From Venture Capital to Innovation Capacity

Venture capital is frequently presented as a central mechanism through which innovative firms obtain the funding required to test, commercialize and scale new technologies. Yet the relationship between venture capital and national innovation performance is not straightforward. Venture capital may finance innovation, but it may also be attracted by countries that already possess strong innovation systems, credible deal flow, experienced founders and viable exit routes. This paper examines the association between venture capital intensity and innovation performance using the OECD Venture Capital Investments database and the European Innovation Scoreboard 2025. The empirical analysis is based on a single cross-sectional OLS model covering 33 countries for which both venture capital and innovation data were available. The dependent variable is the 2025 Summary Innovation Index, while the explanatory variable is the natural logarithm of average annual venture capital investment over the 2020-2024 period plus one. The results indicate a positive association between venture capital intensity and innovation performance. These results shows that venture capital intensity is a marker of innovation-system maturity, although it should not be treated as a stand-alone causal driver. The paper concludes that venture capital matters most when embedded in entrepreneurial and innovation ecosystems that include research capacity, accelerators, business angel networks, growth capital and exit channels.