Fact of the Week: Doubling a County’s Venture Capital Investment Increases Business Establishments by 5 Percent

Source: Steven Poelhekke and Benjamin Wache, “The Impact of Venture Capital on Economic Growth,” Tinbergen Institute Discussion Papers, no. 23-050/VIII (August 2023).

Commentary: In a new working paper, Steven Poelhekke and Benjamin Wache analyzed the effects of venture capital (VC) on economic growth. The authors measured economic growth using U.S. county-level data on employment, payroll, and business establishments from the U.S. Census Bureau. The data on VC equity investment came from the Thomson ONE database. The data covered the period of 1986–2019. A third dataset was Facebook’s Social Connectedness Index (SCI) for August 2020. To effectively infer causation between VC investment and economic growth, the study used an instrumental variable for VC investment, which the authors refer to as the social access to venture capital (SAVC). The purpose of the SAVC instrument was to measure the ability or likelihood of entrepreneurs to attract VC investors from outside their county. The authors defined SAVC as a county’s total VC weighted by that county’s SCI.

The authors note that past studies on VC investment primarily focused on its effect firm-level activities. In this study, the goal was to provide findings on VC’s role in generating broader economic growth beyond the level of individual firms. The study’s findings suggest that VC investment plays an important role in both national and subnational economic development.

The study focused mainly on changes in employment, payroll, and business establishments. The results found that, for a doubling in VC investment, there is a more than 5 percent increase in the number of business establishments. The results also found that, for a doubling in VC investment, there was a more than 8 percent increase in employment and a more than 10 percent increase in payroll. The study also looked at how the presence of California, Massachusetts, and New York might affect or skew the results, given that those three states account for a large portion of VC in the United States. After excluding the counties in those three states, the study found that for a doubling in VC investment, employment, payroll, and establishments each increased by more than 10–20 percent.