Innovation ecosystems and entrepreneurial venture capital: evidence from European countries

Venture capital is a significant component of funding and growing new businesses, offering them capital, knowledge, and managerial know-how that supports thriving in a globalised economy and address technological challenges. However, the connexion to larger innovation ecosystems in Europe is still not well understood. This study fills this gap by looking at how research and development funding, patent activity, education, and government effectiveness affect venture capital dynamics in 28 European countries from 2007 to 2024. We evaluate causal interactions between innovation inputs and VC flows utilising cross-sectional dependence tests and the JKS Granger non-causality framework. The findings indicate that patents, GDP, R&D investments, and human capital are significant predictors of venture capital activity, with multiple instances of bidirectional causality. Early-stage VC is particularly sensitive to innovation and macroeconomic performance, while late-stage VC is closely tied to innovation, government effectiveness, and human capital. These results show that an innovation ecosystem that is proactive and sensitive to different stages is not only a contextual factor but also a major driver of venture capital flows in Europe. Policymakers should therefore design policies that are specific to each situation and that improve the quality of institutions and the ability to innovate. This will lead to more active VC markets and faster commercialisation of new technologies.