Many governments wish to accelerate the development of entrepreneurship in their countries by supporting the venture capital industry.
The authors of a new report based on data from Belgium note that governments typically “have introduced programs to foster venture capital financing. These initiatives may take three general forms: regulatory framework (“law”), indirect framework, and direct investment schemes.” The paper studies shares impact data on an investment scheme implemented in Belgium in which the government funded venture capital firms that then invested in local enterprises.
Interestingly, the researchers found that when they analyzed all Belgian firms with VC investment, these companies were, on average, less efficient than comparable businesses in the country. In fact, they noted that “VC-backing in general destroys productivity in Belgium.”
This seemed a bit strange, so the researchers then examined the effects of venture firms that were funded by the government versus those funded only by private sources. It turns out that the results were very different within these two groups. According to the study’s conclusions:
- Being financed by privately-backed VC investors significantly improves efficiency of portfolio companies.
- Being financed by a government-backed VC fund is associated with a significant reduction in productivity.
- The comparable inefficiency in productivity among Vc-backed firms is due “almost exclusively” to the effect of government backed VC funds.
To download the full study, please click here.