The Role of Environmental Policies in Promoting Venture Capital Investments in Cleantech Companies

Abstract

This paper provides insights on the role of environmental policies in promoting venture capital (VC) investments in companies involved in the development of clean technologies. Based on a supervised machine learning algorithm, we develop a fully replicable methodology to identify cleantech companies among a comprehensive database of VC-backed companies. We, then, analyze the relationship between the stringency level of environmental policies and VC investments in cleantech companies operating in 21 OECD countries. Moreover, we explore whether policies have a differential effect in fostering Institutional VC (IVC) and Governmental VC (GVC) investments. Our findings indicate that IVC investments in cleantech are mainly driven by stringency of environmental taxes and market pull mechanism as feed in tariff and R&D subsidies, whereas GVC investment decisions are positively influenced by the stringency level of emission trading system. Moreover, our results suggest that GVC funds are developed as an alternative to incentive mechanisms: when direct incentives developed by governmental agencies are less developed, the relevance of GVC investments increases, this suggesting a complementarity between the two forms of intervention.