FINNOV

ABSTRACT: Empirical evidence on the effect of venture capital on firms’ patent productivity has been mixed. We aim to assess this effect through simultaneous models that predict the likelihood that firms attract venture capital, the likelihood that they patent and the number of patents applied for and being granted. While prior research has typically estimated these equations independently, we allow for endogeneity of venture capital investment. When estimating simple models with independent equations, we confirm prior findings of a positive impact of venture capital on patenting, which can be interpreted as the beneficial effect of coaching or “smart money”. If we account for endogeneity, however, this effect becomes insignificant or negative for the likelihood that a firm shows any patenting activities. Venture capital investments increase the number of patents granted, but reduce future patent applications. Our results show that venture capital follows patent signals to invest in companies with commercially viable know-how and that as far as the patenting activity of firms is concerned the selection function of venture capital is stronger than its coaching function. Other relevant predictors of patenting are market size and product development time. Expected growth plays a minor role, whereas strong industry competition increases the number of patents if the firm is patenting, but not the likelihood to patent.

Keywords: Venture capital; Innovation; Propensity to patent

JEL classification: D24, D92, G24, G32, O31, O34

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