The Legal Road to Replicating Silicon Valley

Must policymakers seeking to replicate the success of Silicon Valley’s venture capital market first replicate other US institutions, such as deep and liquid stock markets? Or can legal reforms alone make a significant difference? In this paper, we compare the economic and legal determinants of venture capital investment, fundraising and exits. We introduce a cross-sectional and time series empirical analysis across 15 countries and 13 years of data spanning an entire business cycle. We consider three legal variables. First, we employ an aggregate index of legal and fiscal variables that, unlike those used in previous studies, pertains specifically to venture capital. Secondly, we investigate the role of government subsidy programs designed to ‘jump start’ venture capital markets. Thirdly, the paper focuses on the role of bankruptcy law, hitherto ignored in the literature. We show that the legal environment matters as much as the strength of stock markets; that government programmes more often hinder than help the development of private equity, and that temperate bankruptcy laws stimulate entrepreneurial demand for venture capital. Our results provide generalizable lessons for legal reform.