Does Venture Capital Spur Innovation?

Samuel Kortum, Josh Lerner

NBER Working Paper No. 6846
Issued in December 1998
NBER Program(s):   CF   PR

While policymakers often assume venture capital has a profound impact on innovation, that premise has not been evaluated systematically. We address this omission by examining the influence of venture capital on patented inventions in the United States across twenty industries over three decades. We address concerns about causality in several ways, including exploiting a 1979 policy shift that spurred venture capital fundraising. We find that the amount of venture capital activity in an industry significantly increases its rate of patenting. While the ratio of venture capital to R&D has averaged less than 3% in recent years, our estimates suggest that venture capital accounts for about 15% of industrial innovations. We address concerns that these results are an artifact of our use of patent counts by demonstrating similar patterns when other measures of innovation are used in a sample of 530 venture-backed and non-venture-backed firms.

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Published: Kortum, Samuel and Joseph Lerner. "Assessing The Contribution Of Venture Capital To Innovation," Rand Journal of Economics, 2000, v31(4,Winter), 674-692.

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