.
54
markets, due to the increased risks associated with the choice, especially in case of a
potential downturn or financial distress. In a structurally dynamic and risky context
such at tech-entrepreneurship, one could argue that such limits can be detrimental to
the growth of a company. When interviewed on the subject, Paola Bonomo, one of
the members of Italian Angels for Growth claimed that the high inward and outwardjob-market rigidity is probably the least attractive characteristics for tech
entrepreneurs and investors in Italy. Recent work, analytically showed how labor
unions also increase the cost of equity, as they decrease a firms operating flexibility.
Cumming (2013), in particular, shows that lower levels of labor frictions are associated
with more business starts and higher levels of VC per population (Cumming, 2013).
After 20-years of almost complete stagnation in the index, in 2014 Italys economic
freedom score is 60.9, making it the 86th freest economy in the 2014 Index and the
35th out of 43 countries in the European region. According to Heritage, Italian Labor
freedom, in particular, has been declining steadily, leading the Economy to levels well
below OECD countries (See figure 31). Although we immediately notice how markets
with relatively low labor freedom are not necessarily those with the lowest level of VC
activity (France, Finland, Germany and Norway, for instance, have all labor markets
that are more rigid than Italy), based on the above considerations, we formally test
Hypothesis 13: higher levels of Labor Freedom are associated to higher levels of VC
activities.
Corruption Index
Corruption, defined as the demand of payments and bribes connected to
licenses, protections, loans and support, distorts the economic and financial
55
environment, and is a heavy obstacle for efficient markets. Indeed, corruption reduces
the efficiency of government and businesses by enabling people to become powerful
through patronage or bribes rather than ability. Moreover, according to Bonini (2011),
it introduces instability into political processes. Corruption, moreover, often crowds
out other honest businesses, supports the development of a black market and can
discourage or even bring to the withdrawal of investments by financiers. Unfortunately
for corruption-related studies, this variable is highly qualitative and cannot be
measured directly. This means that, particularly when based on questionnaire surveys
(inevitably questions-dependent), the measure inevitably shows a greater noise.
Moreover, several methodologies proxy corruption with the perception of corruption,
thus introducing a potential variable misspecification (Bonini, 2011). In our case, we
use the Corruption Freedom Index as presented by Heritage foundation, which,
drawing most of its data from Transparency Internationals, ranks countries in terms
of the Corruption Perceptions among its surveyed citizens. As in most of the previously
analyzed variables, unfortunately, the Italian position is still extremely negative when
compared to other developed countries, with only Greece showing a worse score among
selected countries. Chart 33, moreover, shows a relation between VC/GDP and
Corruption Freedom Index. In order to test this relation in a more rigorous way, we
state the following hypothesis:
Hypothesis 14: VC/GDP levels and yearly variations are positively impacted by
increasing Corruption Freedom indexes.
56
Corruption Freedom Index - 2012 - Heritage
100
90
80
70
60
50
40
30
20
10
0
Figure 32 Corruption Freedom Index. Source: Heritage (picking data from Transparency International) 2014.
Corruption Freedom Index (x-axis) and VC/GDP (y-axis, %) - 2012
VC Activity (as a % o
0,14
United States
0,12
0,1
Canada
0,08
Hungary
France
0,04
0,02
Sweden
Ireland
0,06
Greece
Czech Republic
Italy
Portugal
Slovenia
Poland
0
30
40
50
60
United Kingdom
Spain Belgium
70
Switzerland
Finland
Germany
80
90
100
Corruption Freedom Axis

Figure 33: VC/GCD (% - y-axis) and Corruption Index (x-axis) correlation. Source: Heritage Foundation (with data
from Transparency International).
Start-up Regulation
It is often tempting for governments to add restrictions to investments and
businesses on several dimensions, such as the type of securities venture investors can
use, stock classes for limited liability companies, possibilities to grant stock options to
57
employees or to raise funds through financial instruments like convertible notes.

Academic researchers, however, have strongly highlighted how government
requirements that limit the flexibility of entrepreneurs and venture investors can be
highly detrimental, and how states should avoid to micromanage the entrepreneurial
process (Lerner, 2010). Lets consider the Italian case. Up to 2014, Start-up operating
in the country as limited liability companies could not use stock options as a way to
incentivize their employees (equity based compensation such as stock options) and,
regardless of their size, had to pass through an expensive notary act for incorporation.
Even though the enforcement of the recent Decreto Sviluppo by the former Minister
of Economic Development Corrado Passera, has addressed some of these issues by
enabling innovative start-ups to issue equity-participation tools as a way to
remunerate collaborators and by reducing start-up cost for startups that can operate
with less than 10.000 in capital (by setting up a simplified limited liability company),
Italian company regulation is still particularly rigid. Italian Startups still need to face
high notary costs as soon as they grow or need capital raises. Moreover, they face
large difficulties in issuing more flexible financing tools, such as convertible notes and
preferred stock: limitations that arguably do not help the attractiveness of local
innovative startups for both foreign funds and local investors. Stock option plans can
be activated only through an expensive notary act, which subtracts to startups the
already limited liquidity needed for their core business. Moreover, limited liability
companies are prevented from issuing shares without voting right. Even though a
formal classification of all the VC-related relevant regulations across countries is not
in the aim of this dissertation, we highlight the relevance of the issue and the urgency
of intervention in Italy toward a greater convergence of existing rules on fundraising,
governance and compensation toward international standards and best practices.
58
Capital Gain Taxes

Taxation has a deep impact on agents choices related to investment, hiring
decisions and entrepreneurial activities. In the Ease of Doing Business paragraph, we
have already seen how Labor and Corporate tax can reduce incentives to hiring and
starting entrepreneurial activities. Capital gains taxes have been widely recognized as
being one of the most important legal instruments for stimulating VC markets
(Poterba, 1989; Gompers & Lerner, 1998; Jeng & Wells, 2000). At the beginning of
the 70s, the US VC industry stagnated due to a sharp increase in capital gain taxes
from 25 to 49%, with a highly reduced upside incentive for investments. As soon as
this policy was reversed, the US VC funding increased from $68.2 million in 1977 to
a massive level of $2.1 billion in 1982, following a reduction in the capital gains tax
rate from 35% in 1977 to 20% in 1982. Poterba (1989) shows, however, how the lower
capital gains tax rates on investors cannot be considered as the main driver of this
growth, since most of the funds have come from investors who already didnt face the
personal capital gains tax. What matters for high potential entrepreneurship, indeed,
is not the general capital gain tax level, but rather the capital gain tax that has a
direct impact on newly created companies and on vehicles organized to invest in these
targets. Poterba also shows how, as only a minimal fraction of the capital gains on
equity in an economy are related to VC investments, a subsidization of formal and
informal VC investments in high-tech companies would be a fairly attractive option
for policy-makers, as it would highly increase VC investments without any particularly
relevant short term negative impact on tax revenues. Despite its importance, due to
the lack of a comprehensive international updated database of VC and Start-up related
capital gain taxation, however, we exclude this variable from our analysis.
59
Bankruptcy Law
Among the many potential determinants of VC Activity, it is lastly worth
mentioning bankruptcy law. Entrepreneurial activity and, as a consequence, demand
for VC, are affected not only by the perspective of large positive payoffs in case of
success, but also by the size of the negative payoffs in case of downturn. Considering
that most of the innovative venture, due to their inherently risky activity, fail, the
impact of this last factor can be particularly relevant. Research has highlighted how
bankruptcy laws, in this sense, can stimulate the demand for VC by reducing the size
of negative payoffs and encouraging risk taking. Several studies support the view that
entrepreneur-friendly bankruptcy laws stimulate entrepreneurial activity and VC
(Armour & Cumming, 2008). Examples of Bankruptcy Law in support of
entrepreneurship are U.S. homestead exemptions, which, depending on their form, can
prevent the forced sale of an entrepreneur home to meet the demands of some
creditors, or can prove the surviving spouse with shelter or an exemption
from property taxes. Counter to expectations, however, Cumming (2013) showed that
U.S. data indicated a positive impact of the homestead exemption only among the
bottom quartile homestead exemption states, but a negative impact elsewhere. The
complexity of the subject and of data collection makes such a variable more suitable
for studies that focus exclusively on taxation and, hence, we keep this analysis at a
qualitative level.
60
2.2.6 Law System: Common Law vs. Civil Law

In addition to single regulations affecting specific incentives and business
processes, the whole juridical form of a country can have a deep impact on business
activity and, arguably, on demand and supply of VC. Whereas civil law systems show
a tendency to promote and support the institutionalization of the economic, with their
higher focus on private property rights enforcement, common law systems grant, on
average, more flexibility in business management, with an emphasis on ex-ante
authorizations usually substituted with ex-post protection. Beck et al. (2003) in
particular, showed that such characteristics belonging to English origin legal systems,
provide a generally more investor-friendly environment than civil law systems, such
as the French and the German ones. Common law systems generally experience
quicker trials and shorter recovery time, both of which are relevant for investors willing
to commit capital of risky ventures where principal-agent conflict of interest can
potentially be problematic. Bonini (2011) classifies countries depending on their
similarities to UK, German, French or Scandinavian juridical system, finding out that
UK systems are more suitable for early-stage companies development, while
Scandinavian systems provided a more consistent environment for later stage VC. In
this study, we control for juridical systems by introducing a common-civil law dummy
variable in our models and by testing the following hypothesis:
Hypothesis 15: Common Law legal systems are associated to higher VC activities
relatively to GDP.
61
3. Econometric Model and Sample

3.1 Our Model
To allow for proper econometric testing of our hypotheses, we construct four
different sets of measures capturing the market dynamism, ease of doing business,
cultural factors, stock of educational & innovation and legal environment of each
country. Building on the methodology used by Bonini (2011), and expanding it by
considering both observation levels and yearly variations, we performed four sets of
regressions (Panel A, B, C, D) which differ in both their regression model (OLS on
yearly levels in Panel A and B, GLS on year-on-year variations in Panel C and D)
and in the dependent variable used (Total VC investments in Panel A and C, Early
Stage VC Investments in B and D). Specifically, the four panel differ by:
the model used:

o Panel A and B use an OLS model where observations from all the
countries and years are expressed in yearly levels.
o Panel C and D use a GLS model where observations from all the
countries and years are expressed in their year-on-year variation.
the dependent variable used:

o Panel A and C focus on Total VC investments over GDP
o Panel B and D focus on Early Stage VC investments over GDP.
62
For both Total VC and Early Stage VC dependent variables, we decided to scale
observations by GDP in order to take into account the size of different economies. In
each panel, moreover, before regressing the whole set of explanatory variables against
the dependent variables, we performed different regressions for each of the families of
independent variables: market dynamism, ease of doing business, cultural factors,
education & innovation and legal system. We will call partial regressions all the
regressions that use explanatory variables belonging to only one cluster16, while we
will refer to general regressions17 for those including all the explanatory variables at
the same time. We believe that both partial and general regression can contribute to
the explanation of the sign of different variables coefficients, as well as to capture
coefficients of determinations from different families of variables. The choice of two
different models (OLS on levels and GLS on yearly variations) was driven by reasons
mentioned below.
In the OLS model we consider both cross-country and time series observations
without considering country-related fixed effects. In particular:
, = + , +,
Where i represent different countries in the cross-country analysis, t represents

different years, Y is the vector of dependent variables, X the matrix of independent
variables, is the vector of intercepts, is the regression coefficients vector and is
the vector of residuals. The aim of such a test is to capture a first relation between
Partial regressions: regressions 1-5 in Panel A and B and regressions 1-4 in Panel C and D.
General regressions: regression 6 in Panel A and B and regression 5 in Panel C and D, including all
explanatory variables from different families.
16
17
63
cross-country level of VC/GDP ratios and cross-country levels of the explanatory

variables from the five different families. Although, as we will explain later, the model
is statistically weaker than the GLS-fixed effects model used on variations with the
data considered, we decided to perform OLS regressions on observations levels for
two reasons. First, the model can try to explain some of the cross-section variation by
including explanatory, time-invariant variables that, in the fixed-effect model, could
not be considered18. Moreover, the basic OLS model computed on levels can provide
insights on coefficient of determinations, although biased in their statistical
significance, and on regression coefficients signs. With the chosen panel data, however,
the basic OLS model has two set of limitations. First, OLS models require that
observations are independent and identically distributed i.i.d.-, whereas observations
considered in our panel are auto-correlated. This implies that the reliability of
coefficients estimation and t-values is compromised, with an upward bias of statistical
significance and, thus, the risk of reporting as statistically significant some coefficients
that, in reality, are not. Second, the model used on observation levels involves the
risk of finding relationships that are spurious, that is, to find relations that are more
related more to dependencies of both the explanatory and dependent variables to an
external variable (such as the scale of the country), than to direct relations between
dependent and independent variables. Although the normalization of the dependent
variables of VC Investments and some of the independent variables by individual
GDPs partially reduces the risk of spurious relations due to uncaptured scale effects,
however, we acknowledge that the risk of spurious relationships, is still present.
18
This is the case, for example, with the Common Law dummy variable or with Hofstedes cultural
individualism.
64
To increase the robustness of the analysis, we run a second set of regressions:

namely, Generalized Least squares regressions19 with fixed effects considering a panel
data of year-on-year variations observations. When variables are measured at multiple
points in time for different countries, indeed, we need to refer to Panel Data analysis
techniques, as it would be a mistake to treat 25 country-data points measured at 6
points in time as though they were 150 independent observations (as in the OLS case).
The choice of a fixed-effects model compared to a random-effects one was done by
both following Boninis (2011) methodology and by performing a Hausman20 test on
estimates from both techniques. Our regressions use standard panel data methods
elaborated through STATA.
For both models, in the variables related to VC investment, but also pension
funds and insurance companies assets and stock market capitalization, we follow the
methodology used by Romain and La Potterie (2004) and normalize the values of all
the dependent variables for the respective national GDP values (for each country and
year). By normalizing the variables with respect to GDP, not only we reduce the risk
of a spurious scale-driven relation between variables in the OLS model, but also we
reduce the potential heteroscedasticity effect, being natural that the higher the
GLS models are usually chosen when the variances of the observations are unequal
(heteroscedasticity), or when there is a certain degree of correlation between the observations. In these
cases ordinary least squares basic assumptions are violated and the model, leading to problems with
the statistical inference process which could result into misleading coefficients. As its name suggests,
GLS includes ordinary least squares as a special case.
19
20
The Hausman test tests the null hypothesis that the coefficients estimated by the efficient random
effects estimator are the same as the ones estimated by the consistent fixed effects estimator. If they
are, it is safe to use random effects, while statistically significant P-value indicate that the use of fixed
effects should be preferred. In our case, p-values in all regressions where statistically significant and,
therefore, we decided to use GLS with fixed effects.
65
economic level the higher the observed variability, and remove the inflation effect,
since nominal GDP already incorporates inflation effect of each country (Romain and
La Potterie, 2004). Following the same reasoning, we also normalize by the respective
national populations all the variables related to tertiary educated people, scientific
publications and patent applications by residents. Normalization is not required,
however, for other explanatory variables such as Corruption Freedom Indexes and
Common-Civil Law dummy variables.
After running our 4 sets of regressions, for a total of 22 analyses21, we compared the
results for Total VC and Early Stage VC with our initial hypothesis. As a result of
the comparison, we use the following scheme to either confirm, weakly confirm or not
confirm our hypotheses.
Confirm the initial hypothesis: whenever the GLS fixed effects regressions
confirm the Hypothesis with statistical significance, and none of the OLS
regressions reject the Hypothesis with statistical significance. We also confirm
the Hp when only one of the GLS regressions support the HP with statistical
significance, while both OLS regressions (partial and global) going in the same
direction with statistical significance.
Weakly confirm the initial hypothesis: whenever the GLS fixed effects regression
coefficients are not statistically significant, but some or all of the OLS
regression coefficients are.
Panel A: OLS on observation levels using Total VC as a dependent variable. 5 partial regressions
and 1 global regression. Panel B: OLS on observation levels using Early Stage VC as a dependent
variable. 5 partial regression and 1 global regression. Panel C: GLS on observations year-on-year
variations with fixed effects, using Total VC as a dependent variable. 4 partial regressions (COM_LAW
variable time-invariant and, hence, not included) and 1 global regression. Panel D: OLS on observation
year-on-year variations with fixed effects, using Early-Stage VC as a dependent variable. 4 partial
regressions and 1 global regression.
21
66
Not Confirm the initial Hp: whenever either the GLS or the OLS showed
statistically significant coefficients with signs going in a different direction from
the hypothesis, or whenever none of the regressions gave statistically significant
results.
Formally, our general version of the model, used in the OLS and GLS regressions is:

= ( , ,
, & , )
Where the Common Civil Law Variable was omitted in the GLS model due its timeinvariance and where the individual arguments of the function include families of
variables that are tested in partial regressions. In particular:
(1)
(2)
= , ,
(3)
, ,
(4)
= &
,
With GDP Growth omitted from the OLS models, and with cultural individualism
omitted in the GLS model due its their time invariance.
67
3.2 Our Sample

For our empirical analysis, we used aggregate data on 25 medium-high income
countries, selected according to their belonging to either the European Union or OECD
and controlling for VC data availability. In particular, we selected Australia, Austria,
Belgium, Canada, Czech Republic, Denmark, Estonia, Finland, France, Germany,
Greece, Hungary, Ireland, Italy, Luxemburg, Netherlands, Norway, Poland, Portugal,
Slovenia, Spain, Sweden, Switzerland, United Kingdom and United States. We
deliberately chose not to include Israel due to its extreme values on Venture Capital
activity which, as an outlier, could have undermined the validity of our results. Data
was collected including both cross-section and time-series dimensions, with
observations from the 6 years period going from 2006 to 2012. The selection of a longer
period was unfortunately constrained by data availability, being extremely hard to
find databases that present observations collected under the same perimeter for longer
periods22. Table 2 summarizes all the dependent and independent variables used,
including data sources and predicted signs for the analysis. First, we combined data
from EVCA23 for Europe, NVCA24 for USA, CVCA25 for Canada and from the National
Bureau of Statistics for Australia26 for data on VC Activity. In particular, we collected
data on Total VC activity by country, including seed, start-up stage and later stage
registered investments by both national and international VC funds into national
companies, and data on early stage VC.
EVCA, for instance, for all years before 2007 did non collect figures on the total amount of VC
invested in national companies, but only data on the total amount invested by national VC Funds.
23
European Private Equity and VC Association - http://www.evca.eu/
24
National VC Association United States. - http://www.nvca.org/
25
Canadas VC & Private Equity Association http://www.cvca.ca/
26
http://www.abs.gov.au/
22
68
Variable Name
Dependent Variables
Total VC Investments in the
Country over GDP
Early Stage VC Investments over
GDP
Explanatory Variables
Market Dynamism
Stock Market Capitalization on
GDP
Pension Fund Assets on GDP
Insurance Funds Assets on GDP
GDP Growth
Education and Innovation Stock
Tertiary Attainment on
Population
University-Industry cooperation
Short Name
Description
Sources
TOT_VC
Total VC Funds invested in national

companies, divided by yearly GDP levels.
VC Funds invested in Early Stage
national companies, divided by yearly
GDP levels. Sum of Seed and Start-up
registered investments.
OECD,
EVCA
OECD,
EVCA
Total capitalization of listed companies

on GDP.
Total AUM of local pension funds.
Total AUM of local insurance companies.
Yearly level of growth in real GDP.
World
Bank
OECD
OECD
WB
% of population which has completed a

tertiary education program.
Measure of the level of cooperation in
R&D activities between universities and
companies (the lower, the better).
Number of scientific and engineering
articles published in physics, biology,
chemistry,
mathematics,
medicine,
engineering, earth and space sciences.
Worldwide patent applications filed
through the Patent Cooperation Treaty
procedure or with a national patent office
by a country resident.
OECD
W.E.F.
OECD
OECD
Measure of the degree of interdependence

between the members of a society.
Measure of the national fear of failure in
the decision of starting a business.
Level of consideration and admiration of
entrepreneurs inside the country.
Hofsteade
G.E.M.
G.E.M.
Average cost of opening a new business,

as % of average income.
Measure considering regulations on
minimum wages, layoffs, severance
requirements, hiring and hours.
Measure considering the diffusion of
corruption practices inside the country.
Juridical system used in the country.
W.B.
Heritage
Heritage
Countries
ES_VC
D_CAP
D_PEN
D_INS
D_GWT
E_RATIO
I_COOP
Scientific Papers on Population
I_ARTPOP
Residents Patent Applications on

Pop.
I_PATPOP
Cultural and Social Factors

Hofstede Individualism
CUL_IND
Fear of Failure
C_FAIL
Entrepreneurs Status
C_STATUS
Ease of Doing Business

Cost to open a Business (%
Income)
Labour Freedom
B_COS
B_FLEX
Corruption Freedom
B_COR
Civil Law (0), Common Law (1)
COM_LAW
H0
+
+
+
Table 2. Dependent and independent variables descriptions. Including variables adopted in the dissertation, the variables
descriptions, the sources of data and the variables predicted sign.
69
This last measure was creates by combining seed and start-up investments and, to
guarantee comparability across-countries, was collected for all country except United
States, Estonia, Slovenia and Canada. Secondly, we used World Bank data for ease
of doing business, market capitalization, GDP, GDP growth and Population. The
OECD technology database was used to get data on the number of scientific papers
and patent applications of residents. Moreover, we also used OECD for statistics on
National Pension funds assets under management, insurance companys assets under
management and percentage of population with tertiary education attainment. We
refer to Hofstede website for cultural individualism data, to Heritage foundation
database for Labor Freedom and Corruption Freedom and to World Economic Forum
global competitiveness reports for university-industry cooperation level. Finally, we
complete the Civil-Common Law dummy variable by looking at national governments
websites.
3.2.1 Correlation Matrices

Tables 3 and 4 below presents a correlation matrix for the main variables used
in the multivariate tests provided in the next section. We present a correlation matrix
based on observation levels for all years and countries (table 3), and another one for
year-on-year observations of the former observations (table 4). While many of the
correlation coefficients between observation levels have relatively high levels, with a
potential multicollinearity issue, we notice how cross-section year-on-year variations
on selected variables present a correlation structure which does not indicate a high
risk of multicollinearity. During our choice of independent variables, we have
considered the correlation matrix to exclude many of the potential choices which
resulted excessively correlated to other variables in the model and reduce
multicollinearity risk.
70
Explanatory Variables Correlation Matrix - 25 countries, 2007-2012. 150 observations per Variable.
Correlations computed on Yearly Levels
D_PEN
D_PEN
D_INS
D_INS
D_CAP
B_COR
B_COS
B_FLEX
C_FAIL
C_IND
(0.15)
1.00
D_CAP
0.48
(0.10)
1.00
B_COR
0.52
(0.11)
0.52
1.00
B_COS
(0.38)
0.06
(0.29)
(0.77)
1.00
0.49
0.11
0.23
0.25
(0.25)
1.00
(0.38)
(0.11)
(0.15)
(0.42)
0.48
(0.19)
1.00
0.53
0.03
0.32
0.45
(0.44)
0.57
(0.28)
1.00
B_FLEX
C_FAIL
C_IND
C_STA
E_RAT
C_STATUS
0.28
0.02
0.15
0.41
(0.34)
(0.03)
(0.10)
0.09
1.00
E_RATIO
0.53
(0.17)
0.47
0.65
(0.63)
0.33
(0.30)
0.54
0.24
1.00
I_COOP
I_COO
I_ART
I_PAT
1.00
(0.48)
(0.08)
(0.38)
(0.80
0.81
(0.33)
0.58
(0.53)
(0.21)
(0.54)
1.00
I_ARTPOP
0.64
(0.12)
0.42
0.79
(0.61)
0.38
(0.45)
0.45
0.34
0.59
(0.61)
1.00
I_PATPOP
0.22
(0.12)
0.15
0.37
(0.39)
0.21
(0.22)
0.44
0.40
0.29
(0.43)
0.30
1.00
Table 3. This table summarizes the correlation observations coefficients of the selected explanatory variables.
Observations for each variable include 150 observations (25 countries times 6 years) and represent the yearly levels
of the selected variables.
Explanatory Variables Correlation Matrix - 25 countries, 2007-2012. 150 observations per Variable
Correlations computed on year-on-year Variations
D_PEN
D_PEN
D_INS
D_CAP
D_GWT
B_COR
B_COS
B_FLEX
C_FAIL
C_STA
E_RAT
I_COO
I_ART
D_INS
0.05
D_CAP
0.15
0.2
D_GWT
0.17
(0.2)
(0.08)
B_COR
(0.01)
0.04
(0.04)
0.17
B_COS
(0.24)
(0.24)
(0.04)
0.12
(0.12)
B_FLEX
0.02
(0.11)
(0.27)
0.28
0.09
0.03
C_FAIL
(0.13)
(0.08)
(0.1)
(0.02)
0.06
(0.18)
C_STATUS
(0.04)
0.08
(0.13)
0.00
(0.01)
(0.05)
(0.06)
-0.04)
0.07
(0.12)
(0.05)
(0.11)
0.02
0.02
0.03
(0.018)
0.011
(0.031)
0.077
0.00
0.035
(0.064)
0.043
0.007
-0.168)
I_ARTPOP
(0.05)
(0.06)
(0.23)
0.12
0.12
0.01
0.05
0.05
0.08
0.19
(0.04)
I_PATPOP
0.27
(0.00)
(0.08)
(0.03)
0.09
(0.02)
(0.04)
(0.06)
(0.01)
(0.16)
(0.00)
0.11
E_RATIO
I_COOP
I_PAT
1
1.00
Table 4. This table summarizes the correlation coefficients of the selected explanatory variables. Observations for each
variable include 150 observations (25 countries times 6 years) and represent the year-on-year difference (prime differences)
on the level of the selected variables.
71
4. Empirical Results
In this section, we discuss the main results of all our multivariate regressions.
Following the above explained methodology, we present the results of the four sets of
regressions which differ in both their regression model (OLS on yearly levels in Panel
A and B, GLS on year-on-year variations in Panel C and D) and in the dependent
variable used (Total VC investments in Panel A and C, Early Stage VC Investments
in B and D) to control for investment stage-specific effects. In each panel, moreover
we performed different regressions (named partial regressions) for each of the families
of independent variables: market dynamism, ease of doing business, cultural factors,
education & innovation and legal system. We then present the results of the joint
regressions (named global regressions) where all explanatory variables from different
families are included at the same time to control for all their potential impact on VC
investments.
4.1 F-stats and coefficients of Determination

We first note that, with the exclusion of regression 2 (ease of doing business variables),
3 (cultural variables) and 4 (education and innovation variables) in Panel C (GLS
regressions on total VC), and with the exclusion of regression 2 in Panel D (GLS
regression on early stage VC), the F-stats are relatively high in all the cases.
72
Panel A OLS regression on all observations between 2007 & 2012, 25 countries
Dependent Variable: Total VC Investments over GDP
Partial Regressions (par.)
Regression #
Intercept
Market Dynamism
D_PEN
D_INS
D_CAP
Global
Reg.
6
0.21***
(3.9)
-0.27
(-1.17)
0.05
(0.16)
-2.47***
(-6.59)
0.32***
(9.82)
0.52*
(1.74)
0.0025***
(2.89)
0.005
(0.71)
0.0019***
(3.19)
Ease of doing Bus.

B_COR
-0.00
(-0.85)
0.013*
(1.95)
0.00106**
(2.06)
0.0043*
(1.69)
-0.015***
(-2.36)
0.0075***
(4.79)
B_COS
B_FLEX
Cultural Factors
FAIL_FEA
0.0019
(0.54)
-0.0035
(-0.54)
0.006**
(2.16)
-0.017***
(-4.33)
0.0099***
(5.04)
0.0048
(1.54)
CUL_IND
ENT_STATUS
Education & Innovation
EDU_SH
-0.0129***
(-3.69)
-0.004
(0.76)
0.008
(0.90)
0.016***
(5.07)
-0.00
(-0.80)
0.0000612
(1.55)
0,00117***
(8.0)
I_COOP
I_ARTPOP
I_PATPOP
Legal System
COM_LAW
Adj.
F
n
19.3
17.6
12.2
150
34.7
33.4
42.6
150
31.4
30.0
18.9
150
56.0
54.8
38.9
150
0.014***
(3.88)
-0.0032
(1.60)
0.00001
(0.08)
0,0014***
(9.38)
0.45***
(6.83)
0.11
(1.13)
23.9
23.4
29.2
150
69.2
66.0
21.6
150
Table 2. This table present results for the cross-section OLS regressions for the six models hierarchically tested on
total VC investments. Partial regressions test different families of variables one at a time, while the global
regression includes all explanatory variables from all the families at the same time. Each variable contains a
vector of 150 observations (6 years times 25 countries). Explanatory variables are defined in the Sample
paragraph. T statistics for coefficients are in parentheses. Significance at the 1, 5 and 10% levels is denoted by
***, **, and *, respectively.
73
Panel B OLS regression on all observations between 2007 & 2012, 21 countries
Dependent Variable: Total Early Stage (Seed plus Startup) Investments over GDP
Regression #
1
2
3
4
Intercept
Market Dynamism
D_PEN
D_INS
D_CAP
0.11***
(4.98)
-0.002
(-0.02)
0.148***
(1.24)
0.039
(0.68)
Global Reg.
6
0.18***
(11.9)
0.08
(0.59)
0.00049**
(2.32)
0.0074**
(2.15)
0.00049*
(1.88)
Ease of doing Business

B_COR
0.001**
(3.14)
0.003
(1.15)
0.0002
(1.13)
0.0035***
(3.33)
-0.0065**
(-2.33)
0.000
(-0.56)
B_COS
B_FLEX
Cultural Factors
FAIL_FEA
-0.0013
(-0.77)
-0.004*
(-1.78)
-0.000
(-0.06)
-0.010***
(-6.87)
0.000
(0.70)
0.0056***
(4.72)
CUL_IND
ENT_STATUS
EDU_SH
-0.0064***
(-3.80)
0.00
(-0.66)
0.0038**
(2.30)
0.000
(-0.10)
-0.0012***
(-2.37)
0.00027***
(5.15)
0.00014
(1.15)
I_COOP
I_ARTPOP
I_PATPOP
Legal System
COM_LAW
(%)
Adj. (%)
F
n
12.4
10.2
5.7
126
41.7
40.3
29.1
126
40.44
38.98
27.6
126
48.02
46.3
27.9
126
0.001
(0.68)
-0.000
(-0.12)
0.000335***
(5.26)
-0.000
(-0.15)
0.059*
(1.69)
-0.03
(-0.82)
2.26
1.47
2.8
126
65.01
60.60
14.7
126
Table 3 - This table present results for the cross-section OLS regressions for the five models hierarchically tested
on Early Stage VC investments. Partial regressions test different families of variables one at a time, while the
global regression includes all explanatory variables from all the families at the same time. Each variable contains a
vector of 126 observations (6 years times 21 countries). Explanatory variables are defined in the Sample paragraph.
T statistics for coefficients are in parentheses. Significance at the 1, 5 and 10% levels is denoted by ***, **, and *,
respectively.
74
Panel C GLS regression (fixed effects) on all prime differences between 2006 & 2012, 25 countries
Dependent Variable: Total VC Investments over GDP (prime differences)
Global Reg.
Regression #
1
2
3
4
5
Intercept
Market Dynamism
D_PEN
D_INS
D_CAP
GDP_GWT
-0.10
(-1.37)
0.33
(1.08)
1.16***
(3.93)
0.006***
(4.80)
-0.04
(-0.63)
0.0013
(1.26)
0.025***
(3.27)
0.43***
(21.82)
0.0056***
(3.82)
-0.06
(-0.88)
0.002*
(1.81)
0.018**
(2.23)

B_COR
0.004
(0.31)
-0.022
(-1.32)
0.005
(0.55)
B_COS
B_FLEX
Cultural Factors
C_FAIL
-0.003
(-0.33)
-0.007
(-0.46)
0.001
(0.59)
-0.005*
(-1.69)
-0.000
(-0.06)
C_STATUS

EDU_SH
I_ARTPOP
I_PATPOP
(within - %)
F
n
0.44***
(21.66)
35.4
16.6
150
1.7
0.7
150
2.2
1.4
150
-0.002
(-0.59)
0.00
(0.02)
-0.129
(-0.65)
0.00033
(0.55)
0.000978*
(1.94)
-0.01**
(-2.31)
0.000518
(0.55)
0.000495
(0.61)
4.0
1.7
150
41.3
6.6
150
Table 4. This table present results for the cross-section fixed (within) effects GLS regressions for the five models
hierarchically tested on total VC investments. Partial regressions test different families of variables one at a time,
while the global regression includes all explanatory variables from all the families at the same time. Each variable
contains a vector of 150 observations (6 years times 25 countries). Explanatory variables are defined in the Sample
paragraph. T statistics for coefficients are in parentheses. Significance at the 1, 5 and 10% levels is denoted by ***,
**, and *, respectively.
75
Panel D GLS regression (fixed effects) on all prime differences between 2006 & 2012, 21 countries
Dependent Variable: Early Stage VC Investments over GDP (prime differences)
Global Reg.
Regression #
1
2
3
4
5
Intercept
Market Dynamism
D_PEN
D_INS
D_CAP
GDP_GWT
-0.068*
(-1.72)
0.023
(1.48)
0.033***
(2.37)
0.04**
(2.16)
0.0015**
(2.12)
-0.02
(-0.65)
0.0011**
(2.01)
0.025**
(2.34)
-0.08**
(-1.97)
0.0005
(0.62)
-0.035
(-1.00)
0.0017***
(2.78)
0.007
(1.35)

B_COR
0.000
(0.01)
-0.014*
(-1.64)
0.008*
(1.73)
B_COS
B_FLEX
Cultural Factors
C_FAIL
-0.004
(-1.58)
-0.010
(-1.23)
0.005
(1.33)
-0.007***
(-2.76)
0.002
(0.68)
C_STATUS

EDU_SH
I_ARTPOP
I_PATPOP
(within - %)
F
n
25.0
8.4
126
4.9
1.7
126
7.3
4.0
126
-0.004***
(1.97)
0.002
(0.67)
-0.025
(-1.45)
0.00086
(1.47)
0.00089*
(1.96)
-0.03**
(-1.96)
0.00095*
(1.80)
0.00067*
(1.69)
9.0
3.3
126
37.8
4.7
126
Table 5. This table present results for the cross-section fixed (within) effects GLS regressions for the
five models hierarchically tested on early-stage VC investments. Partial regressions test different families of
variables one at a time, while the global regression includes all explanatory variables from all the families at the
same time. Explanatory variables are defined in the Sample paragraph. T statistics for coefficients are in
parentheses. Significance at the 1, 5 and 10% levels is denoted by ***, **, and *, respectively.
76
This means that all the OLS regressions (both partial and global) and most of the
GLS regressions (including the two global regressions) reject the null hypothesis that
all of the model coefficients are equal to zero. Even though the violation of the i.i.d.
assumption of the OLS brings to an upward bias in the statistical significance of these
statistics, we believe that these results still bring some evidence in support to the
hypothesis that considered factors do play a role in explaining VC/GDP levels.
Secondly, adjusted values for all the global regressions are relatively high.
The coefficient of determination is a goodness of fit measure, showing the
proportion of the total variation of the dependent variable that can be explained
through the different models. Even though correlation does not imply causation and,
hence, high do not imply the existence of a direct causal relation between the
explanatory variable and the dependent variable variances, the coefficient of
determination is valid measure of models strength. As we are using regressions with
multiple variables, we consider Adjusted to correct for the otherwise artificial
increases of the coefficient of determination by purely adding new explanatory
variables. In global regressions, selected variables seem to explain respectively 66%
(in OLS) and 41% (in f.e. GLS) of total VC/GDP variation, and 60% (in OLS) and
37% (in f.e. GLS) of early stage VC/GDP variation. In OLS partial regressions,
Education & Innovation Adj. have the highest values for both total and early stage
VC activity (56% and 48%), followed by ease of doing business (34% and 41%) and
cultural factors (31% and 40%). GLS partial regressions computed on yearly
variations, however, show how the highest coefficients of determinations are related
to market dynamism for both total and early stage VC (35% and 25%). Variables
from other families seem to have a much smaller explanatory power, with all coefficient
of determinations below 10% and the highest fit present when education & innovation
(9%) and cultural (7%) factors are used to explain early stage investments. We expect
77
that, more than to the violation of the i.i.d. assumption in the OLS model, such a
difference could be due to a potential correlation of both the dependent and the
explanatory variables levels with some external, unobserved factors. This omitted
variable bias may attribute to our independent variables some of the explanatory
power that, in reality, is related to other, factors. When we regress observations
variations instead of levels, however, we believe that the omitted variable bias becomes
less relevant. Spurious relations could be related uncaptured scale or economic
development effects and would be coherent with the correlation matrixes previously
shown, reporting higher values on levels than on yearly variations. Moreover,
differences in OLS and GLS may be also related to the inclusion in the OLS model
of variables that, due to their time-invariance, could not be included in the GLS fixedeffects model.
4.2 Coefficients Results

After our initial considerations on the overall ability of models to capture total and
early stage VC/GDP variance, we hereby move to a deeper analysis of variables
families (i.e. market dynamism, ease of doing business, cultural issues, education &
innovation and legal systems) and of the various explanatory variables considered.
Tables 10 and 11, coherently with the above explained methodology, summarize
statistically significant coefficients signs for both partial and general regressions using
different models (OLS and GLS with fixed effects) to explain both Total and Early
Stage VC activity as a percentage of GDP. Results are compared with our initial
hypothesis to either confirm, weakly confirm or non-confirm them. In the following
paragraphs we will more deeply analyze individual coefficient effects.
78
Total VC. Initial Hypothesis vs. Regression Results

Variable Name
OLS
H0
GLS f.e.
HP Confirmed?
par
gen
par
gen
Market Dynamism
D_PEN
ns
Confirmed
D_INS
ns
ns
ns
Weakly
D_CAP
ns
Confirmed
D_GWT
Confirmed
B_COR
ns
ns
ns
Weakly
B_COS
ns
ns
ns
Weakly
B_FLEX
ns
ns
Weakly
C_FAIL
ns
Confirmed
C_IND
ns
Weakly
C_STATUS
ns
ns
ns
ns
Non confirmed
E_RATIO
ns
Non confirmed
I_COOP
ns
ns
Non confirmed
I_ARTPOP
ns
ns
ns
ns
Non confirmed
I_PATPOP
ns
Confirmed
ns
Weakly
Cultural Issues
Legal System
COM_LAW
Table 10 - The table compares the initial hypothesis (H0) on independent variables with the actual
results from the different regressions. In particular, hypothesis are compared with the results from the
OLS model and the GLS model. The OLS model used as a sample all the observations for 25 countries
and 6 years, considering their yearly levels. The GLS model used the same sample, but using yearly
variations of individual observations instead of yearly levels. Moreover, both partial and general model
results are shown. Partial results refer to regressions between independent variables belonging to the
same family (such as Cultural Issues) and the dependent variable (total VC investments over GDP:
levels and y.o.y. variations). Global results refer to the regression between all independent variables and
the dependent variable. +/- indicate statistically significant coefficient signs, ns stands for nonsignificant and \ indicates variables that were not included in the test due to either their time-invariance
(in GLS) or their variation nature (in OLS on levels). Note that the I_COOP Hypothesis has a
negative size as higher I_COOP values are related to countries with a lower University-Industry
cooperation in R&D.
79
Early Stage VC. Initial Hypothesis vs. Regression Results

Variable Name
H0
OLS
GLS f.e.
par
gen
par
gen
HP Confirmed?
Market Dynamism
D_PEN
ns
Confirmed
D_INS
ns
ns
ns
Weakly
D_CAP
ns
Confirmed
D_GWT
ns
Weakly
B_COR
ns
ns
ns
Weakly
B_COS
ns
ns
Weakly
B_FLEX
ns
ns
ns
Weakly
C_FAIL
Confirmed
C_IND
ns
ns
Non confirmed
C_STATUS
ns
ns
Weakly
E_RATIO
ns
ns
ns
Non confirmed
I_COOP
ns
Weakly
I_ARTPOP
ns
ns
Weakly
I_PATPOP
ns
ns
Confirmed
Cultural Issues
Legal System
COM_LAW
ns
Weakly
Table 11 - The table compares the initial hypothesis (H0) on independent variables with the actual results
from the different regressions. In particular, hypothesis are compared with the results from the OLS model
and the GLS model. The OLS model used as a sample all the observations for 25 countries and 6 years,
considering their yearly levels. The GLS model used the same sample, but using yearly variations of
individual observations instead of yearly levels. Moreover, both partial and general model results are shown.
Partial results refer to regressions between independent variables belonging to the same family (such as
Cultural Issues) and the dependent variables (early stage VC investments over GDP: levels and y.o.y.
variations). Global results refer to the regression between all independent variables and the dependent
variable. +/- indicate statistically significant coefficient signs, ns stands for non-significant and \ indicates
variables that were not included in the test due to either their time-invariance (in GLS) or their variation
nature (in OLS on levels). Note that the I_COOP Hypothesis has a negative size as higher I_COOP values
are related to countries with a lower University-Industry cooperation in R&D.
80
4.2.1 Market Dynamism results

Joint effects Partial Regression: According to GLS models results, with
values of respectively 35% and 25%, Market Dynamism variables are the ones
explaining yearly fluctuations of VC total and early stage investments to the higher
extent. The statistical strength of the model, together with the very high F-stat values,
makes us confidently reject the null hypothesis that Market Dynamism variables,
including Pension Funds and Insurance Companies AuM27, Listed Companies Market
Capitalization over GDP and GDP growth, have all coefficients equal to 0. The
coefficients of the partial OLS regression, capturing relations between independent
and dependent variables levels, moreover, drive us to the same conclusions, even
though they seem to capture a lower share of VC investments cross-section and timeseries variance (17% and 10% for Total and Early Stage VC). We hence confirm the
hypothesis that selected market dynamism variables jointly have an effect for both total
and early stage VC activity.
Individual variables: Moving to individual coefficient of regressions, tables 10
and 11 bring us to the confirmation of the positive effect of pension funds assets and
stock market capitalization on both Total and Early Stage investments and a weakly
confirmation of the positive effects of insurance companies asset under management
on both investment stages. Moreover we also confirm the hypothesis on the positive
relationship between GDP Growth and year-on-year variations of VC investments,
although this relationship is statistically weaker for Early Stage Investments.
27
Expressed as yearly variations of their percentages over GDP.
81
4.2.3 Ease of Doing Business

Joint Effects - Partial Regression: Partial OLS regressions attribute to Ease of
Doing Business variables the second highest28 adjusted coefficients of determination
(33% for TOT_VC and 44% for ES_VC), in both cases with high (even though
upward biased by the violation of i.i.d.) F-stats. Year-on-year variations of Ease of
Doing Business variables, however, seem to explain a much lower total variation of
VC activity in the selected countries for the 2007-2012 period. In particular,
coefficients in the GLS are lower than 5% in both investment stages. However, while
the F-stat for Total VC investments is not statistically significant, F-stats for Early
Stage reject the null hypothesis that the coefficients of Ease of Doing Business
variables are all equal to zero. Without forgetting about OLS upward bias, results are
generally supportive of the hypothesis that Ease of Doing Business variables jointly
have an impact on VC levels across all stages, and have an impact on yearly
fluctuations of Early Stage investments.
Individual variables: Moving to the analysis of single ease of doing business
variables, we note how tables 10 and 11 comparisons weakly confirms all our initial
hypothesis for both dependent variable sets. Hence, a decrease in the Costs of Startup,
an increase of the Corruption Freedom index or an increase in Labour Flexibility are,
on average, associated to both increased levels and year-on-year variations of total
and early stage investments. We acknowledge, however, that the statistical significance
of most of these results is rather weak. With the exclusions of partial GLS regressions
coefficients of the startup cost and labour flexibility in the early stage model, none of
the GLS regressions, indeed, presented statistically significant results, leaving most of
The highest coefficient of determination in our OLS regressions are those related to Education &
Innovation.
28
82
our conclusions to the interpretation of the weaker OLS regression. The most
statistically significant (p-values < 0.10) results are related to the negative impact of
Startup Costs and the positive impact of Labour Flexibility on Early Stage
Investments. These results are consistent with what we would expect: labour rigidities
and start-up costs represent higher barriers to entry and obstacles for companies of
lower dimensions which, with lower resources and higher risks, have more difficulties
to sustain heavy notary costs or to hire personnel without the possibility to easily
terminate the agreement in case of need.
4.2.4 Cultural Factors

Joint effects - Partial Regression: Partial OLS regressions considering Cultural
Factors respectively for Total and Early stage investment levels show a relatively good
fit of dependent variables observation levels, with adjusted of 30% and 38%, with
a higher importance of these variables, hence, in explaining funding of Seed and Startup companies. A higher importance of Cultural Factors to explain Early-Stage
investments is also confirmed by the analysis of yearly fluctuations through
generalized least squares, with Fear of Failure and Entrepreneur Status jointly
explaining 7.34% (with a statistically significant F-stat) of year-on-year variations of
Early-Stage investments vs a mere 2.27% (with no statistically significant F-stat) of
Total VC investments. Always considering the OLS upward bias, results are generally
supportive of the hypothesis that selected Cultural Factors jointly have an impact on
VC levels across all stages, and have an impact on yearly fluctuations of Early Stage
investments.
Individual coefficients: moving to the analysis of individual coefficients, the
comparisons shown in Table 10 and 11, strongly support our hypothesis on the impact
of national fear of failure on both total and early Stage investments. Cultural variables
83
coefficients are negative and statistically significant in all the performed regressions,
with the exception of the general GLS regression on total VC/GDP. Fear of failure
can be classified as a demand-side determinant and obtained results are coherent with
the interpretation of this variable as a potential entry barrier to entrepreneurial
activity. Presented data weakly support the hypothesis on the relevance of
Entrepreneurial Status as an explanatory variable for VC activity, but only when the
Early-Stage segment is considered. In this case, indeed, the coefficients from the OLS
model are positive and statistically significant (in both partial and general regressions),
while GLS coefficients present the same sign but have low t-stats. Lastly, we weakly
confirm our hypothesis on the positive impact of Cultural Individualism on either Total
VC investments, with results that, as they are not confirmed only in the partial
regression, arent particularly strong from a statistical perspective.
4.2.5 Education & Innovation

Joint effects - Partial Regression: according to OLS models results, with
adjusted coefficients of determination of respectively 54% and 46% for Total and Early
stage investment levels, Education and Innovation variables are the ones jointly
explaining investment levels variance to the higher extent. F-values related to
education & innovation partial regression are always statistically significant and lead
us to the rejection that all selected variables coefficients are equal to zero. GLS
coefficients of determination for partial regressions, however, are much lower than the
ones reported in OLS results. In particular, year-on-year variance of variables
belonging to this family seem to capture 9% of Early Stage Investments over GDP
year-on-year variance, and only 4% of total investments. It is important to stress again
that these differences between the OLS and GLS models could be attributed not only
to the violation of the i.i.d. assumption, but also to an omitted variable bias, which
84
could jointly attribute to education & innovation variables an upward biased

coefficient of determination due to the effect of an unobserved variable correlated with
both VC/GDP and independent variables.
Individual Coefficients: Although education and innovation variables jointly
have an impact, the interpretation of individual coefficients is partially puzzling. On
the one side, we confirm that an increased patent applications over population ratio
has a positive and statistically significant impact on both total and early stage
investments. Even though causal relation is unclear, countries that have the ability to
generate a relatively higher number of patents present thus more dynamic VC
markets. On the other side, contrary to expectations, tables 10 and 11 bring us to o
non-confirmation of the hypothesis on the positive effect of tertiary education
attainment, due to coefficients that are either non-significant or significant but with
opposite signs compared to what we would expect. In total VC panels, in particular,
the rejection of the hypothesis is led by a discrepancy between the statistically
significant and positive relation existing between levels in the OLS model, and
statistically significant but negative relations existing in the GLS model between yearon-year variations. We suspect that such a difference, which can be hardly supported
by logic rationales, can be due either to the presence of a spurious relation in the OLS
regression or, probably, a period-specific effect related to the recent financial crises.
Over the considered period, indeed, while tertiary educated people (as a % of total
population) have been increasing year-on-year in most of the considered countries,
VC level has been simultaneously dropping almost everywhere. If the Market
Capitalization/GDP variable is unable to capture all the effect of the financial crises,
this last issue could be a possible explanation. By trying to substitute the variable
with alternative measures, such as the quality of management education or of
mathematics and scientific education, as published by W.E.F. global competitiveness
85
report29, we couldnt see any improvement in the coefficients. We hence believe that
further research is required to overcome the issue. Some evidence on the impact of
cooperation in R&D between Universities and companies is present, but only in a
statistically weak partial OLS regressions explaining Early Stage Investments. Signs
of the coefficient, however, always go in the direction of our hypothesis in all performed
regressions. The interpretation of this result might be that, although other variables
impact VC activity to a much higher extent, a higher level of spillovers of academic
research on industries would be desirable and, in particular, would help to support the
demand side of capital by newly created companies. Lastly, we weekly confirm the
positive impact of a higher number of scientific publications per person on early-stage
venture capital activity, arguably sustained by a rationale that is similar to the one
related to Universities-Industry Cooperation levels.
4.2.6 Legal Systems: Common vs Civil Law

OLS regressions on levels30 attribute to the Common-Civil Law dummy
Variable a 23% R^2 coefficient for Total VC Investments, but a negligible explanatory
power in the model with Early Stage VC. By looking at Scatter plots, moreover, we
see how most of the positive impact of Common Law is referred to the presence in the
country samples of United States and United Kingdom. In none of the global OLS
regression, moreover, coefficients related to the dummy variable are statistically
significant. We weakly confirm the positive relationship between Common Law
systems and Total Investments, non-confirm the hypothesis for Early Stage VC and,
in general, believe that the relation is too weak and too much dependent on a small
http://www.weforum.org/reports/global-competitiveness-report-2013-2014
Note that, as legal systems are time-invariant, the Common-Civil law variable was omitted from
the GLS model.
29
30
86
number of observations to justify a strong acceptance of our initial hypothesis with

general relevance.
4.3 Empirical Analysis Results Summary

To sum up, we hereby list the main conclusions of our empirical study. The strongest
results of our above analysis on the relationships between explanatory variables and
VC/GDP ratios have led us to strongly confirm:
the positive impact on Pension Funds across all stages;
the positive impact of Stock Markets development across all stages;
the positive impact of GDP growth (especially for total VC);
the negative impact of Fear of Failure across all stages;
the positive effect of Patenting activities across all stages;
Moreover, we find evidence supporting a weak confirmation of:
the positive impact on Insurance Co. AuM across all investment stages;
the negative impact of Corruption across all investment stages;
the negative impact of Start-up Costs across all investment stages;
the positive impact of Labour Flexibility across all investment stages;
the positive impact of a high consideration of the figure of the Entrepreneur in

the Society across all investment stages;
the positive impact on University-Industry R&D cooperation on E.S. VC;
the positive impact of Scientific Publications on Early Stage VC;
We found no support, however for our hypothesis on the importance of cultural

individualism, tertiary education ratio and legal systems in the explanation of
VC/GDP ratios.
87
4.4 Limitations and Acknowledgements

Cross-sectional studies exploit differences in the independent variables across
Countries to infer the effects of determinants and policy changes on the size or
composition of the VC market. As explained by Da Rin et al., 2011, a fundamental
flaw of such studies is the potential presence of unobserved external factors that
influence both explanatory and outcome variables. This can be the case, for example,
of a countrys cultural propensity towards innovation that, although difficult to
measure, is likely to affect both VC_GDP ratios and the independent variables
included in the model. Even though our analysis has tried to overcome this issue by
combining OLS and GLS analyses and by then comparing different results, the
existence of omitted variable biases cannot be excluded and represents an impediment
to causal interpretation of the correlations found in this and other cross-sectional
studies from the existing literature (Da Rin et al, 2011). Another limitation of our
analysis is represented by potential lack of comparability between data sets from
different countries. Even though data used has been sourced from the most
authoritative institutions on the subject (World Bank, OECD, EVCA), the collection
of national data inherently presents risk related to accounting biases (such as in the
R&D expenditure case, as stated above), variables misspecification (such as the use
of Corruption Perception as a proxy for Corruption). Moreover, we acknowledge the
existence of a bias in the statistical significance of OLS regression coefficients, given
the violation of the i.i.d. assumption of the model. We believe, however, that the
combination of the statistically weaker OLS model on panel data with the generalized
model run on variations, however, increases the robustness of the analysis and of our
hypotheses test. If on the one side is true that OLS coefficient are upward biased in
their statistical significance, we also believe that whenever OLS coefficients show the
same sign as GLS coefficient, the robustness of our analysis is increased. Lastly, it is
88
important to state that regressions on panel data with a longer time-series dimension
would arguably bring to better results than the ones obtained by regressing
observations from a dataset that is wide in its cross-sectional dimension (25-21
countries) but constrained on its time-series dimension (only 6 years between 2007
and 2012). Comparable data availability, unfortunately, still represents an issue, as
EVCA, OECD and National Bureau of Statistics data on total VC investments have
often changed their perimeter in terms of both coverage of total VC funds and
definition of VC Investments (with an often subtle line between Later Stage and
Growth Equity investments and differences between statistics showing investments by
local VC funds and statistics showing investments made by VC funds in national
companies). As data collection in the sector will become increasingly complete, we
believe that future researchers will have greater possibilities to investigate on the
determinants of venture capital activity across countries.
89
5. Implications for Policy-Makers

5.0.1 The need for a Policy Intervention in Italy
One may claim that, referring to Adam Smiths intuition and to David
Ricardos successive studies, countries should focus on sectors where they have a
comparative advantage31 and that, hence, it would make little sense for Italy to focus
on the development of an industry, like the VC one, where it arguably presents a
comparative disadvantage. Following this vision, Italy should be focusing more on
traditional areas of strength, such as high-end fashion, the food industry, tourism and
design. While such a story might be compelling, we strongly believe that it cant be
applied to VC. Rather than a stand-alone, indeed, VC can be seen as a cross-sector
innovation enhancer. Like stock markets help companies across different sectors to
find cheaper financing, and just like transport infrastructures help to move people and
goods faster and more efficiently regardless of the specific activity, VC is more a
platform than a sector. A platform that, if not available, can strongly limit the
innovation potential of countries even in the specific sectors where they supposedly
have a comparative advantage. If we take the example of Italy, this could well apply
Comparative advantage refers to the ability of a country to produce a particular good or service at
a lower marginal and opportunity cost over another.
31
90
to limitations in the digitalization of the food or artistic sectors, barriers to food and
luxury e-commerce, as well as in the development of crowdsourcing for designers.
Building on the analyzed literature showing the positive impact between VC and
growth, jobs creation and welfare, we hence confirm our initial claim that VC policy
should be a key priority on governments agendas.
5.1 The need for an Ecosystem

We believe that our results, together with the analyzed results for literature of
the subject, have a clear message: far-seeing policies should consider a wider set of
incentives and tools than simply injecting additional funds into VC supply side. As
Florida and Kenney had already observed in 1988, simply making VC available will
not magically generate the conditions under which high technology entrepreneurship
will flourish. On the same line, 17 years later Zook (2005) claimed that simply
pumping additional capital into a region will not necessarily produce the dynamism of
established VC centers. However, despite the widely recognized importance of the
entrepreneurial ecosystem, in many cases governments hand out money without
focusing on barriers other than liquidity that entrepreneurs face, thinking about lack
of VC activity just as a capital supply-side issue (Lerner 2010).
Our analysis, however, shows how not only the presence of supply-side sources
of funding (such as pension and insurance companies) are important, but also of
demand-side variables, such as cultural factors influencing the fear of failure and the
image of the entrepreneur in the society, the existence of a florid patenting market,
corruption levels, start-up costs inhibiting market entry for new entrepreneurs, labour
market rigidities, scientific publications and R&D collaboration between universities
and industry.
91
Policy Makers measures, hence, should concentrate more on a holistic

development of the regions high-tech entrepreneurship ecosystem, encouraging the
development of a technology base, promoting entrepreneurial culture, increasing the
ease of doing business inside the country, educating and attracting human capital and
enhancing technology transfer mechanisms. Moreover, policy makers should remember
that Start-up is not an environment-independent activity, as entrepreneurs are highly
dependent on their partners. Without skilled business development professionals,
computer scientists and engineers willing to work for equity, experienced lawyers and
professionals able to provide advice on negotiations and financing structures, and
customers who are willing to become early adopters, success becomes highly
problematic. Coherently with Lerner (2010), our results show how it is critical to take
a broader view on the entrepreneurial ecosystem and address not only the supply-side
VC, but also other relevant determinants of the demand side of the system, such as
human capital educated in the country, cultural awareness, ease of doing business,
regulation, and financial market development. As the industry heavily relies on
positive externalities (R&D spillover, former entrepreneurs reinvesting in new ventures
with the funds gained from previous exits) and network effects, we strongly believe
that the simultaneous activation of multiple factors is necessary to ignite a virtuous
cycle in which new entrepreneurial and venture capital clusters can be created.
Without claiming to present a complete classification of the possible policies to
stimulate VC in Italy, in this chapter, we briefly present some ideas that, coherently
with our results and with existing literature, could provide a support to the
development of the national industry.
92
5.2 Demand Side Intervention

5.2.1 Entrepreneurial Education and Culture
Our study supports the hypothesis that culture plays a role in the
determination of VC activity. Fear of failure and the high status of entrepreneurs, in
particular, were shown to be positively associated to increased Early Stage VC
activity. In the Italian case, however, fear of failure was shown to be among the highest
across OECD countries. Agreeing with the Startup Manifesto for Europe, promoted
by panel of leading European entrepreneurs32, we believe that educational systems,
starting from very young ages, could play a vital role to gradually change this situation
over time by introducing basic entrepreneurial education into their teaching system
and making students decrease their fear of failure and perceive the path of
entrepreneurship as a viable and attractive alternative career. According to the
Manifesto:
If we want our younger generation to start their own business we need

to teach them how to do so. We need to excite them and instil in them
the passion (and pride) to do so. We cant expect every 12 year old to
start their own company. But every 12 year old should know what it
means to take an idea, validate it and make something they can offer to
other people as a product or a service. The tools and the knowledge are
all out there. We just need to make sure the passion is present.
Startup Manifesto
Promoters of the Startup Manifesto include some of the most successful startup founders in Europe,
including the CEO of Spotify, the Chairman of Rovio, the CEO of Tech City UK and Co-Founders of
Seedcamp. http://startupmanifesto.eu/
32
93
While Italy is certainly a country of small and medium entrepreneurs, according

to Global Entrepreneurship Monitor, in 2010 early stage entrepreneurship made up
just 2.3% of adult population, compared to 5.8% in France and 7.6% in America. The
Startup Manifesto claims that, also thanks to entrepreneurship lessons and examples
around them, around 20% of the students at Berkeley, Caltech and Stanford start
their businesses before they graduate, further supporting the hypothesis of the
relevance of entrepreneurial education for individual choices to start-up a venture.
While entrepreneurial education is already important in medium and high-schools, it
becomes absolutely essential during university. Ventures started while studying,
indeed, give to students a taste of what its like to operate a business and increase
their likelihood to work in ventures in the futures, while leaving them in a supportive
environment that can acts as a safety net in case failure (Startup Manifesto, 2013).
First, universities should increase formal entrepreneurship teaching, and their
incubation programs in order to stimulate an increasing number of students to start
their business while still at University33. We believe that this should be the case not
only in business Universities, but also in engineering and scientific faculties, where
highly skilled technical profiles often lack the basic business tools to start their own
ventures.
Moreover,
we
believe
that
universities
could
further
promote
entrepreneurship culture by making it possible for students to formally recognize

entrepreneurial activities as an alternative to internships in already existing schools.
An enhancement of work-oriented and entrepreneurial-oriented experiences and
teaching during universities is also supported by EY, according to which Italian
students, compared to other G20 countries are not as prepared when they leave school
This objective is shared by the European Commission Startup Europe Partnership, setting as key
pillar of their plan to encourage university students to start a business before they graduate.
33
94
to transition to the job market. Tertiary education institutes tend to focus on theory
rather than practical applications of assimilated knowledge, thus widening the gap
between supply and demand of skills in the job market. Moreover, an extremely low
share of the population can fluently speak a foreign language. This makes it more
difficult for them to start ventures and for early-stage entrepreneurs to recruit people
with the skills they need.
In addition to a stimulation of local population entrepreneurial culture, we also
agree with the Startup Manifesto on the possibility for governments and for Italy to
partially import it. Knowing how difficult it is to change a whole culture, in this sense,
Italy could be doing something as a country with quicker results and easier
implementation. The activation of programs to attract international entrepreneurial
and research talents, such as the Startup Chile or the U.S. Fulbright programs, could
increase ideas cross-fertilization, increase the average qualification of foreign labour
force (currently, as shown in figure 34, at the lowest level across OECD countries)
and increase the dynamism of the Italian entrepreneurial market. Similar results,
according di AIFI (2011), could be activated by increasing the number of applied
research PhD in Italy, forcing them to use English as the standard language and
Italy
Norway
Germany
Austria
Slovak
Portugal
Denmark
Netherlands
Finland
Belgium
Spain
Sweden
France
Switzerland
Austria
Hungary
Luxembourg
New Zealand
United States
Mexico
Ireland
Canada
0,5
0,4
0,3
0,2
0,1
0
United
Country share of Foreign labour force with tertiary

education attainment (2011)
Figure 34- Country Share of Foreign labour force with tertiary education attainment (2011). Source:
Education at Glance 2013 OECD
95
reserving a large percentage of total available places and scholarships to non-local

applicants. Although an adequate cost-benefits analysis should be performed to assess
the convenience of these programs we believe that international talent attraction,
avoidance of brain-drain and entrepreneurial culture enhancement strategies are of
vital importance for the long-run prosperity of nations. Its not a case that Thomas
Friedman indicates that the U.S. economy ability to attract foreign brains is among
the main pillars of its entrepreneurial ecosystem and of the 40 million jobs created by
startups over the 1985-2005 period (AIFI, 2011). Lastly, as proposed by the Manifesto,
all the above mentioned talent-attraction programs could be supported by rolling out
a pan-European Startup Visa that would both make it easier for foreign entrepreneurs
to move to Europe and for European companies to hire foreign talents for their
startups.
5.2.2 Startup Cost Reductions, Standardization of Policy and the E-Corp.

Across European member states national regulation on doing business are
diverse. Yet, needs of early-stage companies are often similar. They need light
bureaucracy, low Start-up costs, flexible governance structures and flexible funding
tools. Our analysis statistically confirmed the negative impact of startup legal and
bureaucratic costs on VC activity. According to the Startup Manifesto, governments
should make it possible to create a corporation in less than 24 hours and perform all
major legal operations without any bureaucratic costs. The proposed E-Corp,
moreover, would unify requirements and policies across EU in order to enhance crosscountry business development operations and foreign investments. Although the
Societ a responsabilit limitata semplificata (S.r.l.s.), introduced by the Decreto
Sviluppo of the former Ministry C. Passera, has already made a few steps ahead in
this direction, as Startuppers, we believe that ventures that need a minimum capital
96
to operate are still excessively burdened by bureaucratic duties and costs. As soon as
a S.r.l. reaches the low level of capitalization of 10.000, indeed, immediately need to
face extremely high notary and tax costs to be transformed into a classic S.r.l. and to
organize capital increases. Needless to say, all these burdens inevitably subtract useful
time and monetary resources from companies core businesses, with negative impacts
on ventures development and, ultimately, of venture capital demand. As startuppers,
we strongly feel that the Italian government should remove all taxations related to
capital raising and equity based compensation operations on innovative Start-Ups, set
to the minimum their related notary fees and target a full convergence of Startup Cost
and number of procedures needed to open a business to international best practices,
as indicated by the World Bank Ease of Doing Business. Even though this claim would
require further analysis, we believe indeed that tax revenue collected by the state by
taxing innovative ventures for authorizations and notary acts, ultimately generates to
the whole society much more harm than benefits.
5.2.3 Investments on Innovation and Technology Transfer

The Open Innovation paradigm indicates the importance of innovating through
the usage of both internal and external knowledge. In such a framework, universities,
research centers and private companies should work in win-win collaborations based
on technology transfer activities of industrial applications. Already in 1994, however
the European Commission was talking about the existence of a European Paradox
(European Commission, 1994), related to the fact that Europe suffers from an inability
to turn scientific competence into successful ventures. Above presented data shows
how this issue, unfortunately, is even more present in Italy than in the rest of Europe.
One of the potential ways to stimulate technology, as recognized by the European
Commission, is to include the joint presence of universities and industries as one of
97
the eligibility criteria for obtaining public funds (Innovation Place, 201434). However,
one of the most widely recognized tools to incentivize the cooperation between
Universities and Companies is the promotion of technology transfer offices. These
offices systematically perform matching activities between the demand and supply of
new technologies or industrial applications, decreasing thus the information
asymmetry in the market and increasing its efficiency. Moreover, another potentially
effective tool to incentivize academic spin offs consists in the creation of university
technology incubators, which can support students and researchers, as well as external
participants, in their funding, business development and go-to-market activities. Our
personal view is that these incubators not only need to be promoted where academic
research is present at high level, but also should be managed through collaborations
between faculties of different studies. As we believe that cross-subjects fertilization is
essential for business startups (such as between business, engineering and design),
indeed, we strongly believe that such cooperation could enhance the probabilities to
find complementary team-mates and launch successful businesses (in this sense, to
make an example for Italy, it would be interesting to consider joint incubation
programs between Bocconi University and Politecnico di Milano). Although a full
comparison of different potential schemes is not in the scope of this dissertation, we
believe that the low level of University-Industry cooperation in Italy, as highlighted
by W.E.F. (Global Competitiveness Report, 2013), should be addressed by highly
incentivizing both the diffusion of technology offices and of venture incubators in the
territory.
34
https://www.innovationplace.eu/technology-transfer-and-european-and-national-funding-programs
98
5.2.4 Facilitating the matching of demand and supply of Start-up exits

and fundraising
Even though we have classified this intervention as on the demand side, since
it incentives entrepreneurs to invest their time and resources in the hope of large
financial benefits, it impacts the offer side as well, by mean of attracting investors
with the perspective of higher potential returns. Whenever a start-up cluster, where
startups can easily meet large corporations, market intermediaries and advisors, is
missing, organizing a successful exit becomes extremely hard for early-stage
entrepreneurs running promising businesses. Where to find the right buyer for a trade
sale or how to organize an IPO on small-cap markets, indeed, become difficult
challenges without the appropriate entrepreneurial ecosystem. From a theoretical
perspective, in all these cases government supported programs could be a viable way
to increase exit probabilities and enhance, as a consequence, both demand (through
an increasing number of people entering entrepreneurship because of the higher
expected returns) and supply (through an enhancement of perceived probabilities for
investors to reach a liquidity event and through the creation of a wider number of
former entrepreneurs turning into investors themselves) of venture capital. In this
sense, we welcome the recent initiatives from the European Commission: namely, the
Startup Europe Partnership35 and the European Digital Forum36. While the European
digital forum is structured as a tech-entrepreneurs think tank aimed at advancing
entrepreneurial-friendly policies on a systematic base, the Startup Europe Partnership
program, created to implement the Startup Manifesto, is aimed at directly building
bridges between Europes startups, large corporates, education institutions and
35
36
http://ec.europa.eu/digital-agenda/en/startup-europe-partnership
http://www.europeandigitalforum.eu/
99
investment communities to help ventures raising funds and completing successful

exits. One of the main activities of the program, in particular, is to systematically
organize events matching startups and corporations/investors to encourage corporates
to start partnerships and invest in startups37 and help ventures to scale-up.
In order to facilitate fundraising and exits, moreover, the Startup Manifesto proposes
to make, on the example of the London Stock Exchanges High Growth Segment, stock
markets more accessible for ventures, with the creation, in particular, of an Internet
and Mobile specific segment aimed at reducing the incentives for EU ventures in this
increasingly large category to move to the United States.
Lastly, as trade sales represent the main exit path for both European and U.S.
startups, a specific suggestion advanced by AIFI to the Italian Government is to
institute a guarantee fund (fondo di garanzia) to support debt-raising operations by
corporations whenever they are aimed at completing M&A transactions targeting
national innovative Start-ups. Such a strategy could not only increase the number of
exits in Italy, but also support R&D-by-acquisition strategies of national companies.
5.3 Supply Side Intervention

5.3.1 Pension funds and Insurance Companies
According to Drte Hppner38, Chief Executive Officer of EVCA, the European
VC and, in particular, the Italian Market, is heavily constrained on the Supply side
by the absence of adequate institutional investors. Such a claim is coherent with our
findings related to the positive impact of increased Pension Funds and Insurance
These activities will be initially coordinated by a partnership composed by Mind the Bridge
Foundation, Factory, Nesta, Telefnica, Orange, BBVA, European Investment Bank, Cambridge
University, IE Business School, Humboldt University.
38
From June 2014 Bocconi lesson on Private Equity & VC - Drte Hppner speech.
37
100
Companies assets under management on VC/GDP ratios. According to Mrs. Hppner,

a reform of the pension system in Italy that could channel more capital to the private,
rather than the public sector, would be highly beneficial for private equity markets
development across all investment stages, thus including venture capital.
With respect to policies targeting large institutional investors, it is worth
mentioning that also moral suasion actions aimed at incentivizing pension funds and
insurance companies to increase their exposure to private equity can help to drive
additional funding to the sector), without the need to increase institutional investors
assets under management. An exemplary case was represented by the 2004 case of the
French Ministry of Economy, which led to an increase of the share of total PE funding
by Insurance Companies from 11% to 18% between 2004 an 2005).
5.3.2 PPP and Fund of Funds

In addition to interventions with insurance companies and pension funds, there
are also a number of targeted initiatives that we believe the Italian governments could
put in place. The most coherent with the suggestions of existing literature involves
the creation of Public-Private-Partnerships where hybrid schemes are put in place to
incentivize private venture capital funds to invest by leveraging their returns.
The Fondo High-Tech per il Mezzogiorno39 represented the first PPP
initiative in Italy, through a 50% funding provided by the Italian Department for
Innovation and Technologies (DIT) into four different private funds (AIFI, 2011) and
a total of 86mm exposition by the government distributed over several years. In the
39
http://www.aginnovazione.gov.it/attivita/politiche-dellinnovazione/fondo-high-tech-capitale-dirischio-per-pmi-innovative-del-mezzogiorno/
101
fund, an up-side leverage scheme was implemented. Considering the extreme

differences of the Italian VC market compared to European peers (71mm in 2012 vs
552M in France, 549mm in Germany and 722mm in United Kingdom40), however, this
expositions, looks way too small to really make the difference.
Although we keep stressing the importance of a parallel support on the demand
side of venture capital, we agree with AIFI on the necessity of larger-size interventions
on the market and, in particular, of a Fund-of-Funds aimed, through a PPP hybrid
scheme, at investing collected resources into professional VC funds over the whole
national territory.
Luckily, in June 2014, a strong intervention in this direction was announced by
the Italian Cassa Depositi e Prestiti (CdP), which decided to open two Funds of
Funds, both managed by Fondo Italiano dInvestimento, aimed at supporting the VC
and Minibond industries by matching private investments into other funds. The target
size of CdP commitment will be of 100 million which, according to AIFI, should
bring 200 to 300 million euros of additional funds to Italian Startups over the next
years. In addition to a stimulus for insurance companies, pension funds, banks and
other traditional institutional investors, we believe that the creation of Funds of Funds
could be attractive also for larger international funds, such as sovereign wealth funds,
which would be able to reach minimum sizes that are sufficient for them to justify
their interest for a single investments, while achieving at the same time an higher level
of risk diversification.
40
EVCA data.
102
5.3.2 Tax incentives for private investors

In addition to providing funds through government schemes, according to the
Startup Manifesto, governments can support the informal venture capital market by
offering a wider range of tax reliefs to private investors who invest in innovative
ventures. Following the model of UK's Enterprise Investment Scheme (EIS) and Seed
Enterprise Investment Scheme (SEIS), or the Israeli example, which allows angel
investors to recognize their startup funding as losses in the year of the investment
(Startup Manifesto, 2013), we believe that, due to already analyzed spillovers and to
the relatively small size of the industry, the advantages for the whole system over the
medium run could be greater than the decreased tax revenues in the short run. Steps
should be taken, moreover, to incentivize business angels to constantly recycling the
wealth they have generated by re-investing in new companies. To this respect, US
legislation probably represent one of the most successful examples worldwide, as it
offers to Business Angels a null tax rate on capital gains as long as they re-invest their
capital gains into qualified small business stocks within 60 days from the sale of their
previous stakes41. To conclude with our brief review of policy proposals, we believe
that such a highly effective example should be absolutely considered by Italian policymakers.
41
Prof. Stefano Caselli - Private Equity & Venture Capital Bocconi University notes.
103
Conclusions
Conclusions
Entrepreneurship, innovation and economic development benefit significantly
from an active VC industry, which also allows the ignition of virtuous cycles on the
startup ecosystem. The activation of such cycles depends on a number of factors,
which governments can, and should, address through far-seeing policy. However, there
is still much to study about the macro determinants of VC activity across countries.
In order to help shed light on the subject, in this dissertation we analyzed the
determinants of the international VC market by both reviewing sector literature and
using multivariate regressions on data sets covering medium-high income EU and
OECD countries in the 2007-2012 period. We contribute to the existing literature by
including several of the determinants already tested in previous studies (stock market
activity, GDP growth, patents, and legal system) as well as new specific variables
related to education, culture and ease of doing business. The main results coming from
the combination of OLS models over yearly observation levels and GLS over year-onyear observation variations, can be summarized as follows. We find significant
evidence of the existence of a positive relationship between VC/GDP ratios and
national pension funds assets under management, stock markets development, GDP
growth and patenting activity. Across all investment stages, moreover, we find a
negative impact of the national fear of failure on VC/GDP levels and year-on-year
104
Conclusions
variations. Although statistically weaker, we found some evidence of a positive

relationship between VC/GDP and insurance companies assets under management,
corruption freedom indexes, labour flexibility, and higher social consideration of the
figure of the entrepreneur. Moreover, we weakly-confirmed our hypothesis on the
negative impact of start-up bureaucratic costs, and on the positive impact of
universities-industry collaboration and of scientific publications on early stage VC.
Against our expectations, however, we did not find any evidence supporting the
relevance of cultural individualism, tertiary educated shares of total population and
legal systems in the explanations of VC/GDP ratios.
Presented results provide interesting insights for policy-makers, stressing the
importance of factors affecting not only the supply side of venture capital, but also
the overall entrepreneurial environment. While we cannot offer a comprehensive costbenefit analysis of potential VC-enhancing policies and although our results present
the acknowledged limitations, we finally propose a number of potential interventions
by the Italian Government and the European Union. On the demand side of venture
capital, we stress the importance of entrepreneurial education and foreign talent
attraction, the reduction of taxation and bureaucratic burden for innovative
companies, the relevance of technology transfer offices and technology incubators and
the value of programs aimed at improving the matching between demand and supply
of startup exits and fundraising. On the supply side, we briefly discuss about pension
fund reforms, government moral suasion actions with institutional investors. We then
highlight the potential impact of a PPP Fund-of-Funds for venture capital and suggest
higher tax incentives to business angels as a way to stimulate informal venture capital.
Without the claim of offering a comprehensive view of the complex subject represented
by the determinants of venture capital and acknowledging the limitations of the
presented empirical analysis, we hope that this study may offer some valuable insights
105
Conclusions
for policy-makers and future research. Given the increasing importance of VC policy
in modern societies and the complexity of these subjects, we stress the urgency of
additional studies on both VC macro-determinants and on specific support policies.
106
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Acknowledgements

I would like to express my sincere gratitude to the supervisor of this dissertation,

3.2 Our Sample ...................................................................................................... 68

These include Gompers, Lerner, Cumming, Jeng, Wells and others.

1. Technological innovation and entrepreneurship are key for economic growth

U.S.A. Net Job Change - Million Jobs (Startups)

U.S.A. Net Job Change (Startups)

high-potential entrepreneurship and VC availability positively influence each-other.

European Private Equity and Venture Capital Association.

bear the marks of government investment. In these cases, in particular, governments

1.2 VC in Italy: why is the market so small?

VC Investments as a % of GDP - 2012

Seed Venture capital (% GDP)

VC investments include seed investments, start-up investments and later-stage investments by VC

VC Investment level (Compared to 2007)

Total VC Investment trends in Europe - 2007-2012 (2007 level = 1)

2012 Data - OECD

VC Investments as a Relative Size to GDP

2. The determinants of VC: literature review and research hypotheses

2. The determinants of VC: literature

1. macroeconomic variables (inc. GDP growth, expectations, interest rates)

Some of these factors impact on entrepreneurship and have a prevailing effect of

2. The determinants of VC: literature review and research hypotheses

government co-funding or VC capital gains tax reductions) or an effect on both sides

2. The determinants of VC: literature review and research hypotheses

discouraged if preferred stock structures cannot be employed in a given nation. As one

regulation can impact both the entrepreneurial

environment and the VC industry activity.

2. The determinants of VC: literature review and research hypotheses

for early-stage companies development, while Scandinavian systems provided a more

Supply and Demand Side

Figure 4 - Demand of VC: possible determinants classification. Personal Model.

2. The determinants of VC: literature review and research hypotheses

2. The determinants of VC: literature review and research hypotheses

2. The determinants of VC: literature review and research hypotheses

additional VC injected by governments without a simultaneous stimulus on the

2.2 The Determinants of VC

Figure 5 VC Level Determinant Variables Families

2. The determinants of VC: literature review and research hypotheses

2.2.1 Government Investment Schemes

Direct interventions, where governments directly acts as a Venture

Hybrid schemes: where governments co-invest with professional Venture

Research shows how direct interventions raise a number of issues related to

2. The determinants of VC: literature review and research hypotheses

The Small Business Investment Company program in the early 1960s,

According to Cumming (2003), another exemplary case of inefficient use of

2. The determinants of VC: literature review and research hypotheses

2. The determinants of VC: literature review and research hypotheses

2. The determinants of VC: literature review and research hypotheses

and contacts contribution to seed-stage startups. The lack of comprehensive data on

2.2.2 Market Dynamism and Funds availability

2. The determinants of VC: literature review and research hypotheses

deeply involves advanced technologies and services, however, it is also reasonable to

GDP per Capita

2. The determinants of VC: literature review and research hypotheses

Hypothesis 1: Yearly variations of VC Activity relatively to GDP are positively

Data from World Bank.

2. The determinants of VC: literature review and research hypotheses

2.2.2.2 Exit Markets Dynamism: Equity Market

2. The determinants of VC: literature review and research hypotheses

MarketCapitalization/GDP (x-axis) vs VC/GDP (y-axis) - 2012

2. The determinants of VC: literature review and research hypotheses

Hypothesis 2: The level of VC Activity relatively to GDP is positively correlated