Does Governmental Venture Capital Spur Innovation? : A comparison with private venture capital in Sweden

Abstract: Governments have increased their commitment to spur innovation by increasing the amount of venture capital (VC) flowing to the venture capital market over the last decades. Still, research shows that governmental venture capital (GVC) has no impact on innovation. The literature comparing governmental and private venture capital’s effect on innovation is scarce. Therefore, this study explores how different types of VC affects innovation in Swedish entrepreneurial companies. Based on VC data from the Swedish Venture Capital Association (SVCA), we use 440 VC-backed companies and 440 control companies to test the effects of governmental venture capital, private venture capital (PVC), and mixed venture capital (MVC, a combination of GVC and PVC) on four innovation indicators - patent grants, passive citations, trademarks, and industrial design rights. We use fixed-effects models to compare different VC types and Difference-in-Differences models to draw inferences about causality. Our findings show that all types of venture capital positively affect innovation, while MVC has the most substantial effects. PVC spur innovation mainly through trademarks, while GVC increases both trademarks and patent quality. We argue that MVC has access to an immense amount of capital and can allocate its non-financial resources better than both PVC and GVC separately. We also suggest that GVC focuses more on innovation quality and PVC focuses more on commercializing innovations and bringing them to the market.