A new report published by the ECB, “Does Private Equity Investment Spur Innovation? Evidence from Europe”, finds that private equity investments stimulate innovation and create more innovation than investments by larger conglomerates. This is the first time such an extensive analysis has been carried out on the European market.

The study provides the first cross-country evidence of the effect of investments by private equity firms on innovation in the European region.  The study is based on Kortum and Lerner’s (2000) empirical methodology, which investigated similar effects in the US economy.

The study finds that while private equity investment accounts for 8 percent of aggregate (private equity + R&D) industrial spending, private equity investment accounts for as much as 12 percent of industrial innovation.

In addition, the report shows to some important policy implications. They argue that the development of a viable venture capital industry in Europe hinges upon the regulation which Europe’s institutional investors – like pension funds and insurance companies, face. The cross- country variations explain a large portion of the variations in private equity investment across countries and over time. In that respect, the study argues that recent pan–European regulation aimed at liberalizing investment by institutional investors for diversification purposes can be credited with a role in nurturing the European venture capital industry.