Interaction between VC Investments and lagged M&A Activity across different countries

Venture Capital (VC) is widely recognized as a crucial factor for startup growth, and several policies are often designed by governments to ensure a higher availability of this type of finance. However, there is a concern that in an economy without economic dynamism and the resulting prospects for growth, venture capital may not help promote the projected growth. Conversely, the weakness of venture capital may be a sensible response by investors and it could signal that something in the economy is not working properly. This work particularly investigates the causal and temporal relationship between Mergers and Acquisitions (M&A) and Venture Capital investments, arguing that a more active M&A market may act as a precursor, with a certain time lag, to increased Venture Capital activity, because investors react positively to better exit opportunities. Few studies have investigated the complex dynamics between M&A and VC markets, this study aims to fill the gap through a cross-country perspective, contributing to the academic debate and offering insights to investors, governments, and policymakers. A systematic review of the literature on subject matter has been conducted. Furthermore, a total of 10 relevant nations have been specifically selected, and comprehensive data has been obtained regarding their GDP, long-term interest rates, number and value of venture capital investments, as well as the number and value of mergers and acquisitions investments. A preliminary analysis with correlations and graphs was first carried out for each country. Based on the temporal lags identified, a multivariate linear regression model has been developed and the regression line equation derived. Furthermore, an indicator for Venture Capital market maturity has been defined and calculated, in order to identify three clusters of countries. Finally, an Autoregressive Distributed Lag (ADL) model was run to also leverage the time series information of lagged VC activity that serves as the dependent variable. The findings of the study demonstrate that the number and the value of VC investments in a given year and country can be explained with statistical significance by the number of M&A deals, GDP, and long-term interest rates with a temporal lag. The model confirms enhanced predictability in more mature VC markets, like USA, Canada, UK and Israel, where lagged M&A activity significantly influences both the value and the number of VC transactions. The USA, with its well-established financial market, exhibits the most robust results, exceptionally showing that lagged M&A transactions, GDP, and long-term interest rates outweigh the significance of the autoregressive component of lagged VC transactions. In contrast, the results highlight that in less mature markets, such as Japan, Italy, and Spain, the influence of lagged M&A activity on VC investments is poorer, reflecting the absence or weakness of a virtuous system that supports this dynamic. Overall, the application of the ADL model and the interpretation of the results on the basis of VC market maturity constitute novel elements in the research field in which the study fits, and are intended to stimulate the academic research in the complex determinants of the VC market and the joint cross-country dynamics with the M&A market.