Determinants and effects of Venture Capital and Private Equity ...

credit allocated to small business decreases in the long run after mergers, due to more
pronounced size change and more complex organizational structure.
In light of the above discussion hypothesis on the determinants of venture capital financing
can be test.
Hypothesis 1:
Given the specific setup in which VCs and PEs operate it is possible to identify a cluster of
variables which can drive their investment decisions.
3.2 Literature on the economic impact of VCs and PE funds
The interest on economic impact of VCs and PE funds can be grouped in two: (1) specific
studies addressing the outcomes for the general economy; (2) researches focusing on the
performance of the small business after new capital has been acquired.
In relation to the first group of studies, Hellman and Puri (2000) and Kortum and Lerner
(2000) show that there is a strong positive correlation between venture capital and innovation.
More precisely, the formers argue that VC backed firms appear to be faster in implementing
new patents; Kortum and Lerner conclude that a dollar of VC is three times more effective in
promoting patent creation than a dollar from a corporation. Yet, the direction of causality
between Venture Capital and the degree of innovation is an open issue. Some empirical studies
have found that more VC financing fosters innovation (“venture capital first hypothesis”, e.g.
Kortum and Lerner, 1998), while others document the opposite, meaning that the entrance of
the external financer follows the discovery of a new technology and meets the need to market
such innovations (“innovation first hypothesis”). Hirukawa and Ueda (2003) find that venture
capital financing is more frequent in industries that have had an increase in total factor
productivity, which the Authors interpret as a proxy for innovation, while after the deal, this
relation turns to be negative.
In terms of job creation, research has focused on understanding the relationship between
employment growth and VC/PE funding in macroeconomic terms. For example, Wasmer and
Weil (2000) find evidence of the impact on employment of an increase in the ration VC
investment/GDP in a panel of 20 OECD countries. Belke et al. (2003) extend the scope of the
key question testing a virtuous circle between entrepreneurial dynamism, innovative start ups,
dynamic venture capital industry and job creation. The paper delivered pioneering empirical
evidence of such a link at the macroeconomic level, showing that venture capital is able to
significantly raise employment growth and job creation.
Focusing on the second field, recent studies examined empirically the relationship between
receiving venture capital and firm performance. Sapienza (1992) found that the provided
services are positively related to the performance of venture‐backed firms. Most notably, the
stylized facts are: (1) the greater the innovation pursued by the venture, the more frequent the
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