A Survey of Venture Capital in Europe : Implications for the Chinese Venture Capital Market

Despite the rapid growth of the European VC market, few Chinese academic researchers have studied it. In this paper, I make a detailed description of the European venture capital market, and hope to withdraw some lessons from Europe for the development of the venture capital market in China. After some theoretical reviews about the definition of venture capital, the structure of a venture capital market and the determinants of venture capital investments, the paper describes the history and recent developments in the European venture capital market. The items covered include fundraising, source of funding, investment volume, stage distribution of investment, industrial distribution of investment, the internal rate of return for different kind of venture capital investments and the legal and tax environment for venture capital in Europe. I hope these latest data can be informative for academics, regulators and VC fund managers alike in China. Then I discuss the economic impact of venture capital on the sustainable economic growth, innovation and job creation in European. Most government agencies and researchers claimed that venture capital investment is beneficial to innovations and job creations. The survey of EVCA also provides data to support these ideas. Job creations in venture-backed firms are much higher than traditional companies, and the innovation activities in these companies are also higher than the average. The survey of the European venture capital market finds that the development of the venture capital market is quite imbalanced in Europe. To answer the question what determines the equilibrium amount of venture capital investments in a country, I develop models to explain it. The basic model is similar to that developed by Romain and van Pottelsberghe (2003). However, I introduce a microeconomic perspective to construct the supply function of VC funds. And I also extend the model by including the legal environment in the demand function of VC funds. The empirical analysis is run, using the dataset covering 15 European countries over the period 2002-2008. Other than previous researches, I use the public R&D expenditures to reflect the entrepreneurial environment of the economy, because I want to find whether public R&D expenditures can be used as a policy tool to stimulate the venture capital activities in a country. The regression results show that the venture capital investment is positively related to the GDP growth rate, depth of the capital market, entrepreneurial environments and public R&D expenditures. However, my analysis focus is on how legal environments and the type of legal system matters in the determination of VC investments. The analysis shows that a bad legal environment will diminish the effectiveness of public R&D expenses on VC investments. And whether a country adopts case law tradition also influences the effectiveness of public R&D expenses on VC investments. After that, the paper analyzes the recent development of the venture capital market in China, makes a comparison with the Europe and concludes some potential problems hindering the development of VC market in China. At last I provide some policy suggestions for Chinese government using experience from Europe, including speeding up the construction of a multi-level capital market in China, making more public investments in scientific researches and education programmes and creating a favourable environment for venture capital activities