THE IMPACT OF VENTURE CAPITAL ON ECONOMIC GROWTH

THE IMPACT OF VENTURE CAPITAL ON ECONOMIC GROWTH IN THE UNITED STATES

The purpose of this research is to assess the effects of venture capital on economic growth in the United States. One point of focus in this assessment is the role of venture capital-backed internet start-up companies on economic growth in the contemporary period.

It is necessary to define two terms, as these terms are used in this research. The two terms are "venture capital" and "economic growth."

The term "venture capital," as the term is used in this research, is defined as investments in "young companies, ranging from start-up firms to developed businesses preparing to initially offer their stock in the public market" (Sharpe, Alexander, & Bailey, 1999). This definition does not, however, exclude repeated investments by venture capitalists in the same firm.

The term "economic growth," as the term is used in this research, is defined in positive terms as the rate of change in gross domestic product (GDP). Within this definition, a decline in GDP would be referred to as negative growth. There are two general types of economic growth. Extensive economic growth refers to an expansion of the total output of goods and services, regardless of the change in per capita output. Intensive economic growth refers to an increase in per capita output (Ekelund & HTbert, 1991). Extensive economic growth is the focus in this research. Because economic growth refers to changes in t

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Ayres & Cramton, 1993, p. 16). With venture capital, the contingencies for control must be made explicit, as external discipline fails "because there is no takeover threat without public shares. Internal discipline is also likely to be difficult without an active venture capitalist. Careful and informed monitoring is needed because of the idiosyncratic cash flows in an innovative venture" (Ayres & Cramton, 1993, p. 16). The function of the venture capitalist reduces agency costs, thereby promoting economic growth. The venture capitalist, thus, is "useful in situations where the agency costs otherwise would be large: external discipline is not possible or is distorting because it is uninformed, and internal discipline is ineffective without in-depth knowledge and careful monitoring" (Ayres & Cramton, 1993, p. 16). Venture capital is used in new start-ups, often involving substantial research and development. "Great uncertainty and long payback periods are the norm. In this environment, the returns from monitoring are large" (Ayres & Cramton, 1993, p. 16). With respect to growth, PriceWaterhouseCoopers (2000b) found that firms with venture capital financing increase their sales per employee twice as fast at the rate in that

Category: Business - T