Stimulating Venture Activity Through Government Investment in Venture Funds

Abstract

Innovation and R&D are important to economic growth. One argued way to encourage innovation is through government support for venture funds. This might be especially important in countries that lack a developed venture capital (VC) sector. However, some papers have suggested that this government backing might ‘crowd out’ purely private sector funds and might undermine innovation creation. Thus, I examine the use of a scheme in Australia (the Innovation Investment Fund (IIF) scheme). I focus on Australia because unlike many low innovation countries, it has strong legal foundations, enabling a cleaner look at the impact of government backing. I argue that Australia's scheme is well structured. I then show that while Australia has relatively low levels of VC and innovation compared with other countries, its VC activity scaled by GDP has grown following the inception of the IIF scheme, particularly increasing after 2001. The policy implication is that properly structured government support for VC funds can stimulate innovation and VC activity.