Can Venture Capital Foster Innovation in Canada? Yes, but Certain Types of Venture Capital Are Better Than Others

Canada’s problem with lagging productivity growth has led policymakers to focus on boosting innovation, in part by supporting Canadian venture capital funding for business. But which types of venture capital (VC) funds are most effective in spurring innovation? This study examines that question in the Canadian context by examining the records of VC funding in generating new patent applications for the period 1996-2008. Overall, Canadian VC funding spurs innovation more effectively on a dollar-for-dollar basis than investment in research and development (R&D). The type of VC fund also matters. Private and institutional VC funds consistently foster innovation; corporate and government VC funds do reasonably well in promoting innovation; but retail, bank and other VC dollars perform poorly on that score.