How to Spur Innovation? The Venture Capital Funds that Work Best: C.D. Howe Institute
TORONTO, Sept. 19, 2012 /CNW/ - Some forms of venture capital funding for business in Canada are strongly linked to innovation, as measured by new patent applications, according to a report released today by the C.D. Howe Institute. In "Can Venture Capital Foster Innovation in Canada? Yes, but Certain Types of Venture Capital Are Better Than Others," author Tariq Fancy finds Canadian venture capital (VC) funding, overall, is more effective in stimulating innovation than business research and development investment, on a dollar-for-dollar basis.
Stimulating productivity growth is an important priority for Canadian policymakers, as reflected in Ottawa's earmarking $400 million in the 2012 budget to support a market for the kind of early-stage risk capital that venture capital funds provide, notes the author. But which types of venture capital best serve the goal of promoting innovation? To answer that question, Tariq Fancy examines the relationship between VC funds and innovation for the years 1996 to 2008. He includes foreign and domestic funds that fall into a range of categories: (i) corporate venture investments; (ii) government-backed funds like the Business Development Bank of Canada; (iii) institutional players, like pension funds, endowments and foundations; (iv) retail funds, like labour-sponsored funds; (v) private VC funds; (vi) banks, such as investment banks and other financial institutions; and, (vii) other funding that does fall into the above categories.
The results show private and institutional VC funds consistently foster innovation; corporate and government VC funds do reasonably well in promoting innovation; but retail, bank and other VC dollars perform poorly on this score. The author concludes private, institutional and government-backed venture capital should be encouraged and notes that a large opportunity remains in seeing private VC funds thrive, because they boost innovation by providing not only critical funding, but also knowledge and oversight to entrepreneurial start-ups.
SOURCE C.D. Howe Institute