Macroeconomic and Institutional Determinants of Venture Capital Investments

• Název práce v češtině: Makroekonomické a institucionální faktory rizikového kapitálu
• Název v anglickém jazyce: Macroeconomic and Institutional Determinants of Venture Capital Investments
• Klíčová slova: rizikový kapitál, instituce, soukromý kapitál
• Klíčová slova anglicky: venture capital, institutions, private capital
• Akademický rok vypsání: 2022/2023
• Typ práce: bakalářská práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: doc. PhDr. Martin Gregor, Ph.D.
• Řešitel: skrytý - zadáno vedoucím/školitelem
• Datum přihlášení: 19.06.2023
• Datum zadání: 19.06.2023

Zásady pro vypracování

Research question and motivation

As venture capitalists (VCs) play one of the most crucial roles to identify high potential and innovative firms, the main research question I intent to study is how macroeconomics and institutional indicators influence the volume and number of venture capital investments into young technological companies (startups).

For that purpose, I will begin with a cross-sectional analysis of data of volume and number of investments in the last 10 years across 100 countries from all around the world, categorized by specific sectors and the size of the investment rounds. The data from a large number of countries will allow me to test both how certain institutional characteristics affect the volume of VC investments and primarily how they affect the existence of the sector in the first place.

Secondly, I will analyze panel data focusing primarily on Central and Eastern Europe (CEE) consisting of (1) volume and number of VC investments, and (2) main macroeconomic indicators, such as (a) inflation rate, (b) interest rates, (c) real GDP growth rate, (d) unemployment rate, (e) market capitalization, supplemented by (3) institutional indicators which are often being used in financial analyses, such as (a) initial public offerings (IPOs), (b) investments and tax treatment, (c) labour market rigidity, (d) indicators of technological opportunity, and (e) government effectiveness. All collected for the last 10 years, as well as in the first analysis.

Similar tests were also done by researchers Romain and van Pottelsberghe (2004) who developed a theoretical model where macroeconomic conditions, technological opportunity, and the entrepreneurial environment affect the demand and supply of VC, based on a panel dataset of 16 OECD countries from 1990 to 2000. Also, Jeng and Wells (2000) studied in their paper the determinants of VC activity for a sample of 21 countries with a focus on the US. In particular, they considered the importance of IPOs, GDP and market capitalization growth, labor market rigidities, accounting standards, private pension funds, and government programs on the volume of investments.

Seznam odborné literatury

BALBOA, Marina; MARTI, Jose. The determinants of private equity fundraising in western Europe. Available at SSRN 269789, 2001.

BERNOTH, Kerstin; COLAVECCHIO, Roberta. The macroeconomic determinants of private equity investment: a European comparison. Applied Economics, 2014, 46.11: 1170-1183.

DUŠÁTKOVÁ, Martina Skalická; ZINECKER, Marek; MELUZÍN, Tomáš. Institutional determinants of private equity market in Czech Republic. Economics & Sociology, 2017, 10.4: 83-98.

FÉLIX, Elisabete Gomes Santana; PIRES, Cesaltina Pacheco; GULAMHUSSEN, Mohamed Azzim. The determinants of venture capital in Europe—Evidence across countries. Journal of Financial Services Research, 2013, 44: 259-279.

JENG, Leslie A.; WELLS, Philippe C. The determinants of venture capital funding: evidence across countries. Journal of Corporate Finance, 2000, 6.3: 241-289.

LI, Yong; ZAHRA, Shaker A. Formal institutions, culture, and venture capital activity: A cross-country analysis. Journal of Business Venturing, 2012, 27.1: 95-111.

NING, Yixi; WANG, Wei; YU, Bo. The driving forces of venture capital investments. Small Business Economics, 2015, 44: 315-344.

ROMAIN, Astrid, et al. The determinants of venture capital: a panel data analysis of 16 OECD countries. Institute of Innovation Research, Hitotsubashi University, 2003.

VAN POTTELSBERGHE DE LA POTTERIE, Bruno; ROMAIN, Astrid. The Determinants of Venture Capital: Additional Evidence. Discussion Paper Series 1, 2004.

Předběžná náplň práce

Research question and motivation

As venture capitalists (VCs) play one of the most crucial roles to identify high potential and innovative firms, the main research question I intent to study is how macroeconomics and institutional indicators influence the volume and number of venture capital investments into young technological companies (startups).

For that purpose, I will begin with a cross-sectional analysis of data of volume and number of investments in the last 10 years across 100 countries from all around the world, categorized by specific sectors and the size of the investment rounds. The data from a large number of countries will allow me to test both how certain institutional characteristics affect the volume of VC investments and primarily how they affect the existence of the sector in the first place.

Secondly, I will analyze panel data focusing primarily on Central and Eastern Europe (CEE) consisting of (1) volume and number of VC investments, and (2) main macroeconomic indicators, such as (a) inflation rate, (b) interest rates, (c) real GDP growth rate, (d) unemployment rate, (e) market capitalization, supplemented by (3) institutional indicators which are often being used in financial analyses, such as (a) initial public offerings (IPOs), (b) investments and tax treatment, (c) labour market rigidity, (d) indicators of technological opportunity, and (e) government effectiveness. All collected for the last 10 years, as well as in the first analysis.

Similar tests were also done by researchers Romain and van Pottelsberghe (2004) who developed a theoretical model where macroeconomic conditions, technological opportunity, and the entrepreneurial environment affect the demand and supply of VC, based on a panel dataset of 16 OECD countries from 1990 to 2000. Also, Jeng and Wells (2000) studied in their paper the determinants of VC activity for a sample of 21 countries with a focus on the US. In particular, they considered the importance of IPOs, GDP and market capitalization growth, labor market rigidities, accounting standards, private pension funds, and government programs on the volume of investments.

Contribution

The aim of this study is to analyze if there is an association between above mentioned macroeconomic and institutional factors and the volume of VC investments, and compare it among the researched countries. The contribution will be in connecting a microeconomic phenomenon, which the venture capital is, to macroeconomic and institutional conditions in examined regions and countries. The study will try to answer to questions such as how individual countries differ in approach to investments in technological startups and how it is connected to their macroeconomic wellbeing. The results could be theoretically use in practice, as during the investment process in venture capital funds, also mentioned conditions must be taken into consideration to respond to variable valuations of technological startups, and lower willingness of Limited Partners to put money into these high-risk portfolio funds.

Methodology

I will construct panel dataset based on two types of data for countries of CEE region over the last 10 years. Firstly, I will exploit microeconomic data used from the Dealroom database where people can access all venture capital investments into companies from all around the world that had value at least 1 million EUR, but usually even less. The database allows for filtering according to many variables as the volume of investments, number of investments, industries (e.g. FinTech, BioTech), geography etc. I will match these data with datasets with global macroeconomic and institutional data from publicly accessible sources of World Bank, International Monetary Fund and Eurostat. The data series presented within these subjects have been chosen as the most relevant in evaluation determinants of VC investments across older recognized papers, and for which comparable data across countries are available. This will allow me to examine different levels of VC activity observed across countries by considering the variations in economic and institutional environments.

I will use two measures to assess the level of VC activity within a country. The first involves taking the log of the total number of VC investments scaled by the country's population in millions. The second measure is the log of the total amount of VC investments per capita. The second measure serves as a robustness check, as the information on the amount of investments is missing for certain deals in the Dealroom database.

Given the unbalanced panel dataset for up to 18 countries with varying technological opportunities, institutional and economic development, and other unobservable characteristics, I will employ the random effects generalized least squares model (GLS) to test the hypotheses as it was also done in a similar study from Li and Zahra (2012). The GLS model allows the variances to differ across countries and controls for unobservable country characteristics.

Outline

Abstract
Introduction
a. Startups - definition & history
b. Venture capital - definition & history
c. Characteristics of venture capital funds
d. Specifics of the Central and Eastern Europe
Literature review and hypotheses
a. Venture capital investment criteria & value creation
b. Determinants of venture capital investments
c. Development of venture capital in European countries
d. Hypotheses
e. Contribution of this thesis
Methodology
a. Description of data
b. Independent and dependent variables
c. Tests
Results
a. Analysis
b. Interpretation of results
Conclusion
a. Broader interpretation of results
b. Implication for practice
c. Topics for further research

Předběžná náplň práce v anglickém jazyce

Research question and motivation

As venture capitalists (VCs) play one of the most crucial roles to identify high potential and innovative firms, the main research question I intent to study is how macroeconomics and institutional indicators influence the volume and number of venture capital investments into young technological companies (startups).

For that purpose, I will begin with a cross-sectional analysis of data of volume and number of investments in the last 10 years across 100 countries from all around the world, categorized by specific sectors and the size of the investment rounds. The data from a large number of countries will allow me to test both how certain institutional characteristics affect the volume of VC investments and primarily how they affect the existence of the sector in the first place.

Secondly, I will analyze panel data focusing primarily on Central and Eastern Europe (CEE) consisting of (1) volume and number of VC investments, and (2) main macroeconomic indicators, such as (a) inflation rate, (b) interest rates, (c) real GDP growth rate, (d) unemployment rate, (e) market capitalization, supplemented by (3) institutional indicators which are often being used in financial analyses, such as (a) initial public offerings (IPOs), (b) investments and tax treatment, (c) labour market rigidity, (d) indicators of technological opportunity, and (e) government effectiveness. All collected for the last 10 years, as well as in the first analysis.

Similar tests were also done by researchers Romain and van Pottelsberghe (2004) who developed a theoretical model where macroeconomic conditions, technological opportunity, and the entrepreneurial environment affect the demand and supply of VC, based on a panel dataset of 16 OECD countries from 1990 to 2000. Also, Jeng and Wells (2000) studied in their paper the determinants of VC activity for a sample of 21 countries with a focus on the US. In particular, they considered the importance of IPOs, GDP and market capitalization growth, labor market rigidities, accounting standards, private pension funds, and government programs on the volume of investments.

Contribution

The aim of this study is to analyze if there is an association between above mentioned macroeconomic and institutional factors and the volume of VC investments, and compare it among the researched countries. The contribution will be in connecting a microeconomic phenomenon, which the venture capital is, to macroeconomic and institutional conditions in examined regions and countries. The study will try to answer to questions such as how individual countries differ in approach to investments in technological startups and how it is connected to their macroeconomic wellbeing. The results could be theoretically use in practice, as during the investment process in venture capital funds, also mentioned conditions must be taken into consideration to respond to variable valuations of technological startups, and lower willingness of Limited Partners to put money into these high-risk portfolio funds.

Methodology

I will construct panel dataset based on two types of data for countries of CEE region over the last 10 years. Firstly, I will exploit microeconomic data used from the Dealroom database where people can access all venture capital investments into companies from all around the world that had value at least 1 million EUR, but usually even less. The database allows for filtering according to many variables as the volume of investments, number of investments, industries (e.g. FinTech, BioTech), geography etc. I will match these data with datasets with global macroeconomic and institutional data from publicly accessible sources of World Bank, International Monetary Fund and Eurostat. The data series presented within these subjects have been chosen as the most relevant in evaluation determinants of VC investments across older recognized papers, and for which comparable data across countries are available. This will allow me to examine different levels of VC activity observed across countries by considering the variations in economic and institutional environments.

I will use two measures to assess the level of VC activity within a country. The first involves taking the log of the total number of VC investments scaled by the country's population in millions. The second measure is the log of the total amount of VC investments per capita. The second measure serves as a robustness check, as the information on the amount of investments is missing for certain deals in the Dealroom database.

Given the unbalanced panel dataset for up to 18 countries with varying technological opportunities, institutional and economic development, and other unobservable characteristics, I will employ the random effects generalized least squares model (GLS) to test the hypotheses as it was also done in a similar study from Li and Zahra (2012). The GLS model allows the variances to differ across countries and controls for unobservable country characteristics.

Outline

Abstract
Introduction
a. Startups - definition & history
b. Venture capital - definition & history
c. Characteristics of venture capital funds
d. Specifics of the Central and Eastern Europe
Literature review and hypotheses
a. Venture capital investment criteria & value creation
b. Determinants of venture capital investments
c. Development of venture capital in European countries
d. Hypotheses
e. Contribution of this thesis
Methodology
a. Description of data
b. Independent and dependent variables
c. Tests
Results
a. Analysis
b. Interpretation of results
Conclusion
a. Broader interpretation of results
b. Implication for practice
c. Topics for further research