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Private equity (PE) investment is a significant factor in explaining the entrepreneurial and innovative successes of the United States over the past three decades.
Private equity (PE) investment is a significant factor in explaining the entrepreneurial and innovative successes of the United States over the past three decades. PE investment in most European regions, however, has been much slower to develop. This paper identifies the institutional factors and government policies that have inhibited this funding historically, discusses recent advances made in several European regions to attract domestic and foreign investors, and documents current investment levels. Specific attention is devoted to labor market regulations and how government choices between employment protection regulations and unemployment insurance benefits affect PE investment levels and entrepreneurship. European states providing labor market insurance through labor market expenditures developed stronger PE markets over the 1990–2004 period than those states favoring employment protection. These results are relevant to the literature examining the impact of labor market regulations on entrepreneurship and productivity growth due to reallocations across firms and sectors.
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