Empirical study on economic policy uncertainty, corporate venture capital investment, and innovation

Abstract

In this study, we empirically examine the effect of Corporate Venture Capital (CVC) backed U.S. listed firms on their R&D spending and patent activities during changes in macroeconomic environment. While equity financing provided by VC investors is the primary method of raising capital for entrepreneurial firms, corporate venture capital (CVC) investments has become prevalent and developed significantly in recent years. The existing literatures find that CVC-backed ventures invest more in R&D, obtain more patents and patent citations, and achieve higher innovative efficiency. In addition, CVC parent companies can also complement their innovation capacities by strategically absorbing technology skills and inventions that CVC-backed firms generate. However, despite the fact that ventures that lack resources and experience tend to be particularly vulnerable to macroeconomic uncertainties, existing studies have emphasized the positive impact of CVC investment on ventures without considering environmental changes or macroeconomic uncertainties. Hence, by conducting the Ordinary Least Squares(OLS) and Propensity Score Matching (PSM) methods on the U.S. listed firms on NASDAQ market from 2010 to 2021, we conduct panel data analysis using CVC funding data, Economic Policy Uncertainty (EPU) index, R&D intensity and patent data. The paper finds that CVC-backed firms have significantly dropped R&D expenditures than Independent Venture Capital (IVC)-backed firms when economic policy uncertainty is high. This subsequently results in a decrease in patent grants in the next 2-3 years. This paper thus extends the existing literature by showing CVC investment enhances the innovation productivity of CVC-backed firms, but it also reveals unique vulnerabilities of entrepreneurial ventures to changes in macroeconomic environment which might hinder the growth and innovation in the long run. Our study provides the practical implications in identifying the entrepreneurial firms which are in need of a policy support and determining the optimal timing of CVC funding on firms.