Worldwide Venture Capital and Patent Creation
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Companies need to be more innovative to exist and sustain profitability in today’s competitive business environment. They try to increase innovation by increasing their internal knowledge through internal and external sources. One of the main external sources that may support firms in improving their capabilities is venture capital (VC). Venture capitalists not only provide financial support for new firms, but also provide value-added activities, such as leadership, administration, marketing and strategic directions. These activities may improve the competitive advantages, productivity, profitability, and innovation of businesses. This study, based on historical data of VC investment and patenting, explores the effects of VC investment on firms’ innovation in different intellectual property rights (IPR) environments and in many industries worldwide, utilizing large datasets and various empirical models. Our negative binomial as well as logistic regression models of the panel data present the significant and positive impacts of VC investment and IPR parameters on increasing business patenting rates under all legal systems, by controlling for cultural, regulatory, and economic and market conditions of the business environment. These rates vary by area. Details of our analysis show that British (Common) and French Civil legal systems, in order, are more effective than other legal platforms, followed by German and Scandinavian. These results can be extended to different world regions and countries, based on their legal system. These outcomes are also supported by detailed analyses on countries. Furthermore, VC investment positively influences most industries but the impact rates differ by industry. In order to adjust our estimations and taking into account any flows in the panel data, we apply robust regression methods and cluster standard errors in the models. In order to test and address endogeneity concerns about the relationship between VC investment and firms’ patenting activities, three methods are applied: reverse causality, the Heckman Selection model, and instrumental variables. The Ease to Do Business index, as a starting business parameter, is our instrument for VC investment and it ranks world economies from the highest to the lowest level. Higher rankings (which translate to low numerical ranks) indicate that the regulatory environment is supportive and simpler for business operations.