VENTURE CAPITAL IN BANK-BASED AND MARKET-BASED FINANCIAL SYSTEMS: A CROSS-COUNTRY ANALYSIS

Abstract

Previous research is dominated by the view that venture capital (VC) thrives in market-based systems alone while the role of a bank-based system has been rejected. The paper compares the role of the two systems in VC development using financial markets and financial institutions as proxies. The paper analyses a unique dataset of 31 economies over the period 2005-2017 employing two-step system GMM and finds complementarity between financial markets and financial institutions to explain VC fundraising. The findings emphasize that development of financial institutions are equally important for VC markets as they reduce market frictions through networking and intermediation skills.