The emergence of economic geography theory can be attributed to the pioneering works of Nobel Laureate Paul Krugman who hypothesized that uneven economic development of regions could take place if transportation costs preclude trade. The importance of industry sector is also well established in economic literature. This paper recognizes these contributions and applies them to the venture capital market in the United States.
This paper analyzes how the venture capital market is affected by macroeconomic measures, location and industry. Capital venture investment data for the U.S.A. from 1995 to 2009Q1 are examined. This data is augmented by quarterly observations of the following macroeconomic variables over the same time period: real gross domestic product (GDP), federal funds rate, and 3-year, 5-year, 10-year interest rates. The main objective of this paper is to examine the role of geography and type of industry in determining investment in the venture capital entrepreneurial sector. This paper also explores the effects of the aforementioned macroeconomic measures on venture capital investment. The venture capital investment activity data are from The MoneyTree Survey, which allows for the data to be stratified into nineteen regions and seventeen industries. This paper analyzes the data through a statistical and graphical analysis. Basic summery statistics, Pearson correlation coefficients, and regression parameter estimates are used to explore how the variables affect the venture capital market. The results affirm the importance of geographic location and industry sector in venture capital investment. This conclusion is present even in the current economic downturn, displaying that region and industry remain powerful factors even under the pressure of large macroeconomic forces. Since the venture capital market relies heavily on expectations of future GDP, examining venture capital investment data and trends provides insight into how the current economic crisis is affecting the economy of the United States.
This paper makes several important conclusions. The first is that geography and industry sectors are important factors in United States’ venture capital investment regardless of the state of the aggregate economy. Secondly, as one might expect, GDP is positively associated with venture capital investment, while the sum of the interest rates is negatively associated with venture capital investment. Thirdly, the correlation between capital venture investment and interest rate decreases as the length of the interest rate term increases. Furthermore, the Silicon Valley region and the software industry account for a large percentage of capital venture investment and deals in the United States. Finally, venture capital investment decreased dramatically in 2008 due to the current global recession. |