The Impact of Economic Integration on Cross-Border Venture Capital Investments: Evidence from the European Union

Article excerpt

Despite major policies surrounding economic integration among countries (e.g., the European Union [EU], North Atlantic Free Trade Area, and Mercosur), the theoretical and empirical research addressing the impact of such policies on various countries' entrepreneurial activities has yet to fully emerge. To address this issue, this paper draws on institutional, economic, and entrepreneurship literatures to examine if two specific economic integration mechanisms, namely market and currency commonality, increase cross-border venture capital flows made by participating nations in the EU. Findings suggest that broad scale economic integration policies do influence the extent of foreign venture capital investments made into other member countries.

Introduction

An enduring, underlying thesis in the fields of business and economics is that entrepreneurial activity is central to long-term economic stability, growth, and development (e.g., Hayek, 1945; Kirzner, 1973, 1979). Recently, the relationship between entrepreneurship and economic growth has seen increased interest at the state and national levels (e.g., Henderson, 2002; Reynolds et al., 2005; van Stel, Carree, & Thurik, 2005). Discussion in this area has centered principally on the idea that governments seeking economic renewal can stimulate economies by reducing financial constraints on the entrepreneur, thus creating increased levels of entrepreneurial activity (Bygrave & Minniti, 2000; Mitchell et al., 2002). Indeed, entrepreneurship has proven to be an essential part of economic growth because of its impact on new job creation, increased trade, and heightened levels of competition (Henderson; Minniti, 1999; Mitchell et al.; Reynolds, Hay, & Camp, 1999).

In order to achieve such positive economic effects on a larger scale, a number of national regions have sought to increase economic momentum by creating economically integrated regions across several nations (e.g., the European Union [EU], the North American Free Trade Area, the Southern Common Market, and the Common Market of Eastern and Southern Africa). Economic integration includes such mechanisms as eliminating tariffs, developing common markets, and creating common currencies, which all support market incentives for entrepreneurial strategies (Bosma, Jones, Autio, & Levie, 2008). Generally speaking, economic integration has a positive impact on the overall national economies of the member countries (e.g., Krugman & Obstfeld, 2002) and works to stimulate the reinforcing effects of globalization and entrepreneurship (Jones, 2006). For example, being part of the "Euro zone" makes it possible for the EU members to transfer economic resources from countries with healthy economies to those suffering economic setbacks; such actions work to improve the aggregate economic situation of the integrated area in the long run. Also, such globalization mechanisms tend to vastly increase the integration of financial capital markets among involved countries. Such trends have generally improved the efficiency of financial markets for all participants as capital is now better able to move to areas where it receives the highest reward (Jones).

While economic integration has been utilized extensively throughout the world, it has gained relatively no attention in the field of entrepreneurship, despite a seemingly important relationship. In general, economic integration removes trade barriers and allows goods, services, capital, labor, and technology to move more freely between member countries (e.g., Rose, 2000; Rose & Van Wincoop, 2001). These outcomes, which are empirically and theoretically associated with the integration of economies, tend to promote entrepreneurial activity across regions within nation states (e.g., Bosma et al., 2008; Carree & Thurik, 2003; van Stel et al., 2005). More specifically, integration reduces the uniqueness of institutional structures among countries and increases access to research and educational facilities, sources of financing, and skilled labor pools, which improves the level of entrepreneurial activity (Bartholomew, 1997). …