"We provide the first cross-country evidence of the effect of venture capital investment on patented inventions. Using a panel of 21 European countries and 10 manufacturing industries covering the period 1991–2005, we study the effect of venture capital (VC), relative to R&D, on the number of granted patents. We address concerns about causality by exploiting variations across countries and over time in private equity fundraising and in the structure of private equity funds. We find that the effect of VC is significant only in the subsample of high-VC countries, where the ratio VC/R&D has averaged around 3.9% between 1991 and 2005 and VC has accounted for 10.2% of industrial innovation during that period. We also find that VC is relatively more successful in fostering innovation in countries with lower barriers to entrepreneurship, with a tax and regulatory environment that welcomes venture capital investment, and with lower taxes on capital gains."

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