Stepping Up Venture Capital to Finance Innovation in Europe

IMF Working Papers, July 12, 2024

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Relative to the US, productivity growth and investment in R&D in lagging in the EU, where it is more difficult to finance and scale up promising, innovative startups.
Many of the most successful EU startups move elsewhere for financing, causing the EU to lose out on both the direct growth benefits and positive spillovers from these innovative firms.
The EU could nurture innovative startups by accelerating the development of its venture capital (VC) ecosystem.
Reducing regulatory frictions, especially ones that deter pensions funds and insurers from investing in VC, combined with well-designed tax incentives for R&D investments could help accelerate the development of the VC sector.
These and other key CMU initiatives, such as the consolidation of stock markets and reforming and harmonizing insolvency regimes, will take time.
Given the urgency to boost innovation, giving public financial institutions like the European Investment Fund a more active and expanded role in kickstarting VC markets where needed and in familiarizing investors with the VC asset class can be a helpful interim step.

The EU lags the US on productivity growth and R&D investment.
Financing and scaling innovative startups is more difficult in the EU than in the US.
Talent and successful startups often relocate outside the EU for financing, reducing domestic growth and spillovers.
Regulatory frictions deter institutional investors, notably pension funds and insurers, from investing in venture capital.
Structural CMU initiatives (consolidation of stock markets; reforming and harmonizing insolvency regimes) are important but will require time to deliver results.

Reduce regulatory frictions that deter pension funds and insurers from investing in VC.
Implement well-designed tax incentives for R&D investments to complement VC development.
Advance Capital Markets Union (CMU) initiatives, including:
- Consolidation of stock markets.
- Reforming and harmonizing insolvency regimes.
In the short to medium term, expand the active role of public financial institutions, such as the European Investment Fund, to:
- Kickstart VC markets where needed.
- Familiarize investors with the VC asset class.

Authors: Nathaniel G Arnold, Guillaume Claveres, and Jan Frie
Publication date: July 12, 2024
Series: IMF Working Papers
Issue: 146
Volume: 2024
Pages: 42
DOI: https://doi.org/10.5089/9798400280771.001
Stock No: WPIEA2024146
ISBN: 9798400280771
ISSN: 1018-5941
Subject tags: Expenditure, Financial institutions, Financial markets, Insurance companies, Labor, Mutual funds, Pension spending, Pensions, Stock markets
Keywords: Capital Markets Union, EU legislation, EU startup, Europe, Insurance companies, kickstarting VC market, Mutual funds, Pension spending, Pensions, Productivity, startup financing stage, Startups, Stock markets, VC sector, Venture capital

Stepping Up Venture Capital to Finance Innovation in Europe — IMF Working Paper No. 2024/146