On The Upside or Flipside

Technology in Society 65 (2021) 101555
Contents lists available at ScienceDirect
Technology in Society
journal homepage: http://www.elsevier.com/locate/techsoc
On the upside or flipside: Where is venture capital positioned in the era of

digital disruptions?
Muhammad Zubair Khan a, *, Zafir Ullah Khan b, Affan Hameed c, Shehnaz Sahib Zada d
a
Institute of Management Sciences, University of Science and Technology Bannu, Office Add: IMS Campus Besides Judicial Complex, Bannu City, Pakistan
b
Department of Economics, University of Science and Technology Bannu, Office Add: IMS Campus Besides Judicial Complex, Bannu City, Pakistan
c
London College of Fashion, University of Arts London, Office Add: 272 High Holborn, WC1V 7EY, UK
d
Institute of Business Studies and Leadership, Abdul Wali Khan University, Mardan Office Add: Garden Campus, AWKUM, TORU Road, Mardan, Pakistan
A R T I C L E I N F O A B S T R A C T
Keywords: Recent studies have found that disruptive technologies, such as FinTech, have the potential to overturn existing
Venture capital business models and overthrow incumbents. These studies have demonstrated that newly emerging digital
Financial development platforms financing early-stage ventures threaten traditional venture capital (VC). We argue that, conversely, VC
ICT
benefits from advances in information and communication technology (ICT), as ICT fosters entrepreneurship and
Digitization
FinTechs
mitigates agency issues in VC deals. This paper examines the impact of digitization on VC investments from 23
Digital entrepreneurship European countries spanning 2007–2019 using a dynamic panel two-step system generalized method of moments
(GMM) estimation technique. The results show that the factors “ICT penetration” (a general measure of societal
internet and computer access and use) and “digital economy” (a measure of ICT-powered economic activity)
exert significant and positive effects on early-stage, later-stage, and total VC investments. Moreover, availability
of bank credit moderates the effect of digital economy on VC investment. Finally, this study reveals that it is
digital entrepreneurship (as reflected in our “digital economy” measure), and not total entrepreneurial activity,
that attracts VC investment. We conclude that the VC industry is aligned with rather than threatened by the
newly emerging digital environment. The empirical results are robust to different control variables and data
sources. This paper offers useful implications for policy and contributes to the literature on digital entrepre
neurship and venture capital.
1. Introduction This continuous transformation has now moved into the digital age of
internet/mobile banking and electronic finance. Computers, the
Information and communication technology (ICT) and finance have internet, automated teller machines (ATMs), and lately smart phones
grown hand in hand throughout modern history. In the past, financial have revolutionized the customer service, the infrastructure, and the
markets around the world were restricted to serving the local region, as business models of the entire financial industry. These technologies have
they relied on the physical media of paper and coins and physical modes brought massive improvements to the financial system and an enormous
of transport, when people could not move faster than a horse could increase in trading volumes. For instance, the US experienced an almost
gallop. However, over time they changed enormously. The introduction twelve-fold upsurge in annual stock turnover between 1988 and 2008,
of analog financial technologies such as the telegraph enabled the and the ratio of stock market capitalization to GDP increased from 58%
transmission of financial information more quickly, more accurately, in 1988 to 163% in 1999 [3].
and over larger distances [1]. In particular, the publication of lists of He et al. [4] outline four game-changing technologies impacting
stock prices by newspapers, from 1812, and the use of electric stock financial services: artificial intelligence (AI) and big data, distributed
tickers using telegraphy, introduced in 1867, transatlantic cables from computing, developments in cryptography, and mobile access and the
1866, and the telephone from 1872 served the securities industry [2]. internet. These technologies have enhanced financial participation,
* Corresponding author.
E-mail addresses: mzkhan@ustb.edu.pk (M.Z. Khan), dr.zafir@ustb.edu.pk (Z.U. Khan), a.hameed@fashion.arts.ac.uk (A. Hameed), shehnaz@awkum.edu.pk
(S.S. Zada).
https://doi.org/10.1016/j.techsoc.2021.101555
Received 18 July 2020; Received in revised form 23 January 2021; Accepted 6 March 2021
Available online 29 March 2021
0160-791X/© 2021 Elsevier Ltd. All rights reserved.
M.Z. Khan et al. Technology in Society 65 (2021) 101555
financial access [5], financial inclusion [6,7], financial literacy [8,9], on VC investment at its different stages and to analyze how different
and financial development [10,11, 95] 1. ICT has changed the landscape proxies of ICT have affected VC investments in Europe. The paper
of business and technology during the last two decades – the period in scrutinizes whether the VC market is positioned on the upside or flipside
which venture capital (VC) has also flourished enormously. During this in the struggle between incumbents and new entrants.
phase of advancements in digital technologies and their impact on
financial services, market institutions have experienced a transition, 2. Literature review and hypotheses
with some scholars predicting that it will lead to the end of banking era
[1]. Financial commentators have coined the term “FinTech” to describe
Like other financial markets, VC is deeply embedded in ICT. There new financial technologies and the terms “FinTechs” or “FinTech ven
are two contradictory explanations for how ICT has changed VC. One is tures” to describe the institutions or enterprises practicing these in
that development of ICT attracts VC for two principal benefits it offers: novations. Gimpel et al. [21] state that FinTech “characterizes the usage
enhanced efficiency and facilitated entrepreneurship. According to the of digital technologies such as the internet, mobile computing, and data
efficiency-enhancing explanation, financial systems are deemed to be analytics to enable, innovate, or disrupt financial services”. In contrast
information systems [12]. This information systems view applies to VC to the incumbents (i.e., banks) that maintain legacy, tested systems,
more than any other mode of financing as it is an financial expertise, infrastructure, and a stable customer base, FinTechs
information-problematic and knowledge-intensive area of the financial are agile, innovative, and disruptive, have a largely prospective rather
industry, so much so that it has to rely on informal informants [13,14]. than actual customer base, and require highly data-sensitive algorithms
Venture capitalists (VCs) highly depend on pre-investment information and analytics to be regulated [22]. Elsinger et al. [23] argue that Fin
to avoid adverse selection and post-investment information to evade Techs have improved financial products in several ways: more variety,
moral hazard [15]. They invest in opaque, high-risk small and less cost, greater accessibility, and higher quality. They state that as
medium-sized enterprises (SMEs) with high growth potential but little or contact between savers and investors is becoming more direct, such
no transaction history, and other sources of finance are more reluctant to banks’ role of intermediation is obviated. They also contend that Fin
commit their resources to such ventures. For this reason, such private Techs facilitate insurance, credit, and savings, and improve the payment
investments involve more due diligence and monitoring than other and transfer system. Nevertheless, the digital revolution can have a
financing alternatives [16]. ICT has facilitated the collection of infor flipside as well as an upside for different actors in the financial system.
mation for industry selection, firm selection, deal origination, moni On the flipside, FinTechs have created a challenge for regulators as
toring and exit processes. The efficiency-enhancing view deems ICT to well as those incumbents that resist disruptive innovations. They have
be a tool to make VC processes more efficient. the potential to overturn existing business models, take a significant
The entrepreneurship mechanism is the emergence of digital entre market share and overthrow incumbents [24]. For example, Drummer
preneurship facilitating deal flow to the VC industry. ICT has accelerated et al. [25] demonstrate that the traditional banking model gave way to
Schumpeter’s creative destruction process whereby the shattering of some the securitization model after the 1960s, which in turn gave way to the
traditional industries creates many others. This happened after the rise marketplace lending model from around 2005. In the marketplace
of the internet in the 1990s and similarly web 2.0 resulted in greater user lending model, the platform for lenders and borrowers shifts from banks
innovation, bottom-up entrepreneurship, and crowdfunding platforms and special purpose vehicles (SPVs) to online networks – a process often
[17]. ICT offers ample opportunities for entrepreneurs in different fields referred to as the disintermediation of banks and SPVs [25]. Disinter
(social media, the entertainment industry, e-commerce, advertising, mediation and competition between incumbents and new entrants can
games and so forth) to create VC deals. ICT itself has been a top sector for be seen in almost all fields of digital finance, including digital financing,
VC investment during the last decade (Fig. 1). digital investment, digital money, digital payments, digital insurance,
In contrast, some argue that the VC industry has shrunk and moved and digital financial advice [26]. He et al. [4] note that new entrants
toward later-stage investment, as VCs have lost a substantial portion of radically change the existing institutions and market structures as they
their business – particularly early-stage financing – to newly emerging bypass intermediaries, markets, and networks.
financing platforms such as angel groups, business accelerators, micro These existential threats have forced the established financial in
VC funds, and online platforms [18]. Shane and Nicolaou [18] high stitutions to adapt to these disruptive advances. The incumbents – i.e.,
lighted several reasons for this market institutional change: (i) tradi banks with vast knowledge of business expansions and regulations –
tional VCs handle too much money in too few investments, as have gradually teamed up with cutting-edge players such as the FinTech
transaction costs are very high and the labor involved in deal finaliza ventures – which are savvy about innovative products and new markets
tion is intense; (ii) the newly emerging platforms and software-based [27]. Because disruptive technologies are inevitably subject to less
companies are much better suited to making investments in many regulation, banks have a motive to venture into FinTechs [24,28]. Some
early-stage companies with smaller investments; (iii) angel investors are observe that both incumbents and new technology entrants have pros
less concentrated geographically and angel investments are generally pered from competition and cooperation, and such antagonisms and
smaller; and (iv) there have been both advances in digital practices such partnerships have also benefited previously unserved and underserved
as cheaper software and a significant growth in online networking consumers in terms of access to finance [29]. Yet others consider the
platforms. These views have been endorsed by other researchers [19, disruptions beyond the threshold of competition and/or cooperation
20]. between incumbents and FinTechs. For them, financial innovation
This research addresses these conflicting views on whether ICT complements the market for financial services and addresses specific
promotes the VC industry or, conversely, whether novel technologies market niches. For instance, Dorfleitner et al. [30] believe this to be the
threaten traditional VC, and, in the latter scenario, which stages of VC case in Germany.
finance are more vulnerable to the digital technologies and newer On the upside, the digital revolution has reduced the overall costs of
platforms. The main aim of this paper is to investigate the impact of ICT and removed infrastructural barriers to financial services in developing
countries; a good example is mobile phone banking [8]. ICT has a strong
positive effect on financial development [31], financial inclusion
1
For detailed literature see Lechman and Marszk [95]. [32–34], and financial access [35]. There is a positive association be
2
The countries include Austria, Belgium, Bulgaria, Czech Republic, Denmark, tween ICT penetration and financial development. Financial develop
Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, ment with ICT leads to growth in per capita income [36] and not only in
Netherlands, Norway, Poland, Portugal, Romania, Spain, Sweden, Switzerland, developing regions: ICT adoption has had a direct positive influence on
UK and Ukraine. economic growth in Europe [37]. An ICT-based network in Brazil offered
2
Fig. 1. VC investments in europe by sector, 2007–2018.

Source: Eurostat.2
financial services to millions of poor people who would otherwise not Madhavan [42] show that algorithmic trading enhances liquidity and
have access to banking services [38]. Claessens et al. [39] show that informativeness in the New York Stock Exchange. Bhunia [43] finds that
FinTech credit has grown rapidly, reaching high volumes in, for ICT has contributed to the growth of Indian stock market; in particular,
example, the US, the UK, and China, though it remains quite small in mobile telephony is associated with the total value of stocks traded.
some other economies. Essendorfer et al. [44] note that a new breed of software firms and
ICT has also played a significant role in stock market development by technology-oriented small brokerage firms has led to a new market
reducing transaction costs, improving execution speed, and increasing ecology and attracted an aggressive response from incumbent firms.
trade volume in the US market [40,41]. Similarly, Hendershott and To the best of our knowledge there is very little existing research on
3
the role of ICT and digital innovations in the context of VC investment3 adversely affects early-stage VC investment. We conjecture as follows:
apart from the descriptive analysis of Shane and Nicolaou [18]. A review
H2. ICT penetration exerts a significant positive impact on early-stage
of the FinTech VC literature led to the identification of few relevant
VC investment.
articles. Cumming and Schwienbacher [45] showed that FinTech VC
investments are more pronounced in locations with weaker enforcement A second explanation for the expected positive impact of ICT on total
and no major financial center. More recently, Khan et al. [46] found that VC is that it creates a favorable entrepreneurial environment, particu
digitization has a strong positive effect on VC investment and that larly in relation to digital business activities. This explanation borrows
digitization influences the association of innovation and national cul from entrepreneurship theory, which asserts that ICT boosts an entrepre
tures with VC investment. Estrin et al. [47], note that crowdfunding neurial environment. For example, Melissa et al. [49] report a growing
platforms give advice to entrepreneurs through social networks, which trend in social media entrepreneurship, and in particular the engage
is a quicker and cheaper way of communication, and offer possibilities to ment of women entrepreneurs in online businesses. Cumming and Johan
entrepreneurs to test and promote their products and to “turn customers [50] find that the internet fosters entrepreneurial activities by enabling
into investors”. However, they also suggest that these are still not a agglomeration in densely populated urban areas. Moreover, Huang et al.
substitute for the expertise of the traditional early-stage financiers such [51] find that the presence of advanced digital technologies,
as VCs and angels. investment-based crowdfunding, stock markets, and financial develop
ment in a country offers a vibrant environment for digital entrepre
neurship (in their study, in terms of initial coin offerings).
2.1. Hypotheses
It is also argued that the internet caters to those groups ‘who were
previously excluded from the brick-and-mortar entrepreneurship’ [52];
As discussed above, the literature suggests that ICT exerts a strong
p.2; see also [17]. Some go beyond the concept that digital technologies
effect on financial development, particularly financial inclusion and
merely foster entrepreneurial activity and suggest that such technologies
financial access. This motivates the current study to examine the influ
are expanding the domain of entrepreneurship as a discipline, as they
ence of ICT on VC investments. There are two potential explanations for
increasingly permeate the entrepreneurial processes and outcomes, and
why ICT might positively influence VC investment. One argument is the
that this calls for adjustments to existing theories [53]. There is also
process-facilitation or efficiency-enhancing perspective that borrows
evidence that digitization influences economic processes and structures,
from agency theory. Financial systems – and for that matter VC, given
as it enhances technology-powered productivity, employment, income,
that it is an information-problematic industry – are information systems
and trade [54]. Thus, ICT-based business activity, or in other words the
[12]. ICT is expected to facilitate information flow, enhance processing
digital economy,4 is expected to have a positive effect on VC investments
speed, and reduce transaction and agency costs in VC deals. Digital
if the entrepreneurship logic prevails. Hence, we hypothesize as follows:
technology reduces the time and resources needed to perform an action,
increases the availability of a resource, and replaces one resource with H3. The digital economy exerts a significant positive impact on total
another [48]. Thus, it is expected to have a positive influence on VC VC investment.
processes by greatly reducing the risk of adverse selection while
Like ICT penetration, digital economic activities such as FinTechs
selecting deals, reducing time and costs while processing VC operations,
and digital entrepreneurship are also expected to have a positive effect
and mitigating the chance of moral hazard while monitoring portfolio
on early-stage VC. One reason is that FinTechs (such as equity crowd
firms. The first hypothesis is therefore:
funding) may address only small specific market niches and so not
H1. ICT penetration exerts a significant positive impact on total VC represent a genuine alternative to VC investments [30]. Estrin et al. [47]
investment show that VC crowdfunding platforms offer additionality to the previous
sources of entrepreneurial finance and do not pose a threat to the
There is also evidence that completely new institutional patterns and
existing channels such as VCs and angels. Moreover, FinTechs them
innovative practices are emerging while old established practices are
selves may be backed by early-stage VC. For instance, Haddad and
disappearing [24,25]. Shane and Nicolaou [18] show that newer plat
Hornuf [55] find that FinTechs develop in environments where VC is
forms, such as angel groups, business accelerators, micro-VC funds, and
readily available, pointing to a complementarity between FinTechs and
online platforms, have led to a reduction in early-stage VC investment in
the early-stage VC rather than competition. Though frictions exist be
the US. Some even talk about the death of the classic venture capital –
tween VC funding and crowdfunding [56] as VCs are less likely to be
“the provision of (relatively small) investment capital to startup and
attracted by a venture that has received funding from large number of
early-stage ventures by VC firms led and managed by executives with
backers, crowdfunding platforms are more likely to provide equity in
significant entrepreneurial experience” [20]; p.3). Bonini and Capizzi
vestment in a start-up if it has already attracted traditional VC invest
[19] share similar concerns about the future of VC. Generalizing this to
ment [57]. There is complementarity between VC financing and new
the VC industry, as a whole, one might think that ICT may have had a
technological ecosystems, particularly the new products offered over the
negative effect on early-stage VC investment in Europe as in the US.
cloud computing, and that the complementarity strengthens with
However, an increase in the number and types of financing channels for
experience of VC fund managers in the IT industry [58]. Additionally,
start-ups and early-stage firms does not necessarily mean a reduction in
the availability of VC fosters yet more FinTech entrepreneurship in en
early-stage VC. Bonini and Capizzi [19] argue that VC may withstand
vironments with already high levels of FinTech entrepreneurship [59].
the digital disruptions because of the irreplaceable human skills
Moreover, if digital economic activity fosters demand for VC, as pro
involved in early-stage VC. We argue that if ICT enhances the efficiency
posed in Hypothesis 2, then it is appropriate to hypothesize as follows:
of VC through reductions in the time and cost of information processing,
as assumed in Hypothesis 1, then there is no reason to believe that ICT H4. The digital economy exerts a significant positive impact on early-
stage VC investment.
3
We further argue that the effect of the digital economy might be
“A venture capital investment typically involves a commitment for four to
dependent upon access to bank credit. While bank credit might be a
eight years with little or no liquidity along the way and with the probability
substitute for VC, it can also complement it. The reason for
that additional funds will be required from time to time before success can be
assured. Because of the very long-term nature of the investment, the venture
investor often will be actively involved in providing advice and counsel to the
4
management of the enterprise, either informally or through participation on the ICT penetration is a measure of ICT use, and digital economy is ICT-driven
company’s board of directors” [96]; p.108). economic activity, as detailed in section 3.
4
complementarity is that bank credit supports the entrepreneurial envi OECD VC data has been analyzed as a robustness check. ICT variables
ronment and the digital economy – particularly ICT-driven enterprises, have been divided into two categories: ICT penetration and the digital
employment in ICT sector, or the overall ICT sector – and so facilitates economy.6 ICT penetration represents overall ICT usage, including in
deal flow to the VC market. Small credit facilities can have a substantial dividuals using the internet, the number of fixed broadband sub
effect on individual ICT-based SMEs. In contrast, digital economy may scriptions, and the use of computers with an internet connection in the
not attract VC when bank credit is readily available due to the substi workplace. The digital economy represents ICT-driven economic activity,
tution effect. Any expansion in digital economy due to bank financing which includes both FinTech and non-FinTech factors. The FinTech
may be financed through further bank credit. We take the latter position factors consist of number of equity crowdfunding rounds and the
and hypothesize that: amount of equity crowdfunding raised. Non-FinTech factors include
ICT-based enterprises, employment in the ICT-based SMEs, and the ICT
H5. Bank credit negatively impacts the association between digital
sector. Data on the dependent and independent variables of the paper
economy and total VC investment.
have been gathered from various sources (see Appendix 1 for data
The five hypothesized relationships are presented in a conceptual description and sources).
model in Fig. 2. ICT penetration influences VC investment through Table 1 presents summary statistics. The maximum number of ob
agency mechanisms, whereas the digital economy affects VC investment servations is 299. The average of total VC investments (as % GDP) is
through the creation of entrepreneurship activities. The model proposes 0.03. The average number of internet users per 100 population is 74.4.
that ICT penetration, the digital economy, and financial development This suggests the use of the internet was very common in our period of
exert significant positive effects on VC investment. Additionally, a analysis, but the range is wide, from 6.55 to 98.14. There is also a large
financial development also influences the association between digital variation in equity crowdfunding rounds, which has a minimum value of
economy and VC investment. 1 and a maximum value of 864.
Table 2 presents the correlation matrix of our main variables.
2.2. Control variables Financial market depth, internet use, bank credit, and government pri
vate equity are highly correlated with VC investment. Wooldridge [80]
Several papers report the effect of factors other than ICT on VC. They suggests that multi-collinearity might be problematic in case of the high
show that financial sector reforms [5], the presence of active stock correlation between variable of interest and any other variable. To avoid
markets and initial public offerings (IPOs) [60–65], entrepreneurial potential multicollinearity, appropriate balance has been maintained
activity [66], high-tech investments [67], investment opportunities among variables for inclusion in the single regression model.
[68], and research and innovation activities [69,71–73] have a strong Before deciding on the model, it is pertinent to discuss whether VC
association with VC investments. Studies also show that GDP growth investment is a dynamic process or a static one. Most earlier studies
rate [62], business cycles [74], and economic growth strategies [5] implicitly deem the phenomenon to be static, as they used static models,
affect the risk preferences and investment strategies of VCs. Moreover, though some did use dynamic models [81]. However, studies suggest
industrial production [74], labor market rigidities [61], and foreign that VC process at time t is a function of past behavior, and that the
direct investment (FDI) inflows [65] are also positively associated with causal process has memory, as VC investments have delayed effects
VC. [82]. Keele and Kelly [83] state that if a process has memory and the
Governments can also play a vital role in institutionalization of VC past matters to the present, then lagged dependent variable (LDV)
[75]. However, there is debate about how a government should inter models should be used. Black and Gilson [60,84] and Aizenman and
vene to support VC. Some argue that direct support – e.g. subsidies, tax Kendall [81] argue that there is path dependency and persistence in VC
incentives, launching programs, and particularly government direct flows. Manigart [70] shows that every new entry to a VC market further
participation in economic activity, as a competitor to VC – is useful if eases new founding through legitimacy, expertise, and networking.
managed well [76–78]. Others argue that direct government interven Studies suggest that fund managers get more funding when they settle
tion crowds out private VC activity [67]. The control variables included previous funding successfully [86]. Unlike the securities market, VC
in this study are therefore: GDP growth, bank credit, FDI outflows, un
employment, density of new business, government ownership of private
6
equity, ease of doing business (measured through time to register a Several measures of ICT are employed by scholars and databases. For
business), financial market depth, trend, and market crash. Following Li example, Kauffman and Kumar [97] examined different studies using ICT
and Zahra [79] and Khan et al. [46]; this study controls the regression measures. They list a variety of dimensions of ICT: (i) economic, society and
knowledge dimensions; (ii) ICT readiness, ICT intensity, and ICT impacts; (iii)
models for market crash, as well as trend variables. The market crash
discrete measures, economic measures, technology adoption and diffusion
variable captures the fluctuation caused by the 2008 market crash. It is a
measures, single-item index measures of ICTs, and digital divide measures.
dummy variable which takes the value of 1 for the years 2007, 2008 and Dimensions discussed in their work that are of interest to us are discrete
2009, and 0 for the years 2010–2019. The inclusion of the trend variable measures, economic measures, and technology adoption/diffusion measures.
tackles the issue of spurious correlation and captures the impact of The discrete factors as well as the technology adoption and diffusion measures
omitted variables that vary over time [79]. include variables such as numbers of users of the internet, computers and
mobile phones, quality of connections, number of internet hosts and so forth.
3. Research design The economic measures of ICT are productivity, growth, trade, and employ
ment. The present study uses the term “ICT penetration” for the discrete mea
The present study uses VC investment (total, early-stage and later- sures as well as the technology adoption and diffusion measures. The study
employs the term “digital economy” for the ICT-based economic activities. This
stage) as a percentage of GDP as a dependent variable using a sample
categorization is orthogonal to the one used by Huang et al.,. (2020). They used
of 23 European countries5 over the period 2007–2019. Total VC includes
a composite index of ICT market development which consists of three
early-stage and later-stage capital. Throughout this paper, VC data has sub-categories: ICT capability (skills and knowledge), ICT infrastructure, and
been sourced from Invest Europe except in Column 3 of Table 3, where ICT intensity. In our paper, the ICT penetration covers the latter two, but
particularly ICT intensity. To be precise, the internet users, broadband sub
scriptions, and computers are represented by ICT penetration in this study. The
5
The countries include Austria, Belgium, Bulgaria, Czech Republic, Denmark, digital economy represents ICT-backed economic and business activities. They
Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, include ICT-based enterprises, employment in ICT-based SMEs, and total ICT
Netherlands, Norway, Poland, Portugal, Romania, Spain, Sweden, Switzerland, sector. We also use the term ‘digital entrepreneurship’ which represents
UK and Ukraine. ICT-based enterprises/SMEs.
5
Fig. 2. Conceptual model.
investment is not a volatile market, as these investments are looked after

Table 1
for years and their effects have a longer duration.
Summary statistics.
Thus, dynamic panel data model is estimated to test hypothesis 1 to 4
Variable Obs. Mean Standard Min. Max. as follows:
Deviation.
VCi,t = β0 + β1 VCi,t− 1 + β2 ICTi,t + δZi,t + εi,t
Dependent Variable
Total VC investments 299 0.03 0.02 0.00 0.11
Independent Variables Where VCi,t is the VC investment in country i at year t, VCi,t− 1 is the lag of
ICT Penetration VC investment. ICTi,t represents the ICT variables used in this study, such
Internet use 292 74.44 17.75 6.55 98.14 as internet use, broadband, and so forth. Zi,t represents all other control
Fixed broadband 297 28.81 9.42 1.72 46.32
Usage of computers 181 50.72 11.32 32.75 100.00
variables in country i at time t, and εi,t = ni + vi,t represents the com
Digital Economy: FinTech posite error term which consist of fixed effects ni and idiosyncratic
Equity crowdfunding 105 54.44 152.83 1.00 864.00 shocks vi,t . β1 is the autoregression coefficient. β2 is the coefficient of ICT
rounds and δ measures the elasticity of control variables. In addition, we employ
Equity crowdfunds 105 10.65 21.42 0.00 112.99
the market crash variable to capture the fluctuation caused by the 2008
raised
Digital Economy: Non-FinTech crisis. The inclusion of trend variable tackles the issue of spurious cor
Employment in ICT 149 2.73 0.72 1.32 4.75 relation and captures the impact of omitted variables that vary over time
sector [79]. To test hypothesis 5, the following econometric model is
Employment in ICT- 215 4.28 1.31 1.89 7.35 considered:
based SMEs
ICT-based enterprises 237 4.92 2.06 1.44 10.47 VCi,t = β0 + β1 VCi,t− 1 + β2 DEi,t + β3 Bankcrediti,t
ICT-based SMEs 229 1.51 0.46 0.36 2.35
ICT Sector 130 4.03 1.07 1.91 6.66 + β4 (DEi,t × β4 Bankcrediti,t ) + δZi,t + εi,t
Control Variables
GDP growth 299 1.50 3.31 − 14.76 25.16 where model incorporates the interaction term (digital economy × bank
FDI net outflows 298 6.18 14.88 − 43.54 140.10
credit) where DEi,t represents digital economy and Bankcrediti,t sym
Bank credit 296 95.44 41.79 22.83 201.26
Unemployment 299 8.00 4.50 2.01 27.47 bolize bank credit.
Number of employers 299 4.09 1.54 0.88 8.34 The Pagan/Cook-Weisberg, White/Koenker test, and modified Wald
New business density 267 4.78 3.52 0.47 17.55 test confirm there is groupwise heteroscedasticity in the data. The
Government PE 299 10.67 16.00 0.00 136.49 Wooldridge test for autocorrelation suggests that there is a first-order
Financial markets depth 276 0.59 0.30 0.03 0.99
Trend 299 7.00 3.75 1.00 13.00
autocorrelation. Moreover, there is an expectation of partial endoge
Market Crash 299 0.23 0.42 0.00 1.00 neity (i.e., reverse causality) in GDP growth and FDI outflows, given that
VC investment may lead to more economic growth in a country. This
Table 2
Matrix of correlations.
Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)
(1) Total VC investments 1.000

(2) GDP growth 0.239 1.000
(3) FDI net outflows 0.034 0.036 1.000
(4) Bank credit 0.469 − 0.149 0.177 1.000
(5) Unemployment − 0.212 − 0.193 − 0.015 0.102 1.000
(6) Internet use 0.507 0.230 0.104 0.351 − 0.252 1.000
(7) Number of employers 0.259 0.027 0.024 0.364 0.327 0.242 1.000
(8) New business density 0.282 0.186 0.123 0.232 − 0.200 0.314 − 0.177 1.000
(9) Government private equity 0.499 − 0.011 − 0.041 0.374 0.102 0.281 0.248 0.095 1.000
(10) Financial markets depth 0.647 0.026 0.211 0.775 − 0.026 0.565 0.375 0.267 0.553 1.000
(11) Trend 0.101 0.193 − 0.196 − 0.172 − 0.066 0.384 − 0.085 0.132 0.091 − 0.029 1.000
(12) Market crash 0.051 − 0.217 0.138 0.087 − 0.137 − 0.334 0.058 − 0.077 − 0.051 0.029 − 0.732
Note: This table displays the coefficients of Pearson correlation of all variables of the study. The definitions of the study variables and the data sources for variables are
reported in Appendix 1.
6
Table 3
Impact of ICT penetration (internet use) on the stages of VC investment and private equity investment: Two-step system GMM estimates.
Variables Dependent Variable
Total VC Total VC Total VC Private equity Early-Stage Later-Stage

(OECD) (PE) VC VC
(1) (2) (3) (4) (5) (6)
Dependent Variable t-1 0.469*** 0.495*** 0.474*** 0.412*** 0.495*** 0.452***

(0.097) (0.134) (0.121) (0.114) (0.118) (0.098)
GDP growth 0.891** 0.854* 0.854** 0.897** 0.915 − 0.133
(0.353) (0.437) (0.375) (0.405) (0.558) (0.661)
FDI outflows − 0.377* − 0.530 − 0.279 − 0.135 − 0.532** − 0.832
(0.202) (0.367) (0.183) (0.290) (0.237) (0.806)
Bank credit 0.615*** 0.637** 0.534** 0.440** 0.644** 0.357
(0.213) (0.255) (0.243) (0.174) (0.306) (0.388)
Internet use 1.079*** 0.961*** 0.996*** 1.017*** 0.934** 1.439**
(0.264) (0.334) (0.286) (0.274) (0.430) (0.636)
Unemployment − 0.061 − 0.081 − 0.064 − 0.157 − 0.085 0.146
(0.147) (0.193) (0.159) (0.217) (0.167) (0.144)
Constant − 10.553*** − 9.280*** − 9.927*** − 9.039*** − 8.424*** − 6.094*
(1.650) (2.871) (1.897) (2.864) (2.232) (3.522)
#Observations 232 232 226 236 221 208
#Countries 23 23 22 23 23 23
Year Dummies No No No No No No
F test 48.566 52.479 33.609 31.991 35.307 16.053
#Instruments 22.000 22.000 22.000 22.000 22.000 22.000
AR (1) p-value 0.058 0.058 0.091 0.010 0.023 0.037
AR (2) p-value 0.396 0.409 0.379 0.421 0.387 0.347
Hansen p-value 0.202 0.145 0.240 0.242 0.181 0.304
Notes: This table shows the results of regressing ICT penetration and the control variables on total VC, total PE investment, early-stage VC, and later-stage VC. All the
estimates are based on Invest Europe data except for the estimates in Column 3, which are based on OECD data. The dependent variable is different for each column and
consists of total VC (Invest Europe) in Columns 1 & 2, total VC (OECD) in Column 3, total private equity investment in Column 4, early-stage VC in Column 5, and later-
stage VC in Column 6. Lagged dependent variable, FDI outflows and GDP growth have been treated as endogenous regressors except in Column 2, where internet use
has also been treated as endogenous regressor. The excluded instruments in all the models are hi-technology exports, patents, and gross capital formation. *, **, and ***
indicate the significance levels of standard errors at 10%, 5%, and 1%, respectively.
view is corroborated by the findings of Ning et al. [74] and Khan et al. declined continuously after the last market crash. One the other hand,
[46]. Moreover, VC investment may also lead to a reduction in FDI early-stage VC was less vulnerable to the market shocks and experienced
outflows because VC boosts entrepreneurial opportunities and creates vigorous growth in terms of investment and number of investments. The
an appetite for further local investment, which eventually leads to more plot of early-stage VC investment crosses that for later-stage VC in
FDI inflows and a reduction in FDI outflows. Unless otherwise vestment in terms of both investment and number of investments.
mentioned in the notes to the tables, GDP growth and FDI outflows are Concerning investment size,7 the 2008 crisis led to a sharp decline in the
listed in internal instruments throughout this study, while all other average size of early-stage VC as well as later-stage VC, but both jumped
variables (including control variables) are listed in external instruments. back up thereafter.
We also treat equity crowdfunding, new business density, and govern The trend in the equity crowdfunding market is presented in Fig. 3
ment private equity as endogenous regressors. (d) and demonstrates a tremendous increase in both number of crowd
In the presence of heteroscedasticity, autocorrelation, and endoge funding rounds and amount of crowdfunds raised. Equity crowdfunding
neity, the generalized method of moments (GMM) is one of the best emerged after the 2008 financial crisis. Shane and Nicolaou [18] show
estimators [87]. The current study uses LDV models; while these cause that, in the US, early-stage VC investment decreases when FinTechs are
dynamic panel bias [88], they also reduce autocorrelation [89]. GMM is increasing. Conversely, we show that European early-stage VC invest
able to reduce the dynamic panel bias [90]. We employ a two-step ment increased at greater pace than later-stage VC investment when
system GMM estimation technique. A two-step procedure in the GMM equity crowdfunding was becoming an established practice in the Fin
framework improves the efficiency and power of statistical tests Tech market.
compared with a one-step procedure because it has less asymptotic
variance [91].
4.2. Regression results
4. Results
Table 3 documents the impact of internet use on early-stage, later-
4.1. Trend analysis
7
In this section, we show that early-stage VC is performing well Average investment size of total VC investment = Total VC investment in US
compared with later-stage VC. Fig. 3(a) depicts the amount of VC in dollars divided by number of total VC investments in a given year. The same
formula applies to size of early-stage VC and later-stage VC.
vestment (in US dollars) during 1989–2018, whereas Fig. 3 (b) and (c)
display the number of VC investments and the average size of VC in
vestment, respectively, during 1997–2018 in Europe. This is based on
Eurostat data of VC investment by country of the VC firm. The amount of
early-stage VC experienced recovery and growth particularly after 2015,
unlike the later-stage VC, which received huge shocks during the dot-
com bubble and the 2008 financial crisis and showed no signs of re
covery thereafter. The number of later-stage VC investments also
7
Fig. 3. VC Investments in Europe over the period 1989–2018.

Data Source: Data for VC investment has been taken from Invest Europe and data of equity crowdfunding has been obtained from Crunchbase.
stage and total VC investment and private equity investment.8 Column 1 significance level. To test hypothesis 2, we add early-stage VC as a
reports the results of total VC investment as a dependent variable. A one dependent variable in Column 5. The result shows that ICT penetration
percentage point increase in internet use boosts total VC investment by wields a positive effect on early-stage VC investment at the 5% level of
1.079% points at the 1% significance level. This result supports hy significance, supporting the hypothesis. Economically, ICT penetration
pothesis 1, that ICT penetration exerts a significant positive effect on demonstrates almost the same effect on early-stage VC as on total VC.
total VC investment. We add internet use as an endogenous regressor in For comparison, we also add later-stage VC as a dependent variable in
Column 2, keeping in view the possibility of reverse causality, as dis Column 6, which is also significant at the conventional level of 5%,
cussed by Ref. [92]. However, the coefficients do not change signifi though its impact is economically larger.
cantly, indicating that endogeneity is not a problem, hence we will treat To further test hypothesis 1, we examine other proxies of ICT
internet use as an exogenous regressor in the rest of the models. For penetration in Panel A of Table 4. The results in Columns 2 and 3 of
robustness, we also consider VC data from the OECD in Column 3, but Table 4 (Panel A) reveal that the coefficients on the variables broadband
the coefficient of internet use follows a similar pattern to that in the subscriptions and usage of computers in the workplace are positive and
earlier columns. Total private equity (PE) investment (see Appendix 1 statistically significant at the 1% level in explaining total VC investment.
for definition) has been added in Column 4 to further check the The coefficient estimates imply that a 1% point increase in employees
robustness of results. One percentage point increase in internet use using computers with an internet connection at work leads to an in
causes private equity investment to surge by 1.017% points, at the 1% crease of 1.53% points in total VC investment. Similarly, a 1% point
increase in broadband subscriptions results in a 0.76% point increase in
total VC investment. The results in Columns 1 to 3 of Table 4 (Panel A)
8
Throughout in present paper, Windmeijer (2005) finite sample corrected therefore further support hypothesis 1.
standard errors have been reported in parentheses in the two-step GMM esti To test hypothesis 3, the results reported in Columns 4 and 5 of
mation results. In all the GMM models, the instrument matrix has been Table 4 (Panel A) show the direct effect of FinTechs (proxied by number
collapsed with two to five lags to avoid instrument proliferation. The Hansen J and amount of equity crowdfunding rounds) on total VC investment. We
-test for the presence of over-identification and endogeneity of instruments suspect equity crowdfunding is endogenously related to VC investment
reports the p-values for the null hypothesis that instruments are valid. The as there might be a measurement error or reverse causality (i.e., avail
Hansen tests are non-significant, showing the validity of the instruments in all
ability of VC investment might boost equity crowdfunding and vice
the GMM systems. The Arellano Bond test for AR (1) and AR (2) report first- and
versa). Bank credit has been removed from these two models to avoid
second-order serially correlated disturbances in the first-differenced equation.
The AR (1) p-value shows the existence of first-order serial correlation while the potential multi-collinearity with crowdfunding as FinTechs and bank
AR (2) rejects the null hypothesis of no second-order correlation in the errors. credit seem to have a substitution relationship with each other. The
8
Table 4
Panel A: Impact of ICT penetration and digital economy on amount of total VC investment: Two-step system GMM estimates. Panel B. Impact of ICT penetration and
digital economy variables on amount of total VC investment: Two-step system GMM estimates.
Panel A
Variables (1) (2) (3) (4) (5)
VC investment t-1 0.469*** 0.489*** 0.476*** 0.681*** 0.770***

(0.097) (0.115) (0.112) (0.093) (0.070)
GDP growth 0.891** 0.825** 1.055** 0.215 0.173
(0.353) (0.382) (0.399) (0.356) (0.356)
FDI outflows − 0.377* − 0.392* − 0.251 0.787 1.070
(0.202) (0.210) (0.188) (0.536) (0.834)
Bank credit 0.615*** 0.505** 0.250 – –
(0.213) (0.190) (0.195) – –
Unemployment − 0.061 − 0.070 0.134 − 0.110 − 0.059
(0.147) (0.169) (0.114) (0.167) (0.181)
ICT Penetration
Internet use 1.079*** – – – –
(0.264) – – – –
Fixed broadband – 0.764*** – – –
– (0.185) – – –
Usage of computers at work – – 1.526*** – –
– – (0.235) – –
Digital Economy: FinTechs
Equity crowdfunding rounds – – – 0.217** –
– – – (0.079) –
Equity crowdfunding amount – – – – 0.060**
– – – – (0.023)
Constant − 10.553*** − 7.610*** − 11.435*** − 4.427** − 5.263*
(1.650) (1.846) (1.772) (2.115) (2.981)
Observations 232 234 149 96 96
#Countries 23 23 20 20 20
Year dummies No No No No No
F test 48.566 34.630 70.624 22.087 56.290
#Instruments 22.000 22.000 22.000 21.000 21.000
AR (1) p-value 0.058 0.047 0.031 0.118 0.115
AR (2) p-value 0.396 0.339 0.300 0.805 0.294
Hansen p-value 0.202 0.203 0.565 0.406 0.593
Panel B
Variables (6) (7) (8) (9) (10)
VC investment t-1 0.451*** 0.270* 0.458*** 0.486*** 0.347***

(0.101) (0.131) (0.124) (0.114) (0.118)
GDP growth 0.965* 1.781*** 1.036** 1.009** 1.650***
(0.502) (0.498) (0.387) (0.381) (0.464)
FDI outflows − 0.101 − 0.202* − 0.571 − 0.762 − 0.474
(0.585) (0.113) (0.911) (1.202) (0.569)
Bank credit 0.541** 0.631* 0.687** 0.641** 0.819***
(0.210) (0.330) (0.266) (0.288) (0.269)
Unemployment 0.029 − 0.039 − 0.028 − 0.028 − 0.138
(0.233) (0.194) (0.201) (0.228) (0.119)
Digital Economy: Other – – – –
Employment in ICT-based SMEs 0.919*** – – – –
(0.286) – – – –
Employment in ICT sector – 1.688*** – – –
– (0.475) – – –
ICT-based enterprises – – 0.443*** – –
– – (0.155) – –
ICT-based SMEs – – – 0.428** –
– – – (0.165) –
ICT sector – – – – 1.099***
– – – – (0.299)
Constant − 8.342** − 11.585*** − 6.589 − 5.412 − 10.299***
(3.042) (2.634) (4.080) (4.588) (3.257)
Observations 187 144 205 198 126
#Countries 21 18 22 22 18
Year dummies No No No No No
F test 14.791 14.576 14.018 12.944 24.711
#Instruments 22.000 16.000 22.000 22.000 16.000
AR (1) p-value 0.107 0.153 0.097 0.096 0.188
AR (2) p-value 0.309 0.235 0.335 0.312 0.273
Hansen p-value 0.275 0.541 0.288 0.214 0.649
Notes: Panels A and B of Table 4 show the results of regressing different ICT proxies and control variables on the amount of total VC investment over the period
2007–2019 using the two-step system GMM approach. The dependent variable in Panel A and B is total VC investment. GDP growth and FDI outflows have been treated
as endogenous regressors and all the other regressors have been considered as exogenous in Columns 1 to 3 and Columns 6 to 11. In these columns, patents, gross
capital formation, and hi-technology exports have been added to the list of excluded instruments. In Columns 4 and 5 respectively, the crowdfunding rounds and
crowdfunds amount raised have also been treated as endogenous regressors. To deal with the small sample size in Columns 4 and 5, patents have been removed from
9
excluded instruments because their inclusion reduced the number of observations further, from 96 to 84. To deal with endogeneity of crowdfunding, number of
employers has been added to the list of excluded instruments. *, **, and *** indicate the significance levels at 10%, 5%, and 1%, respectively.
results show that equity crowdfunding has a positive influence on total market depth in Column 5, and it displays a significant positive impact,
VC investment at the 5% level of significance. supporting previous research [60–65]. It eclipses the impact of bank
Other aspects of the digital economy have also been examined for credit, while the impact of internet use is still significant. The results of
their potential impact on total VC investment. In Column 6 of Table 4 additional control variables supporting previous literature reinforce our
(Panel B), the coefficient of employment in the ICT-based SMEs (OECD confidence in the present results.
data) is 0.92 and statistically significant at the 1% level in determining Finally, government ownership of private equity (PE) is added to
total VC, as expected. This estimate implies that a 1 unit increase in Columns 6 and 7 of Table 6. Government PE10 has been treated as an
employment in ICT-based SMEs raises the VC investment level by 0.92% endogenous variable due to its endogenous relationship with captive
points. For robustness, a largely similar indicator of digital economy and independent VC. We introduce government PE investment in this
from Eurostat ICT data, i.e., employment in the ICT sector, is shown in study – instead of government VC investment – because Invest Europe
Column 7 of Table 4 (Panel B) and the result shows an even larger only reports categorizations of government, independent, and captive
economic impact on VC investment. PE investments. To tackle the potential measurement error and reverse
In Column 8, the coefficient on ICT-based enterprises is positive and causality, government PE has been instrumented with unemployment
statistically significant at 1% level in explaining total VC investment. For because government spending in the private sector is usually motivated
robustness, we also examine the impact of ICT-based SMEs. As expected, by job creation. As can be seen in Columns 6 and 7, the positive asso
the variable ICT-based SMEs also exhibits statistically and economically ciation between government PE and VC investment indicates that gov
similar results to ICT-based enterprises. Finally, the influence of the ernment VC does not crowd out private VC investment, supporting the
variable ICT sector is reported in Column 10 of Panel B, and it also has results of Cumming [94].
large and statistically significant influence at the 1% level. A 1% point
increase in the ICT sector leads to an increase of one percentage point in
total VC investment. The significant positive impact of the digital 4.4. Interaction analysis
economy variables in Columns 4 to 10 in Table 4 (Panel A and B) sup
ports hypothesis 3. In Table 7, we allow bank credit to interact with digital economy
To test hypothesis 4, the association between the digital economy variables. The results in Column 1 show that the interaction between
and early-stage VC investment is examined in Table 5. For brevity, we bank credit and the digital economy index is statistically significant at
introduce a composite index of the digital economy rather than using all the 1% level in determining VC investment. The coefficient of digital
the components for early as well as later-stage VC investment. The economy is 8.013, indicating that it has a positive effect on VC invest
composite index is the average of ICT-based enterprises, ICT-based ment, whereas the negative coefficient of the interaction term between
employment, and the ICT sector to GDP. Columns 1, 2, and 3 of bank credit and digital economy (i.e., bank credit × digital economy)
Table 5 report the results with early-stage, later-stage, and total VC in equals − 1.604, implying that bank credit adversely affects the positive
vestment as the dependent variable, respectively. The influence of dig association between digital economy and VC investment. The positive
ital economy on early-stage and total VC investment is positive and effect of digital economy on VC investment disappears when bank credit
significant at the 1% level, whereas the effect on later-stage VC invest reaches a threshold level of 5 (more precisely, 8.013/1.604 = 4.996).
ment is trivial. Columns 4, 5, and 6 report the same results with the This implies that the state of the digital economy matters to VC investors
digital economy treated as an endogenous regressor on the ground of more when bank credit is less readily available, which points to a sub
reverse causality. The pattern remains unchanged. This confirms hy stitution effect between bank credit and VC. On the other hand, any
pothesis 4, which asserts that there is a strong and positive association improvement in the digital economy does not attract further VC when
between early-stage VC investment and the digital economy. bank credit is widely available. As a robustness test, we replace bank
credit with the IMF world financial development index in Column 2, and
the results remain similar. Further, we add individual components of the
4.3. Additional controls and robustness tests
digital economy i.e., ICT-based enterprises, employment in ICT-based
SMEs, and ICT sector in Columns 3 to 5, respectively. The results are
Table 6 reports the results of different adjustments of the control
robust and remain largely the same in all the models.
variables for a check on robustness. Column 1 adds time dummies to the
The interaction relationships are plotted in Fig. 4 (a) to (e). The red
baseline regression model.9 After taking time fixed effects into account,
line depicts the highest level of digital economy and the blue line shows
the effect of internet use is enhanced both statistically and economically
the lowest level. The right-hand side of the graphs represents the highest
compared with the baseline regression model. In Column 2, we control
level of availability of bank credit (or financial development), while the
for trend variable and market crash and the positive association between
left side marks the lowest level. In conditions with low levels of bank
internet use and VC investment still holds. Following Li and Zahra [79];
credit, the greater difference between lowest and highest levels of digital
we add new business density to the model, which is treated as endoge
economy indicates that more ICT-backed business activities cause more
nous regressor in Column 3. Those authors used self-employment and
VC investment as plotted on the y axis in Fig. 4. This leads us to accept
number of scientific articles as instruments for new business density. We
hypothesis 5, which conjectured that financial development positively
take number of employers and patents as instruments. The coefficient on
new business density is non-significant and negative, which supports the
findings of Li and Zahra [79]. In Column 4, we control for trend and time 10
Da Rin et al. [67] examine the impact of government VC on innovation
to start a business. Time required to start a business has a negative effect
ratios (early-stage to total VC and hi-tech VC to total VC). Cumming [94]
on VC investment at the 10% level of significance. This finding is questions the method employed by Da Rin et al. [67] and examines the impact
consistent with previous work by Oberli [93]. Next, we add financial of government VC to GDP on early-stage VC to GDP. We follow [94] strategy.
However, due to data restrictions, we analyze the impact of government
ownership of private equity as a percentage of GDP, on the venture capital as a
9
With this inclusion, the number of lags of instruments was reduced from percentage of GDP as well as private equity as a percentage of GDP (see Col
five to two, to avoid instrument proliferation. It is worth mentioning that the umns 6 and 7 of Table 6). We, however, consider the government ownership of
collapse option in xtabond2 routine of Stata 15 has been employed to keep the private equity as endogenous regressor rather than an exogenous regressor as
number of instruments below the number of groups throughout this study. done by Cumming [94].
10
Table 5
Impact of digital economy on stages of VC investment: Two-step system GMM estimates.
Variables Digital economy treated as exogenous variable Digital economy treated as endogenous variable
Early-stage VC Later-stage VC Total VC Early-stage Later-stage Total VC
(1) (2) (3) (4) (5) (6)
Dependent variable t-1 0.514*** 0.473*** 0.413*** 0.544*** 0.364** 0.400***

(0.117) (0.114) (0.111) (0.074) (0.159) (0.132)
GDP growth 0.982** 0.523 0.984** 1.312*** 0.481 1.266*
(0.466) (0.782) (0.403) (0.351) (0.736) (0.720)
FDI outflows − 0.453** − 1.277 − 0.446** − 0.388** − 0.514 − 0.273
(0.173) (0.766) (0.168) (0.138) (1.050) (0.305)
Bank credit 0.655*** 0.738** 0.699*** 0.620*** 0.564 0.552*
(0.227) (0.325) (0.234) (0.165) (0.404) (0.283)
Unemployment − 0.085 0.042 − 0.088 0.050 0.134 0.055
(0.117) (0.236) (0.211) (0.117) (0.463) (0.257)
Digital economy 0.512*** 0.574 0.484*** 0.706*** 1.139 1.127***
(0.144) (0.352) (0.151) (0.191) (0.791) (0.396)
Constant − 5.529** − 2.186 − 7.054*** − 7.004*** − 5.455 − 9.052***
(2.569) (3.808) (2.149) (1.816) (3.885) (2.123)
#Observations 203 193 210 201 191 208
#Countries 22 22 22 22 22 22
Year dummies No No No No No No
F test 27.229 8.736 14.736 42.340 9.921 17.783
#instruments 19.000 22.000 22.000 27.000 27.000 27.000
AR (1) p-value 0.044 0.054 0.100 0.027 0.051 0.089
AR (2) p-value 0.440 0.207 0.318 0.444 0.212 0.309
Hansen p-value 0.285 0.203 0.322 0.857 0.667 0.647
Notes: This table shows the results of regressing the composite index of digital economy and control variables on stages of VC investment over the period 2007–2019.
The dependent variables consist of early-stage VC in Columns 1 & 4, later-stage VC in Columns 2 & 5, and total VC in Columns 3 & 6. In Columns 1 to 3, the lagged
dependent variable, FDI outflows, and GDP growth have been treated as endogenous regressors whereas hi-technology exports, patents, and gross capital formation
have been added to the list of excluded instruments. In Columns 4 to 6, digital economy has also been treated as an endogenous regressor, in addition to GDP growth
and FDI outflows. To tackle the measurement error and reverse causality in the case of the digital economy index, internet use has also been added to the list of
excluded instruments in Columns 4 to 6. The dependent variable is the early-stage VC in Columns 1 and 4, later-stage VC in Columns 2 and 5, and total VC investment in
Columns 3 and 6. *, **, and *** indicate the significance levels of standard errors at 10%, 5%, and 1%, respectively.
affects the association between the digital economy and VC investment. US$ 51 billion in 2017. Overall, the global market has experienced
growth in FinTech from 1556 deals in 2014–2590 deals in 2018. The
5. Discussion new platforms are not in competition with the VC industry. The rise of
new platforms reflects the overall increase in the pie of entrepreneurial
This paper empirically analyzes the effect of ICT on VC investments finance worldwide, rather than new platforms taking a share of the
in 23 European countries over the period 2007–2019. The results early-stage VC market in the existing pie. This supports the findings of
demonstrate that ICT penetration and digital economy are strongly Estrin et al. [47] that entrepreneurs perceive crowdfunding platforms as
associated with early-stage VC and total VC investment. We conclude differentiated as well as additional to the traditional platforms such as
that ICT penetration positively influences VC investment through an VC and angels. The results also support previous findings that newer
efficiency-enhancing mechanism that facilitates VC processes of deal platforms, such as crowdfunding, are more likely to support ventures
origination, deal structuring, and monitoring of portfolio companies, that have already attracted VC, as VCs have the ability to ensure due
which eventually lead to a reduction in the selection of bad deals and an diligence [57]. That is, newer platforms are not threatening traditional
increase in the detection of fraud. Moreover, digital economy or digital VC because of the human skills of VCs, in screening, negotiating, and
entrepreneurship creates a vibrant entrepreneurial environment that monitoring [19,47].
generates deal flow for VC. It is concluded that digitization and VC complement each other and
The assertion of Shane and Nicolaou [18] that early-stage VC in this supports the previous finding that FinTechs develop in environ
vestments face decline due to newer platforms apparently does not hold ments where VC is readily available [55,59]. FinTech VC is where the
in the European context. It is not only that early-stage VC investments newer platforms and the VC industry converge, where VCs invest in
have risen much more than later-stage VC in the era of mobile internet FinTechs, reflecting a win-win situation for both sectors. Unlike tradi
and FinTechs, but also that the early-stage VC investments are less tional large financial institutions, particularly banks, the VC industry
sensitive to business cycles than are later-stage investments. This is the has not been threatened by the digital revolution. The VC industry is
age of Facebook, Twitter, LinkedIn, and WhatsApp. The trend analysis as designed to support new ideas, even if the new ideas (such as equity
well as regression results support our hypotheses that ICT penetration crowdfunding, micro-VC funding) are about changing the way the VC
and digital economy lead to an increase in early-stage VC investments. industry works. We thus argue that the VC industry is financing the
The strong autoregressive coefficient of the early-stage VC also shows digital revolutions and pivoting on those disruptions.
that this stage of VC investment has grown vigorously when FinTechs The results demonstrate a strong negative effect of the interaction
has also been growing very fast. term between bank credit and digital economy, implying that advances
So why is all this happening? It is because the VC industry has in digital economy attract more VC when bank credit is not readily
aligned itself to the disruptive technologies and has invested in digital available. We conclude that VC investments thrive in highly digitized
entrepreneurship [59]. FinTech VC investments have been on the rise economies when overall financial development is weak; however, VC
since 2014. For example, KPMG reported the highest number of FinTech investments make little difference when financial development is strong.
VC investments in 2018 in “The Pulse of FinTech 2019”. It reported 2590 When financial development is weak, there is substantial demand for VC
deals worth US$ 120 billion in 2018, compared with 2318 deals worth to meet the capital requirement of digital enterprises. On the other hand,
11
Table 6
Impact of ICT penetration (internet use) on total VC investment and Private equity investment using additional control variables.
Variables Dependent Variable
Total Venture Capital Investment Private equity investment
(1) (2) (3) (4) (5) (6) (7)
Dependent variablet-1 0.257 0.264** 0.517*** 0.477*** 0.459*** 0.413*** 0.397***

(0.185) (0.107) (0.084) (0.071) (0.075) (0.076) (0.111)
GDP growth 0.698 1.551*** 1.117** 1.467*** 1.187*** 0.871* 1.121**
(0.918) (0.491) (0.415) (0.479) (0.347) (0.424) (0.448)
FDI outflows − 0.651 − 0.247** − 0.656* − 0.271 − 0.388 − 0.528 − 0.308
(0.508) (0.099) (0.321) (0.173) (0.231) (0.340) (0.291)
Bank credit 0.689** 0.706*** 0.624*** 0.597*** 0.204 0.395* 0.240
(0.317) (0.229) (0.160) (0.156) (0.167) (0.216) (0.156)
Internet use 1.943*** 1.818*** 1.261*** 1.014*** 0.793** 1.279*** 1.117**
(0.398) (0.440) (0.247) (0.337) (0.285) (0.396) (0.422)
Trend – 0.026 − 0.014 − 0.021* − 0.016 − 0.026 − 0.032
– (0.027) (0.017) (0.012) (0.013) (0.019) (0.022)
Market crash – 0.627** – – – – –
– (0.265) – – – – –
New business density – – − 0.123 – – – –
– – (0.116) – – – –
Time required to start a business – – – − 0.190* – – –
– – – (0.092) – – –
Financial markets depth – – – – 0.975*** – –
– – – – (0.325) – –
Government PE – – – – – 0.226* 0.183
– – – – – (0.111) (0.193)
Constant − 14.53** − 17.73*** − 10.62*** − 11.65*** − 8.88*** − 10.33*** − 8.94***
(5.257) (2.707) (1.729) (1.951) (1.804) (1.976) (2.569)
Observations 232 232 226 232 232 232 236
#Countries 23 23 23 23 23 23 23
Year dummies Yes No No No No No No
F test 19.624 25.032 35.746 87.952 63.737 49.894 27.173
#instruments 22.000 17.000 24.000 20.000 20.000 24.000 24.000
AR (1) p-value 0.050 0.053 0.068 0.047 0.061 0.054 0.009
AR (2) p-value 0.505 0.354 0.335 0.306 0.340 0.481 0.429
Hansen p-value 0.051 0.349 0.258 0.413 0.172 0.207 0.301
Notes: This table shows the results of regressing internet use and control variables on total VC investment and private equity investment using two-step system GMM
estimation. FDI outflow and GDP growth have been treated as endogenous variables in Columns 1, 2, 4 and 5. In Column 3, we add new business density as an
endogenous regressor, and in Columns 6 and 7, we add government PE as an endogenous regressor in addition to FDI outflows and GDP growth. In addition to the
exogenous regressors, hi-tech exports, patents, and gross capital formation (GCF) have been added to the list of excluded instruments in all the models except Columns
3, 6, and 7. To tackle endogeneity of the variable new business density, the variable ‘number of employers’ has been added to the list of excluded instruments in
addition to patents, hi-tech, and GCF. Similarly, unemployment has been added to the list of excluded instruments for government VC in Columns 6 and 7, in addition
to patents, GCF, and hi-tech exports. *, **, and *** indicate the significance levels at 10%, 5%, and 1%, respectively.
ICT-based enterprises prefer bank credit when it is readily available. and naturally aligned with the newly emerging technological environ
Finally, it is important to note that the influence of new business ment by investing in disruptive technologies [59] and pivoting on the
density on VC investment is negative and non-significant, supporting the market disruptions. Policy makers should provide strong ICT infra
findings of Li and Zahra [79]. Conversely, the impact of digital entre structure, promote ICT skills, stimulate the use of ICT in both the private
preneurship (i.e., ICT-based enterprises/SMEs) is positive (at the 1% and the public sectors, and promote digital entrepreneurship. When
level of significance). This leads us to conclude that it is digital entre financial development is weak, a digital economy generates a substantial
preneurship – and not general entrepreneurship – that attracts VC in demand for VC. On the other hand, digital economy prefers bank credit
vestment in a country. when it is readily available.
In future, there is a need to further examine the FinTech data to
6. Conclusion comprehend a direct relationship between those aspects of the digital
revolution that interact with entrepreneurial financing. ICT and Fin
This is the first in-depth cross-country investigation of VC in the Techs may have an impact on fundraising as well as exit of VC in
context of advances in disruptive technologies. The ICT indices vestments and how these relationships interact with innovation and
employed in this paper are novel and relevant to the demand side as well institutions. Mechanisms identified in this study warrant further scru
as the information systems of the VC market. The study offers theoretical tiny using firm-level and national data including how ICT has improved
mechanisms on how ICT affects VC investments. The key mechanisms the efficiency of VC processes of deal origination, selection, and moni
identified are as follows: (i) ICT penetration infuses efficiency into VC toring. It is also worth examining how digitization influences the de
processes by reducing agency and transaction costs and enhancing the cisions of fund managers to make cross-border investments. Finally, it
speed of VC deals; and (ii) ICT creates demand for VC through digital would be interesting to study how ICT is impacting the inclusion of rural
entrepreneurship. The paper contributes to the debate over comple communities in entrepreneurial finance within an individual country,
mentarity versus substitution between VC and newer digital platforms similar to the work of Cumming and Johan [50] on geographically
[18–20,45,55,58,59]. remote internet communities.
The findings have strong policy implications. While large traditional
financial institutions, particularly banks, are struggling to team up with
the FinTech disruptors, the VC industry is demonstrating that it is agile
12
Table 7
Interaction analysis: Effect of digital economy, bank credit, financial development on total VC investment.
Variables Dependent variable is total VC investment
(1) (2) (3) (4) (5)
VC investment t-1 0.448** 0.340*** 0.471*** 0.450*** 0.320**

(0.191) (0.114) (0.114) (0.135) (0.114)
GDP growth 1.307** 1.119*** 0.892* 0.753 1.808***
(0.517) (0.374) (0.490) (0.633) (0.543)
FDI outflows − 0.546*** − 0.419** − 0.077 − 0.230 − 0.538
(0.162) (0.192) (0.730) (0.594) (0.864)
Unemployment − 0.090 − 0.085 0.020 − 0.010 − 0.198
(0.189) (0.147) (0.167) (0.233) (0.164)
Bank credit 2.865*** – 2.121*** 2.951*** 3.342***
(0.790) – (0.698) (0.973) (0.851)
Digital economy 8.013*** 2.714** – – –
(2.327) (1.031) – – –
Bank credit × Digital economy − 1.604*** – – – –
(0.485) – – – –
Financial development index – 6.572*** – – –
– (2.059) – – –
Financial development index × Digital economy – − 3.057** – – –
– (1.415) – – –
ICT-based enterprises – – 5.115*** – –
– – (1.651) – –
Bank credit × ICT-based enterprises – – − 0.976** – –
– – (0.347) – –
Employment in ICT-based SMEs – – – 9.250*** –
– – – (3.171) –
Bank credit × Employment in ICT-based SMEs – – – − 1.756** –
– – – (0.640) –
ICT sector to GDP – – – – 9.120***
– – – – (2.370)
Bank credit × ICT sector to GDP – – – – − 1.766***
– – – – (0.522)
Constant − 17.539*** − 9.343*** − 15.052*** − 18.606*** − 21.931***
(5.330) (2.754) (3.625) (5.647) (6.023)
#Observations 208 209 205 187 126
#Countries 22 22 22 21 18
Year Dummies No No No No No
F test 40.134 64.028 29.807 92.734 84.790
#instruments 21.000 21.000 20.000 20.000 17.000
AR (1) p-value 0.098 0.092 0.093 0.111 0.185
AR (2)-value 0.298 0.302 0.341 0.319 0.273
Hansen p-value 0.295 0.255 0.192 0.108 0.577
Notes: Patents and GDP growth have been treated as endogenous regressors while patents, gross capital formation and hi-technology exports have been treated as
excluded instruments. *, **, and *** indicate the significance levels at 10%, 5%, and 1%, respectively.
Author statement
All authors have contributed equally.
Appendix 1. Data Sources and Descriptions
Variable Description Data Source
VC investment Early-stage VC* investment The sum of seed capital and start-up capital. Seed capital is the “Funding provided before the investee Invest Europe
company has started mass production/distribution with the aim to complete research, product
definition or product design, also including market tests and creating prototypes. This funding will not
be used to start mass production/distribution.“. Start-up capital is the “Funding provided to companies,
once the product or service is fully developed, to start mass production/distribution and to cover initial
marketing”. The amount has been adjusted to total GDP in percentage terms.
Later-stage VC investment “Financing provided for an operating company, which may or may not be profitable. Later-stage Invest Europe
venture tends to be financing into companies already backed by VCs. Typically, in C or D rounds.”
Later-stage investment has been scaled to total GDP in percentage terms.
Total VC investment Both early-stage (i.e., seed and start-up) and later-stage VC. Total VC has been scaled to total GDP. Invest Europe
Private equity (PE) PE investment The sum of all stages of privately held equity investments, which includes start-up, later-stage venture, Invest Europe
investment growth capital, rescue/turnaround, replacement capital, buyout. PE investment has been adjusted to
total GDP in percentage terms.
Government PE investment** Investments made by government VC funds scaled to GDP. Invest Europe
Financial Financial development index A composite index measuring the overall financial system of a country, which covers access, depth and IMF
development efficiency of financial markets and financial institutions.
Financial market depth Stock market capitalization to GDP, stocks traded to GDP, international debt securities of government IMF
to GDP, BIS debt securities database, total debt securities of financial corporations to GDP, dealogic
(continued on next page)
13
Fig. 4. Graphical representation of the interaction analysis.
(continued )
corporate debt database, total debt securities of nonfinancial corporations to GDP, and dealogic
corporate debt database.
Bank credit Domestic bank credit provided to private sector as % of GDP is the financial resources provided to the World Bank
private sector by financial corporations.
ICT penetration Internet use Number of individuals who have used the internet in the last 3 months per 100 population. World Bank
Fixed broadband subscriptions Number of fixed subscriptions (per 100 people) to high-speed access to the public internet at World Bank
downstream speeds equal to, or greater than, 256 kbit/s.
Use of computers at workplace Number of persons employed in businesses with 10 or more employees using a computer with internet OECD
access as % of total workforce in these businesses.
(continued on next page)
14
(continued )
High-technology exports Exports of products with high R&D intensity, such as aerospace products, computers, pharmaceuticals, World Bank
scientific instruments, and electrical machinery. High-technology exports have been adjusted to total
manufactured exports in percentage terms.
Digital economy ICT sector Total ICT sector (including ICT manufacturing and ICT services) scaled to GDP in percentage terms. Eurostat ICT
Data
Employment in ICT sector Percentage of ICT personnel in the ICT sector (including ICT manufacturing and ICT services) to total Eurostat ICT
employment in the country. Data
Employment in ICT-based Total number of employees in ICT-based SMEs (i.e., firms employing 1–249 persons) as % of total OECD
SMEs employment in the SME sector except financial and insurance activities.
ICT-based enterprises Total number of ICT-based enterprises as % of total enterprises in a country except financial and OECD
insurance related enterprises.
ICT-based SMEs Total number of ICT-based SMEs as % of total SMEs in a country. OECD
Equity crowdfunding (rounds) Equity crowdfunding platforms allow individual users to invest in companies in exchange for equity. Crunchbase
Total number of rounds has been scaled to population.
Equity crowdfunding Annual crowdfunding raised, adjusted to GDP. Crunchbase
(amount)
Control Variables GDP growth Annual percentage growth rate of GDP at market prices based on constant local currency. Aggregates World Bank
are based on constant 2010 US dollars.
Foreign direct investment The sum of equity capital, reinvestment of earnings, and other capital that flows from the reporting World Bank
(FDI), net outflows economy to the rest of the world. The amount is GDP-adjusted.
Unemployment Percentage of individuals without work to total labor force of the country. World Bank
New business density Number of new business registrations per 1000 people aged 15–64. World Bank
Number of employers Employers are those workers who work on their own account or with one or a few partners or hold the World Bank
type of jobs defined as “self-employment jobs”. The variable is the percentage of total employment.
Ease of doing business This is measured through time required to start a business (days). It is the number of calendar days World Bank
needed to complete the procedures to legally operate a business.
Gross capital formation Gross capital formation (formerly gross domestic investment) consists of outlays on additions to the World Bank
fixed assets of the economy plus net changes in the level of inventories. The data has been scaled to
total GDP.
Patents Number of worldwide patent applications filed through the Patent Cooperation Treaty, covering World Bank
applications by both residents and non-residents. The variable has been adjusted to total population.
Notes: The description/definitions of the data have been taken from the source documents/sites of the data with no or very few changes.
*The aggregation of the figures of all stages of VC and PE is according to the country in which the investee company is based, regardless of the location of the private
equity fund.
** The aggregation of the figures of government PE consists of industry statistics that represent investments according to the country of the private equity firm rather
than country of the portfolio company.
Appendix A. Supplementary data
Supplementary data to this article can be found online at https://doi.org/10.1016/j.techsoc.2021.101555.
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business leadership.
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Technology in Society 65 (2021) 101555

Contents lists available at ScienceDirect

On the upside or flipside: Where is venture capital positioned in the era of

Fig. 1. VC investments in europe by sector, 2007–2018.

Fig. 2. Conceptual model.

investment is not a volatile market, as these investments are looked after

(1) Total VC investments 1.000

Total VC Total VC Total VC Private equity Early-Stage Later-Stage

(1) (2) (3) (4) (5) (6)

Dependent Variable t-1 0.469*** 0.495*** 0.474*** 0.412*** 0.495*** 0.452***

Fig. 3. VC Investments in Europe over the period 1989–2018.

VC investment t-1 0.469*** 0.489*** 0.476*** 0.681*** 0.770***

VC investment t-1 0.451*** 0.270* 0.458*** 0.486*** 0.347***

Early-stage VC Later-stage VC Total VC Early-stage Later-stage Total VC

(1) (2) (3) (4) (5) (6)

Dependent variable t-1 0.514*** 0.473*** 0.413*** 0.544*** 0.364** 0.400***

Total Venture Capital Investment Private equity investment

(1) (2) (3) (4) (5) (6) (7)

Dependent variablet-1 0.257 0.264** 0.517*** 0.477*** 0.459*** 0.413*** 0.397***

(1) (2) (3) (4) (5)

VC investment t-1 0.448** 0.340*** 0.471*** 0.450*** 0.320**

All authors have contributed equally.

Appendix 1. Data Sources and Descriptions

Variable Description Data Source

Fig. 4. Graphical representation of the interaction analysis.

Appendix A. Supplementary data

Supplementary data to this article can be found online at https://doi.org/10.1016/j.techsoc.2021.101555.

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Dependent Variable t-1 0.469* 0.495* 0.474* 0.412* 0.495* 0.452*

VC investment t-1 0.469* 0.489* 0.476* 0.681* 0.770***

VC investment t-1 0.451*** 0.270* 0.458* 0.486* 0.347***

Dependent variable t-1 0.514* 0.473* 0.413* 0.544* 0.364 0.400*

Dependent variablet-1 0.257 0.264 0.517* 0.477* 0.459* 0.413* 0.397*

VC investment t-1 0.448 0.340* 0.471* 0.450* 0.320**