Short-term and long-term dynamics of venture capital and economic growth in a digital economy: A study of European countries

Abstract There has been a significant transformation in the diffusion of information and communication technology (ICT), development of the venture capital industry, and economic growth in European countries over the past three decades. Using vector error-correction modelling, we examine the possible interrelations between venture capital investment, ICT infrastructure, and economic growth, based on annual data from 25 European countries between 1989 and 2016. Specifically, we examine the direction of Granger causality between these variables. We find that the variables are cointegrated. Our empirical results also illustrate that both economic growth and the development of ICT infrastructure impact all stages of venture capital investment (early, late, and overall VC investment) in the long run. The study also shows that economic growth and late-stage venture capital investment impact internet usage; and internet usage and late-stage venture capital impact economic growth in the long run. The results also reveal strong inter-linkages between the variables in the short run. Overall, empirical results suggest that policy-makers should give special attention to an integrated policy approach for the co-development of the ICT infrastructure, venture capital, and economic growth in Europe.