The Development of Venture Capital: Macroeconomic, Political, and Legal Determinants

There is compelling evidence that financial activity is closely entangled with institutional setting and that this relationship is a major determinant of cross-country differences. This evidence holds particularly true for venture capital (VC) investments and portfolio companies' management, where investment outcomes are a delicate alchemy of effective investment selection, careful investment oversight, and timely exits. Such alchemy is profoundly influenced by differences in legal environments and macroeconomic and sociopolitical conditions (MPL) across countries. This article provides a framework for theoretically identifying these variables and presents empirical evidence for their impact on VC investment activity. For each factor, it discusses the critical issues associated with its measurement for econometric analyses. It then surveys the existing evidence with regard to the effects of MPL and the rule of law on the development of VC investments, the management of companies, and exits from investments.