Abstract
Hellmann and Puri (2000), and Kortum and Lerner (2000) show that VC/PE-backed companies are more efficient innovators, and Belke et al. (2003), and Fehn and Fuchs (2003) prove that they create more employment and growth than their peers. Levine (1997) documents well the role of VC/PE funds in fostering innovative firms, and indeed, there now exists a broad consensus that a strong VC/PE culture is a cornerstone for commercialization and innovation in all economies. Hence, policymakers should focus on the creation of an adequate setting for a prospering VC/PE market to support entrepreneurial activities and growth. However, the risk capital supply is rather small in some European economies relative to their size and expected growth opportunities. This raises questions about the reasons that constrain the development of the VC/PE market in some of the countries. In this paper, we address the attractiveness of the European Union countries (and Norway, and Switzerland) for VC/PE investors by means of the construction of a composite index. For the index’ composition we refer to the results of numerous prior research papers that investigate relevant parameters determining entrepreneurial activity and/or the engagements of institutional investors. We differentiate between the new members of the European Union (the Central Eastern European Union accession countries, named CEE countries), the 15 countries that belonged to the European Union before May 1st 2004 (the EU-15 countries), and the non-EU countries Switzerland and Norway. As a result, we obtain a ranking of all the individual economies based on their attractiveness for VC/PE allocation by institutional investors. We compare our index with the fundraising activities in the individual countries and reveal a reasonable correlation of both figures.