Political Economy of Government Venture Capital in Estonia

DOI: 10.5176/2251-2039_IE17.34

Authors: Meelis Kitsing

Abstract: This research explores the political economy dilemmas of government venture capital on the basis of Estonian Development Fund and its portfolio companies. By using data from the Estonian Business Registry, online network analysis and 14 semi-structured interviews, the analysis shows that the EDF plays an important role in the venture capital ecosystem of Estonia. However, this role is not sufficient for overcoming market failures stemming from information asymmetry and underinvestment in innovative companies. Significant positive externalities of the government scheme are non-existent or unmeasurable. Government’s dual aims to achieve a stellar performance of the EDF portfolio and, concurrently, to create positive externalities for local economy are in conflict with each in the government venture capital scheme. The principles of venture capital investing and public accountability of government expenditures are also mutually exclusive. This is so because venture capital is a form of private equity, where most benefits stem from its private nature. The paper reveals some limited evidence that the potential public benefits have been privatized and costs socialized in the government venture capital scheme.

Keywords: venture capital, start-up companies, government venture capital, venture capital ecosystem, public policy, political economy, market failure, externalities, Estonia.