Seminar 14 November, 2013
Venture Capital and the Diffusion of Knowledge
This paper estimates the effect of Venture Capital (VC) on the diffusion of knowledge. I compare citations to patents invented in VC-backed companies to those of comparable patents invented elsewhere. To isolate the causal effect, I exploit time variation in the assets of state pension funds that allocate capital to VC. This variation provides a valid instrument if its direct effect on citations is uniform across patents in the same technology-class and vintage-year. To sharpen identifcation, I estimate the extra boost in citations from other companies in the VC portfolios. I find that VC financing has a casual effect on the diffusion of patented knowledge, particularly among companies that share a common VC. Additional results show that this effect is not mediated by market transactions such as mobility of workers or patent trade. Overall, results suggest that VC generates knowledge spillovers, and affects the direction of aggregate innovative activity.