Towards a systemic and evolutionary framework for venture capital policy

When compared to the U.S. and Israel, the weak venture capital (VC) markets and VC policy in Europe up to the early 2000s stimulated two alternative streams of research. A majority view, which we term traditional, focuses on the role of VC in overcoming market failure in the financing of innovative ventures. The policy recommendations emerging from this view involve a mix of monetary incentives and institutional changes that can be applied irrespective of the local context. The second is an evolutionary perspective on VC and VC policy. This is based on a dynamic analysis of the co-evolution between VC and high-tech entrepreneurship, as well as an adaptive view of policy and policymaking (Metcalfe, Econ J 104(425):931–944, 1994). In this setting, policy-makers have to overcome not only market failure but also dynamic system failure associated with the linked emergence of entrepreneurial high-tech clusters. Overcoming traditional market failure becomes a necessary but not sufficient pre-emergence condition for the eventual attainment of the latter policy objectives. This paper surveys the post-2000 literature on VC and VC policy and criticizes some of its assumptions and results. Moreover, it examines the Israeli and UK/Scotland innovation policy frameworks from an historical perspective, which allows us to highlight differences in approaches and impacts. The upshot is that the success of VC policies depends on a number of factors, including the phase of emergence of a VC market and high-tech cluster and the specific country/region institutional setting.