The Impact of Venture Capital on the Macroeconomy

Abstract

The paper seeks to develop a theoretical model to explore the relationship between venture capital and the macroeconomic variables like employment, particularly in a labor surplus economy. Dynamic trade theories, such as those proposed by Vernon and Dollar, suggest that innovative  goods and ideas often originate in the economically developed ‘North’ and subsequently move to the ‘South’ for production due to lower labour costs. Our model attempts to give a theoretical foundation for this observation, suggesting a positive relationship between innovation and the presence of venture capital firms.

The model demonstrates that in a two sector economy the presence of active venture capital can affect employment generation via its positive impact on a new good as well as old good sector. In a labor abundant economy as assumed in the present model, this will help increase employment opportunities.