Public Expenditure in Research and Development and Venture Capital Commitments

This study investigates the relationship between Public Expenditure on Research and Development (PR&D) Venture Capital (VC) Investment. Using a comprehensive database of 40 countries: the OECD country-members plus Argentina, China, Romania, Russian Federation, Singapore and South Africa, from 1998 to 2012, we find that PR&D has a positive effect on VC Investment. PR&D can affect some factors that could increase or reduce the expected rate of return for VC investments, but our outcomes indicate a net effect positive and PR&D does seem to generate value through fostering VC activity in the economy. This is especially true in countries with higher institutional quality and higher level of articles published by the scientific community. This could indicate two things: first, that PR&D is more efficient and strategically addressed in countries with high institutional quality; and second, it confirms that scientific production works in partnership with PR&D in generating VC opportunities. PR&D is more important for the generation of VC investments in countries with lower infrastructure; in these countries, the government decision for increasing PR&D takes more relevance in fostering active VC markets. The above conclusions are confirmed for early stage (ES), high technology (HT) and manufacturing sector (MS) venture capital investments, indicating that PR&D is specifically important for these three kinds of VC investments, however infrastructure availability remains definitive to increase MS venture capital investments. The results are based on a panel study controlling endogeneity with a generalized method of moments (GMM) dynamic panel estimator model with a collapsed instrument matrix and two lags