Marco Da Rin

The changing face of the European venture capital industry: Facts and analysis

The Survey of European Venture Capital (SEVeCa) is the largest academic study to date on the European venture capital industry, providing information on more than 1,300 investment companies, 400 venture partners, and 150 venture funds. The European venture capital industry is found to be more integrated than previously believed: 27% of all venture firms have an office in a foreign country, and 24% of investments are cross-border. Significant links to the U.S. lead to increasing emulation of U.S. investment practices. However, distinctively European aspects, such as the prominence of bank and corporate investors, do remain. The study also debunks the belief that all European venture capitalists are conservative and “hands-off.” A majority of the deals are early stage, and involvement with portfolio companies is substantial. The experience and education of of venture partners (their “human capital”) is shown to play an important role in promoting an active investment style.

Banks as Catalysts for Industrialization

We provide a theoretical framework to address the historical debate about the role of banks in industrialisation. We introduce banks into a model of the big push to examine under what circumstances profit-motivated banks would engage in coordination of investments. We show that banks may act as catalysts for industrialisation provided that: (I) they are sufficiently large to mobilise a critical mass of firms, and (ii) they possess sufficient market power to make profits from coordination. Our model also shows that universal banking helps reduce endogenously derived coordination costs. Our results delineate the strengths and limits of Gershenkrons (1962) view of banks in economic development, and help explain a diverse set of historical experiences. We examine both countries where banks were associated with industrialisation, showing that our theoretical condition holds, as well as countries where the failure to industrialise can be related - at least in part - to the absence of our necessary conditions.

Europe's 'New' Stock Markets

The creation of Europe’s ‘new’ stock markets represents a major experiment in market design with important implications for the ability to support innovative, fast-growing companies. We evaluate the success of these markets based on a large number of measures of firm performance and strategy, which extend to several pre- and post-listing years. Our hand-collected database is obtained from the listing prospectuses and annual reports of 538 companies which listed on the Neuer Markt, Nouveau Marche, and Nuovo Mercato from 1996 through 2001. Three findings stand out. First, these companies experience a dramatic change after the Initial Public Offering (IPO), re-balancing their capital structure, increasing their debt and investment, accelerating growth, and becoming less profitable. These changes are consistent with the existence of credit constraints, and are greater than for companies listing on the ‘main’ markets. Second, we document a considerable variation in post-IPO growth rates and corporate strategy, across both companies and markets. This variation is largely due to the ability to raise equity capital at IPO. Third, the adoption of US GAAP accounting standards substantially increases firms’ ability to raise capital. While Europe’s ‘new’ markets have provided high-growth companies with an unprecedented opportunity to finance their growth, the adoption (and enforcement) of tighter standards of disclosure is then crucial for their success.

Corporate Taxation and the Size of New Firms: Evidence From Europe

Using a novel country-industry level panel database with information on newly incorporated firms in 17 European countries between 1997 and 2004, we study how taxation of corporate income affects the size of entrants at the country-industry level. Our results, that are robust to changes in several assumptions, suggest that a reduction in the effective corporate income tax rate leads to a significant reduction of the capital size of entrants, and to a decrease in their capital-labor ratio.

A Reply to Douglas Cumming’s 'Review Essay: Public Policy and the Creation of Active Venture Capital Markets'

In Da Rin, Nicodano, and Sembenelli (2006) we evaluate the effectiveness of different public policies for venture capital using an econometric approach that allows to overcome several well-known flaws of purely cross-country studies. Our results cast serious doubts on the widespread illusion that channeling more funds would create more active capital markets, while they support the use of capital gains taxation and the creation of a stock exchange for exiting investments. Cumming (2010) criticizes our methodology and results. In this short note we reply to his criticisms and show why they are based on a misunderstanding of our methodology.

Venture Capital and Innovation Strategies

Venture capital investors are specialized financial intermediaries that provides funding for technological innovation with the goal of realizing a capital gain within a few years. We are the first to examine the association of venture capital funding with a company’s choice of innovation strategies. We employ a unique dataset of over 10,000 innovative Dutch companies, some of which received venture financing. The data include detailed information on patent applications, innovation activities, and other company characteristics. We find that companies backed by venture capital focus on the build-up of absorptive capacity by engaging in both in-house R&D and in the acquisition of external knowledge. Companies that receive public funding, instead, are able to relax their financing constraints and perform more innovation activities without focusing solely on absorptive capacity. Our results also suggest that the correlation between venture capital funding and the build-up of absorptive capacity is not only due to a selection effect. We derive implications of these findings for corporate strategy and public policy.

Trust and foreign ownership: Evidence from intra-European foreign direct investments

We use a novel firm‐level dataset to test whether trust affects the volume and the ownership structure FDI across Europe. Our methodology deals with the endogeneity of trust from the investor to the recipient country. We expect such a trust measure to affect investment decisions, and the associated knowledge capital, differently across types of foreign investors. In particular, this effect is expected to be stronger for industrial investors who possess transferable knowledge capital. The data confirm our predictions. Higher trust increases the number and volume of FDIs, but also the probability of co‐investing with a partner from the recipient country.