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

development and restructuring on small business formation is certainly important, the e¤ectof private equity investment, especially start-up …nance, is probably equally important andlargely understudied. This paper aims to …ll this gap.The second contribution is that we add to a remarkably limited research on the e¤ectsof private equity on the real economy. Kortum and Lerner (2000) show that venture capitalinvestment in the United States is associated with more innovation as measured by patentcounts and patent citations. Gompers et al. (2005) examine the propensity of publicly traded…rms to create new venture backed …rms. They …nd that younger public …rms located inmain hubs of venture capital activity are the most likely to create new ventures. Tang andChyi (2008) …nd that venture capital investment enhances productivity growth. Regardingnew business formation, we are only aware of one study that examines the impact of venturecapital at the regional level in the U.S. Mollica and Zingales (2007) report that …rm entryand innovation increase in U.S. regions that attract more venture capital. Our paper addsto this literature by providing the …rst comprehensive cross-country study examining thee¤ect of private equity on …rm entry in Europe. Moreover, our European data enables usto distinguish between stages and investor types and does not focus on the e¤ect of venturecapital alone but also includes the e¤ects of later stage private equity, like buyout …nance.There are two main mechanisms suggested by the literature via which private equity ingeneral and venture capital in particular should lead to higher rates of business incorporation.First, nascent entrepreneurs may recognize the need for capital in the future andonly establish …rms when they have reasonably high expectations of obtaining such funding.This implies that not just start-up …nance, but later …nancing stages, like expansion …nance,should matter too for …rm entry. Second, …rms may be engaged in "entrepreneurial spawning",that is, the propensity of former employees of publicly traded …rms to start their owncompanies. There are several competing explanations for that. Christensen (1997) has arguedthat large, established …rms are incapable of adopting radical new technologies becauseit would disrupt their established way of organizing business. It is also possible that these…rms cannot evaluate new disruptive technologies as they fall outside of their line of business8ECBWorking Paper Series No 1078August 2009