Institutional Determinants of Venture Capital : Taking Informal Institutions to a Front Seat

Venture Capital (VC) as an industry exists for more than 50 years. VC has flourished in the US, yet it has only moderately developed other geographical areas despite numerous trials of governments to foster it. Vast research endeavours have been carried out to understand the antecedents, barriers and facilitators of the industry, and the variations of degree of development and performance across different geographical regions. However, the focused has been rather limited and accounted almost exclusively for formal features of institutional environments, leaving the informal dimensions unexplored. This paper tries to close that gap, and by drawing on the institutional theory, posits that informal institutions represent relevant determinants of VC activity. On the basis of longitudinal country level data on European countries, we aim to show that the “usual suspects” (e.g. investors protection laws, taxation regulations, liquid exit markets, flexible labour market regulations) are significant but not exhaustive determinants of VC activity, and that informal institutions (such as social capital, uncertainty avoidance and corruption) have a prominent direct effect on it, as well as facilitate the impact of formal features, i.e. formal institutions. These findings are intended to contribute to the literature on venture capital and to inform policy makers, who should bear in mind that informal institutions could and should be used as indirect mechanisms for creating prosperous institutional environment in the long term. Moreover, the informal institutions should also be considered when designing formal regulations, as the impact of the latter on VC activity will be moderated by the existing informal environment