The relationship between US venture capitalists and Swedish startup companies is the subject of a recent working paper from researchers at the University of Oxford’s Said Business School. This is a striking field of research, if only because in pop culture terms the US is often considered the haven of ruthless capitalism and Sweden as an exemplar of social democracy, where entrepreneurs operate in the interstices. Can the two sides of such a deal both benefit?
Well … yes. The report finds that US venture capital “results in more employment, not less” by Swedish companies, even after “controlling for endogenous selection effects.”
The paper Foreign Investors and Domestic Company Growth, is the work of Thomas F. Hellman and Alexander Montag, both of the Said Business School, and Joacim Tag, of the Research Institute of Industrial Economics, an independent research foundation headquartered in Stockholm.
These authors examine “effects on wages, sales, earnings, foreign subsidiaries subsequent funding rounds, and exits.” They found “no evidence that US venture capital investments hamper the domestic growth of Swedish companies” and a good deal of evidence that such investment helps.
What’s an Endogenous Selection Effect?
“Endogenous selection effects” are a regular problem facing causal inferences. Take any question of the form, “What impact does event A have on the members of group B?” Look at some data about what happens to members of group B after event A. Let us say … C happens. There is always a difficulty in conclusion, simply, that A caused C within group B. After all, who gets to be a member of group B? Perhaps group B was defined in such a way that C was likely to happen to members of such a group anyway, regardless of whether it was going to be preceded by A.
Returning to Swedish startups, one might argue that the type of Swedish entrepreneurs who are most likely to attract the attention of US venture capitalists (and thus to become members of the group under study by Hellman et al.) are also endogenously those most likely to end up succeeding, hiring a lot of people, contributing favorably to their local economy, and so forth. One cannot conclude, from the fact that they do receive money and thereafter hire a lot of people, that they hired a lot of people because they received this money, especially if there were other possible investors, including more locally based venture capital funds.
So, methodologically, a key claim of this study is that the favorable benefits of US VC money remain after controlling for such a bias.
Positive Spillover Effects
The working paper also looks at the issue of spillover effects. If a US VC fund invests in a firm in industry X in a specific city, is it helping that city’s economy beyond the recipient firm and those directly associated therewith? The authors used an ordinary least squares regression with USVC investment as one variable (and VC investment from any non-US sources as another). That is: USVC served as a dummy variable that equaled one in any year when a company had a funding round with at least one US investor, zero otherwise. Likewise, non-USVC served as a dummy variable that equaled one in any year when a company had a funding round with no US investor. This variable would go to zero either when there was no VC funding round at all, or when US money was involved in it.
The conclusion: there is a spillover effect. US investment results in improved performance both at the level of the firm and at that of the municipality involved.
Further Research and a Bottom Line
The report concludes with suggestions for further research. The authors observe that they were “only able to measure the domestic growth of companies,” and they believe it would be valuable to consider systematic differences in the non-domestic growth, but the search for reliable data for nailing that down will be a challenge.
There is also a question of whether the US money crowds out any domestic VC market. One might hypothesize either that it has a negative effect on Sweden’s own VC space or that it doesn’t—perhaps it has a catalytic effect in its own industry.
In simple terms, the bottom line is that US capitalists and Swedish entrepreneurs can get along, mismatched a pairing though it might seem.