On the real effects of private equity investment: evidence from new ...

2.3 US industry-level entry dataAs a benchmark for new business incorporation into an industry, we use data on …rm entryin the respective NACE rev. 1.1 2-digit industry in the US, from the Dun and Bradstreetdatabase of over 7 million corporations over the period 1998-1999.The methodology ofusing US industry characteristics as a benchmark in cross-country cross-industry studieswas …rst introduced by Rajan and Zingales (1998), who argued that the composition ofUS industries in terms of external …nance usage can be viewed as the industries’"natural"or "technological" composition, because US …nancial markets are relatively friction-free,compared with other …nancial markets around the world, including most industrial countries.The methodology has been used, among others, by Beck et al.(2008) to calculate the"natural" share of small …rms in an industry, by Claessens and Laeven (2003) to calculatethe industry’s "natural" usage of intangibles, and most recently by Klapper et al. (2006) tocalculate the "natural" rate of business incorporation, which we use in this paper.It needs to be pointed out that proxying the "natural" rate of industry entry by entryin the respective industry in the US is somewhat arbitrary. It relies on the assumption thatbureaucratic barriers to entry are lower there than in any country in Europe, and that thecost of …nancial intermediation and start-up …nancing is su¢ ciently lower in the US than inEurope as a whole. This technique does not argue that industries in the US have achievedthe …rst best in terms of entry, but that the …nancial and regulatory environment is relativelymore conducive to entry than the countries in our sample. For example, while entry costs inthe US are around 0.5% of per capita GNP, in our sample of European countries they areon average around 20%; and while venture capital investment in the US in 1998-1999 wasabout 0.2% of GDP, it stood at 0.1% of GDP in the UK, 0.05% of GDP in France and 0.02%of GDP in Germany, with these three countries receiving the lion share of the private equityinvestment in Europe. Certainly, the entry costs in the US are non-zero, and it is impossibleto know if the optimal amount of venture capital investment is not much larger than 0.2%of GDP, but what matters is that these characteristics of the US business environment aresuperior than in the countries in our sample.For robustness purposes, however, similar14 ECBWorking Paper Series No 1078August 2009