Crowding Out Private Equity: Canadian Evidence∗

Douglas J. Cumming School of Business University of Alberta Edmonton, Alberta Canada T6G 2R6 Tel: (780) 492-0678 Fax: (780) 492-3325 E-mail: [email protected] Http://www.bus.ualberta.ca/dcumming Jeffrey G. MacIntosh Toronto Stock Exchange Professor of Capital Markets Faculty of Law University of Toronto 78 Queen’s Park Toronto, Ontario Canada M5S 2C5 Tel: (416) 978-5785 Fax: (416) 978-6020 E-mail: [email protected]

First Draft: September 2000 This Draft: September 2002

∗

We are grateful for comments from Mark Huson, Aditya Kaul, Janet Payne, Corrine Sellars, Wolfgang

Stummer and the seminar participants at the Canadian Law and Economics Association 13th Annual Conference (Toronto, September 2001), the Eastern Finance Association (Baltimore, April 2002), and the Academy of Entrepreneurial Finance and Business Ventures Conference (New York, April 2002), and Tilburg University Conference on Regulatory Competition (The Netherlands, September 2001). This paper is scheduled for presentation at the Northern Finance Association (Banff, September 2002), the Financial Management Association (San Antonio, October 2002), and the CESifo Conference on Venture Capital and Public Policy (Munich, November 2002). The Schulich School of Business National Research Program in Financial Services and Public Policy provided generous financial support. In preparing the grant application, preliminary versions of the paper with all the figures that are presented in this current draft (but based on data only up to 1999) were distributed to various Canadian academics for comments in the fall of 2000 and the spring of 2001. We also owe thanks for the (anonymous) comments received through the Schulich application process.

Crowding Out Private Equity: Canadian Evidence

Abstract In this paper, we examine a Canadian tax-driven venture capital vehicle known as the “Labour Sponsored Venture Capital Corporation” (LSVCC). As a theoretical matter, we suggest that the LSVCCs can be expected to have higher agency costs and lower profitability than private venture capital funds. We present data that is consistent with this view. The central question that we analyze, however, is whether the tax advantages conferred on LSVCCs have resulted in LSVCCs “crowding out”, or displacing other types of venture capital funds. Empirical analysis of our data (which covers the 1977-2001 period) is highly consistent with crowding out. The data suggest that crowding out has been sufficiently energetic as to lead to a reduction in the aggregate pool of venture capital in Canada, frustrating one of the key governmental goals underlying the LSVCC programs; namely, the expansion of the aggregate pool of capital. In the course of our analysis, we confirm the importance of macroeconomic factors (the performance of the stock market, real interest rates, and changes in real gross domestic product) in affecting the supply of and demand for venture capital.

We also generate evidence that is consistent with the proposition that

entrepreneurs in the market for venture capital prefer to incorporate their businesses federally, rather than provincially.

Key words: Venture capital cycle; Government sponsorship; Tax; Crowding out JEL classification: G24, G28, G32, G38, K22

1. Introduction The importance of venture capitalists in providing funds for small and medium sized enterprises (“SMEs”) has been well documented (see, e.g., Barry et al., 1990; Berglof, 1994; Black and Gilson, 1998; Gompers, 1997; Gompers and Lerner, 1999; Hellmann, 1998; Hellmann and Puri, 2000a; Kaplan and Stromberg, 2000; Kirilenko, 2001; Kortum and Lerner, 2002; Lin and Smith, 1997; MacDonald, 1992; Megginson and Weiss, 1991; among others). Venture capitalists play a significant role in enhancing the value of their entrepreneurial investments (e.g., Sahlman, 1990; Gompers and Lerner, 1999; Hellmann and Puri, 2000b). Venture capitalists affect the product market strategies and outcomes of entrepreneurial firms (Hellmann and Puri, 2000a) and the variability of equity financing can affect the performance of entrepreneurial ventures (Lerner and Tsai, 1999). In a collection of their groundbreaking work, Gompers and Lerner (1999) document the existence of a “venture capital cycle” in the United States, and the factors that affect venture capital fundraising, investing and exiting. In response to the perceived importance of venture capital to the funding of entrepreneurial firms, many governments have mounted programs that seek to foster venture capital financing. Such programs have been the subject of previous scholarly examination. In particular, Cressy (2002) provides an overview of a special issue of the Economic Journal on capital gaps in private equity; see also Cressy (1996), DeMeza (2002) and Carpenter and Petersen (2002). Lerner (1999) evaluates the success of the U.S. government’s SBIR program. Lerner (1999, 2002) and Gompers and Lerner (2001) discuss the appropriate role of governments in private equity markets, and suggest that government programs ought to complement – and not compete with – private venture capital investments. Recent theoretical research has considered the role of informed versus uninformed venture capitalists and government policy towards venture capital (Kanniainen and Keuschnigg, 2000, 2001; Keuschnigg, 2002; Keuschnigg and Nielsen, 2001, 2002). In this paper, we examine a particular form of government subsidization of venture capital, the Canadian “Labour Sponsored Venture Capital Corporation” (LSVCC). In contradistinction to private funds, LSVCCs are set up as corporations, and may be incorporated in a variety of Canadian provinces or federally. They must have a union sponsor, which must by statute control the fund, but which in almost all cases has no ownership interest1 in the fund, and will merely ‘rent’ its name to the fund in return for a fixed fee or a percentage of net asset value (Osborne and Sandler, 1998). In many cases, the impetus to establish the fund comes not from the union sponsor, but from the company that will manage the fund 1

Formally, the union will hold a class of shares in the fund that does not receive dividends and is not entitled to share in

the assets upon winding up.

2 (Osborne and Sandler, 1998). Only individual investors may invest in a LSVCC, and there is typically either no minimum (or a modest minimum) investment, although investors must typically remain invested for a period of eight years. Contributions are encouraged by extremely generous tax benefits, consisting of a combination of provincial and federal tax credits and deductions. These benefits yield investors an immediate tax generated return of 109.21% - 323.73% (depending on the income of the investor) in the year of the investment for capital contributions of up to $Can 5,000.2 The LSVCC concept was first introduced in the province of Québec in 1983. In 1985, the federal government matched the Québec tax credit and provided deductability of the amount invested for investments up to a certain ceiling. In the late 1980’s and early 1990’s, most of the other Canadian provinces followed suit and introduced their own LSVCC programs, which, like the Québec program, receive the benefit of both provincial and federal tax credits and deductability. Since the early 1990’s, LSVCCs have become the dominant form of venture capital organization in Canada, now controlling over half of the total pool of Canadian venture capital. The focus of this paper is on whether the LSVCCs have “crowded out”, or displaced other forms of venture capital organizations, and on whether the various government sponsors have achieved their goal of expanding the Canadian pool of venture capital. At a theoretical level, we suggest that LSVCCs are an inferior organizational form that we would anticipate will exhibit high agency costs and low returns. Nonetheless, we suggest that the generous tax subsidies underlying the LSVCC programs lowers the LSVCCs’ required rate of return, allowing LSVCCs to out-bid other types of funds (even those with tax-exempt investors), driving up deal prices and crowding out other types of funds. We find evidence that is highly consistent with this view. We build upon previous research on government sponsorship of venture capital and the demand and supply for venture capital in a number of interrelated ways. First, using a Canadian data set covering the period 1977-2001, we use simultaneous equations econometric methodology to estimate the Canadian supply and demand equations for venture capital (and hence the determinants of both the demand for, and supply of venture capital). We examine whether these equations differ across different geographic regions within Canada; namely, British Columbia, Alberta, Saskatchewan and Manitoba (jointly), Ontario, Québec, and the Maritime provinces (jointly). We test the robustness of our estimates by 2

These figures are for Ontario. See www.bestcapital.ca/why_invest.htm for details. See also note 7, infra.

3 separately estimating the equations for start-up, expansion, buyout, and turnaround stages of financing. We also use a bootstrap experiment to test the efficiency of the estimation procedure in a finite sample. Second, in estimating the supply equation, we focus on the determinants of venture capital investing (i.e., capital flows from venture capitalists to entrepreneurial firms), rather than venture capital fundraising (i.e., capital flows from institutional investors to venture capitalists, the specification used by Gompers and Lerner (1998), Black and Gilson (1998) and Jeng and Wells (2000). This difference is motivated by the unique characteristics of the LSVCCs, and in particular, the tendency of the LSVCCs to invest a non-trivial portion of their capital in risk-free instruments such as treasury bills. In estimating supply and demand equations, there is some overlap in independent variables. For example, we hypothesize that interest rates, real gross domestic product, stock market performance, and market trends over time are likely to affect both supply and demand.

Our empirical results offer

confirmation of this hypothesis. On the demand side, we test whether changes in the number of both provincially and federally incorporated firms affect the demand for venture capital. We find that changes in the number of federally incorporated firms are significantly and positively related to demand, while changes in the number of provincially incorporated firms are not. This suggests that entrepreneurs in the market for venture capital tend to incorporate federally, rather than provincially. On the supply side, in furtherance of the central thrust of this paper, we use dummy variables to determine whether the introduction of LSVCC legislation in various Canadian jurisdictions between 1983 and 1994 crowded out other types of funds and/or affected the size of the overall pool of Canadian venture capital. We find evidence not merely that LSVCCs have crowded out other Canadian funds, but that they have led to a reduction in the overall size of the venture capital pool. This evidence, which is strongly at odds with the widely held perception that LSVCCs have greatly added to the pool of venture capital in Canada, supports the theoretical predictions of Kanniainen and Keuschnigg (2000, 2001), Keuschnigg (2002), and Keuschnigg and Nielsen (2001, 2002) with respect to public policy towards venture capital. While we focus on a unique institutional setting, we nonetheless believe that our results have general implications for the efficacy of focused government subsidization of venture capital. Tax breaks

4 to particular types of venture capital funds may exacerbate, not mitigate, capital gaps. We note that venture capital organizations similar to Canadian LSVCCs have been introduced in other countries, such as the U.K.3 Further research is warranted. This paper is organized as follows. Section 2 provides a description of the Canadian venture capital market and Canadian venture capital data over the 1977-2001 period. Section 3 briefly discusses the structure and governance of LSVCCs, and outlines the legislation governing their operation. Section 4 describes LSVCC performance. Descriptive statistics on the Canadian venture capital industry are provided in section 5. We present data on the amount of venture capital financing in Canada, both before and after the introduction of LSVCCs. In section 6 we provide econometric estimates of aggregate demand and supply equations for venture capital in the Canadian provinces. A bootstrap experiment is presented in the Appendix to illustrate robustness and the suitability of the econometric specifications. Section 7 provides a summary and conclusion. 2. The Canadian Venture Capital Industry: 1977-2001 To provide a perspective on venture capital in Canada, we begin by presenting aggregate Canadian venture capital industry statistics collected by Macdonald & Associates, Ltd. (Toronto) for the Canadian Venture Capital Association (1978-2002) (for the years 1977 – 2001). The data are presented in Figures 1 – 5 and described below. Most of the data encompass the full 1977-2001 period, but some of the statistics presented below cover a shorter time frame where the full data are not available. Some of this data is previously discussed by Macdonald (1992). [Figures 1 – 5 About Here] The geographic distribution of venture capital investments in Canada is presented in Figures 1 and 2. There has been a significant increase in the number of venture capital investments in Canada since 1990, particularly in Ontario and Québec, showing the growing importance of the Canadian venture

3

The ‘Venture Capital Trust’ was introduced in the U.K. in 1997. We believe it would be fruitful to conduct a study of

Venture Capital Trusts along the same lines as in this paper.

5 capital industry for small firms in Canada.4 Each data point in the figure indicates the equilibrium point of intersection of the demand for and supply of venture capital each year. Figure 3 presents data for capital under management, capital available for investment and new venture funds for the 1988-2001 period. The capital available for investment reflects the extent to which contributions to venture capital funds have outstripped the funds’ ability to invest these contributions. It can be seen from Figure 3 that, historically, there has been a large “overhang” of uninvested capital in Canada. This suggests that the supply of venture capital in Canada should be defined by the number and dollar amounts of venture capital investments provided by venture capitalists to entrepreneurial firms, and not by the extent of venture capital fundraising (the measure that is commonly used in studies of other countries: e.g., Gompers and Lerner, 1998; Black and Gilson, 1998; and Jeng and Wells, 2000). The reasons for the difference between capital under management and capital available for investment, much of which has accumulated in the LSVCCs, are discussed below.5 As illustrated in Table 3, there are five types of venture capital funds in Canada (see also Macdonald, 1992; MacIntosh, 1994; Amit et al., 1997): private independent, corporate, government, hybrid, and the LSVCCs. As discussed further below, throughout the 1990’s and up to the present, the LSVCC has been the dominant form of venture capital organization in Canada. Because of the statutory limitations placed upon LSVCC funds, LSVCCs are significantly different from private venture capital funds in organizational structure. Private independent funds, the second most important form of venture capital organization in Canada, are similar to U.S. venture capital limited partnerships.

However,

Canadian private independent funds generally have fewer and less restrictive covenants placed on the investment managers (MacIntosh, 1994; Amit et al., 1997) and invest in a wider variety of firms relative to their U.S. counterparts (Gompers and Lerner, 1996, 1999). Canadian corporate VCs are analogous to U.S. Corporate VCs (Gompers and Lerner, 1999), but tend to finance a somewhat more heterogeneous group of entrepreneurial firms (Cumming, 2000). Government venture capital funds in Canada (which comprised 5% of the overall pool of capital in 2001) are managed by independent professional venture 4

Similar trends in venture capital are documented elsewhere. Previous research on the distribution of venture capital

investments within the U.S. includes Gompers and Lerner (1998) and Sorenson and Stuart (1999); research across countries appears in Black and Gilson (1998) and Jeng and Wells (2000). 5

See sections 3 and 4. Data on the details of exactly how much of the difference between capital under management and

capital available for investment (and for different years) are not obtainable in Canada due to incomplete reporting, and the fact that the non-reported details are viewed as confidential by all the funds in Canada.

6 capital managers and finance a wide variety of different entrepreneurial firms. Canadian hybrid venture capital funds, which constituted 6% of the pool of capital in 2001,6 receive both government and private support and invest in all types of entrepreneurial firms (MacIntosh, 1994; Cumming, 2000). As can be seen from Figure 4, in the past decade much of the new capital in the industry can be attributed to the growth of the LSVCCs. By contrast, with the exception of years 2000 and 2001, there were relatively modest increases in the growth of private independent funds.

While significant percentage

increases are observed among corporate, hybrid and government funds, these increases nonetheless represent a relatively modest increase in aggregate dollar value. As discussed in section 4 below, the increase in LSVCC capital is surprising in light of the low returns realized by these funds. It seems reasonably clear that the capital flows to LSVCCs are best explained by strong tax incentives that have induced investors to contribute capital to these funds. Section 3 provides the details. 3. The Legislative and Contractual Structure, and Governance of Labour-Sponsored Venture Capital Corporation (LSVCCs) The traditional venture capital form of organization is the private limited partnership (Gompers and Lerner, 1999, 2001). Private funds both in Canada and the United States are raised principally from public and private pension funds as well as corporations. Wealthy individuals may invest in private funds that are organized as limited partnerships. However, in the United States, individuals account for no more than 1020% of all venture capital fundraising (Gompers and Lerner, 1999, 2001, 2002).

The Canadian LSVCC

(similar to the Venture Capital Trust in the U.K.) is a substantial departure from this traditional model. In an LSVCC, only individuals may invest. Moreover, any individual, regardless of his or her net worth, may invest, and there is generally no minimum (or a small minimum) investment required. Because the tax advantages of investing in an LSVCC are exhausted on investments in excess of $3,500 (formerly $5,000 in most jurisdictions), the great bulk of contributions to LSVCC funds take the form of contributions through individual registered retirement savings plans (RRSPs) of that amount or less (Vaillancourt, 1997). LSVCCs are, in essence, a type of highly specialized mutual fund that invests mainly in private, and hence highly illiquid high growth companies (usually in the technology sectors) in the jurisdiction in which the LSVCC is based. 6

The category “Hybrid” was used by the Canadian Venture Capital Association (CVCA) until 2001. The new term used

by the CVCA for these funds is “Institutional”.

7

The first LSVCC was created in the province of Québec in 1983. The legislative mandate of that fund (which is similar to that adopted by the other provinces) is three-fold in nature: to generate value for the unit holders, to create jobs within the province of Québec, and to create economic development by fostering the growth of small and medium-sized enterprises. However, Vaillancourt suggests that an additional motive for the introduction of LSVCCs was to achieve labour peace in Québec by using the LSVCC vehicle to divert economic benefits to unions (Vaillancourt, 1997). This is done in at least three ways. First, while a union must sponsor a LSVCC, the union will not typically run the fund (and will hire outside managers to do so), nor will it have an ownership interest in the fund. The union is thus able to charge a fee for “renting” its name to the fund. Second, LSVCCs incorporated in Québec (and in some other provinces) give priority to investments in unionized businesses. Third, the LSVCCs subsidize job creation, which will often redound to the benefit of unions. In order to attract investment, the various jurisdictions allowing for the creation of LSVCCs offer individual investors generous tax credits. These tax credits are matched by the federal government, which also allows investors to deduct the amount of the investment (up to a stated ceiling) from their income for the year in which the contribution is made (but only so long as the contribution is placed in an RRSP). Until the mid-1990’s, for example, on an investment of up to $5,000, in most jurisdictions individual investors received a combined federal and provincial tax credit of 40% and could simultaneously use the investment as a tax deduction, for a total after-tax cost of about $500 on a $5,000 investment (with the governmental sponsors effectively paying the rest). An individual investor holding for the (then) required five year period would reap a return on investment in excess of 100% even if the fund earned no more than two percent per year (Osborne and Sandler, 1998). Currently, in most jurisdictions, individuals contributing up to $3500 will receive a combined tax reduction of up to $1050, providing an immediate investment return of 30%.7 The tax benefits in each of the provinces are indicated in Table 1, item #10. These incentives have made LSVCCs an attractive asset class for individual investors in a way that is at least partially decoupled from the fundamental quality of the investment. These tax incentives are the main reason for the growth of LSVCCs (Vaillancourt, 1997).

7

Note however that there is a minimum holding period in each jurisdiction (typically 8 years). Early withdrawal of

contributed funds results in a penalty fee. In Ontario, a contribution of $5,000 yields a tax (only) generated return of 109.21% 323.73% depending on the income of the investor (see www.bestcapital.ca/why_invest.htm). Note that all dollar figures discussed herein are in Canadian dollars.

8 [Table 1 About Here] In what follows, we contrast some key features of the contractual and governance structure of LSVCCs with that of private funds, the LSVCCs’ main competitor. In the case of private funds, both in Canada and the United States, limited partnership agreements govern the relationship between the limited partners (the investors) and the general partner (the venture capital management company). According to Gompers and Lerner, such agreements contain three types of restrictive covenants: those relating to the management of the fund (e.g., the size of investment in any one firm, the use of debt, coinvestment, reinvestment of capital gains); those relating to the activities of the general partners (e.g., coinvestment by general partners, sale of partnership interests, fundraising, the addition of other general partners); and covenants restricting particular forms of investment (e.g., investments in other venture funds, public securities, leveraged buyouts, foreign securities and other asset classes) (Gompers and Lerner, 1996). Importantly, the ‘technology’ of restrictive covenants has changed over time as experience with venture capital partnerships accumulates. Further, the relative frequency with which different types of restrictions are used changes over time with changes in economic conditions. Gompers and Lerner (1996) suggest that this adaptability is one of the more valuable attributes of the contractually-based limited partnership vehicle. By contrast, LSVCCs are set up as corporations, which then enter into a contract with the venture capital manager to supply management services. From an agency cost perspective, one particularly startling feature of LSVCCs is that, while the sponsoring union will typically have no effective ownership interest, it will invariably have control of the board of directors of the fund (items #23-24, Table 1). The lack of an ownership interest obviously attenuates the incentives of the union sponsor to contract efficiently with the management company, to exercise its control in the interest of shareholders, and to monitor the fund’s board of directors and the management company. In short, this structure is a receipe for a high level of agency costs. There are three sources of restrictions on managerial activity in LSVCCs.

Covenants that

generally mimic those reported by Gompers and Lerner (1996, 1999) for private funds are often found in the contract between the LSVCC fund and the management company. In other cases, the board of directors of the fund will adopt policies which may vary from time to time, and which are imposed (by prior contractual agreement) on the management company. While no systematic analysis has yet been done on the extent to which these covenants and policies duplicate those of private funds, our preliminary

9 investigations suggest that the covenants binding LSVCC managers to their investors are very similar to those discussed by Gompers and Lerner. Like the covenants found in limited partnership agreements, these covenants and policies may vary over time and with changing economic conditions. The third source of restrictions is the legislation under which the LSVCC is formed. Each of the provincial (and federal) enactments that allow for the creation of LSVCCs impose restrictions on the fund that are in many respects more onerous than those found in limited partnership agreements.

These

restrictions, which are set out in Table 1,8 affect both the supply side (the flow of funds to entrepreneurial firms) and the demand side (the demand by entrepreneurial firms for LSVCC capital) of the market. Unlike contractually negotiated covenants in limited partnership arrangements, these restrictions are not the product of informed bargaining between arm’s length commercial parties, but reflect the objectives of the relevant legislature. Moreover, LSVCC statutes change very little (and in most pertinent respects, not at all) over time with changing economic conditions. The rigidity of the LSVCC statutory governance mechanism limits the ability of both supply and demand sides of the market to react to changing economic conditions by altering pertinent contractual arrangements. This is in sharp contrast to the governance of private limited partnership organizations, in which changes are observed over time in response to changing conditions of demand and supply (Gompers and Lerner, 1996). As note earlier, LSVCCs are typically formed with multiple objectives, although the principal motive was to expand the pool of venture capital (Osborne and Sandler, 1998). These statutorily specified objectives are indicated in items #4 and 33 in Table 1. The extent to which goals other than profit maximization are in fact pursued in practice varies from one province to another. For example, in Québec, the legislative goals are pursued quite vigorously. However, a number of funds incorporated in other provinces have publicly stated that (despite their broad statutory mandates) they will pursue profit maximization to the exclusion of other objectives (MacIntosh, 1994; Halpern, 1997). Osborne and Sandler state that in Ontario (where more than half of all venture capital investments by dollar value are made), there is essentially no consideration of objectives other than profit maximization (Osborne and Sandler, 1998). Another difference from private funds arises in the investor lock-in period. As indicated in item #12 8

Table 1 was prepared by the Canadian Department of Finance. Osborne and Sandler (1998) also discuss aspects of

LSVCCs; however, note that Osbourne and Sandler’s work does not overlap with ours. Osborne and Sandler discuss the taxation costs associated with LSVCCs. They do not consider, as done in our work, the issue of crowding out (which significantly increases the direct taxation costs of LSVCCs analyzed by Osborne and Sandler).

10 of Table 1, the lock-in period is seven years in Manitoba, and eight years in all other jurisdictions except Québec (in which the shares must be held until retirement). Individuals withdrawing prior to the elapse of this period will lose their LSVCC tax credits (although not the deductability of the contribution, if it was put in an RRSP). By contrast, private fund investors are typically locked in for 10 years. The shorter horizon for LSVCC funds and the ability of investors to make demand redemptions force the fund to maintain liquidity against the event of redemptions. This is partly responsible for the overhang of uninvested funds (i.e. funds invested in low risk market instruments) referred to earlier9. This can be predicted to lower both the risk and expected return of LSVCC funds when compared to other types of funds. The longer duration of private funds and the inability of investors to make demand redemptions not only allows for investment of all the contributed capital, but also provides more breathing room to bring investee firms to fruition and more flexibility in exiting. Other features of the legislative structure depart from contractual arrangements observed in private funds, and are likely to adversely affect performance. In four provinces (Table 1, item #15) there is a limit on the amount of funds raised in any given year, at a threshold (in the range of CAN$20-40 million) that is likely to prevent the exploitation of economies of scale associated with venture capital investing. Further, in response to the common practice of placing up to half (and in some cases more) of a fund’s capital in treasury bills and similar low risk instruments (the problem of “overhang” referred to above), all of the provinces now require that an LSVCC invest a certain portion of its capital contributions in eligible businesses within one or two years of receipt (Table 1, items #28, 30-31). This constraint can have the effect of forcing the fund to invest in inferior businesses if an investment deadline looms (which would result in severe penalties). LSVCCs are also geographically constrained; typically a majority of the salaries and wages paid by the fund (or assets or employment) must be within the sponsoring province (Table 1, item #26). This limits the businesses that can be vetted for investment purposes, and may also impose a constraint on any relocation of the business as it grows and/or participation in follow-on investments. In Ontario (the province in which the majority of LSVCC investments are made), the fund cannot acquire “control”.

However, this constraint

may be more apparent than real, since control is defined as the ability to “determine the strategic operating, 9

By the end of 1996, the overhang amounted to three years of venture capital investments. See Canada, Department of

Finance, 1996 Budget, Budget Plan, annex 5, Tax Measures: Supplementary Information and Notice of Ways and Means Motions, March 6, 1996. The problem of overhang, coupled with the statutory constraints referred to in the text forced Canada’s second largest LSVCC to suspend new capital raising for two and a half years (from mid-1996 to the end of 1998). At the time of suspension, it had only 19% of its contributed capital invested in eligible businesses. See "Working Ventures Puts Capital Raising on Hold" at www.newswire.ca...June996/05/c0564.html.

11 investing and financing policies of the corporation or partnership without the co-operation of another person”.10 The provincial administrators take the view that this does not prohibit a shareholding in excess of 50%. A similar prohibition against control in B.C. is defined in the traditional manner, excluding majority ownership, thus limiting a B.C. fund’s governance options. In addition, the timing of LSVCC capital contributions differs from that of private funds. In a private fund, the fund will secure commitments from investors when the underlying investment fundamentals permit fund-raising to occur. The funds are drawn down if and when needed. By contrast, because most LSVCC capital consists of RRSP contributions, LSVCC funding is concentrated in the first three months of the calendar year (i.e. immediately prior to the cut-off date for claiming the tax benefits associated with the contribution for the previous calendar year). These funds are received immediately from investors, rather than being drawn down as needed. This gives rise to highly lumpy receipts by the LSVCCs, and tends to divorce capital raising from the underlying fundamentals of the investment market. In sum, the legislative, contractual and governance structures of LSVCC funds lead us to hypothesize that the LSVCC is an inferior form of venture capital organization that should have high agency costs and low returns relative to private venture capital funds. We briefly consider the performance of LSVCCs in section 4. 4. The Performance of LSVCCs Figure 5 presents the performance of LSVCCs over the past 10 years.11 The indices in Figure 5 clearly indicate that LSVCCs have underperformed comparable indices.12

This is consistent with related

10

Community Small Business Investment Funds Act, S.O. 1992, c. 18, s.1(3).

11

Canadian data sources for Figure 5: www.globefunds.com, www.morningstar.ca; see note 11 for the U.S. data sources

for Figure 5. The data may exhibit survivorship bias because of the inability to obtain data for LSVCCs that that have been wound up because of poor performance. The existence of such a bias will result in an overstatement of the quality of LSVCCs. Cumming and MacIntosh (2002c) further show that there is little variance in the performance of different LSVCCs. In short, returns calculated to 2002 for all the LSVCCs have been consistently worse than that exhibited by comparable indices. For European VC returns evidence, see e.g. Maginart et al. (2000), Botazzi and Da Rin (2002) and Schweinbacher (2002). 12

The US VC Index value from Peng (2001) is not available for 2000 and 2001. Peng’s data are from Venture

Economics. Venture Economics has posted on their web page (www.ventureeconomics.com) a value of their own index for the date 06/28/2002 (only) of 361.36 that is based over a similar horizon used by Peng. The authors owe thanks to Peng for directing us to the Venture Economics cite for a recent comparable value for the US index. It is noteworthy that Peng’s index calculations

12 evidence documenting inferior LSVCC performance relative to US venture investments (see MacIntosh, 1997; Cumming and MacIntosh, 2002b), and the inferior performance of LSVCC investments relative to private independent and other Canadian venture capital investments (Brander et al., 2002). It is also consistent with Smith’s (1997) evidence that the return of the Solidarity fund, the largest in Canada, has lagged that of short-term treasury bills, and Osborne and Sandler’s (1998) evidence that average LSVCC performance has lagged that of guaranteed investment certificates. In related work, we examine in greater detail the performance of the LSVCCs (Cumming and MacIntosh, 2002c). [Figure 5 About Here] That LSVCCs have underperformed while attracting more capital than their chief competitor - the private funds (Figure 4) - leads us to believe that venture capital has been inefficiently allocated in the Canadian venture capital market. Whether LSVCC capital has crowded out more efficiently managed private capital is the key question addressed in this paper and the focus of our empirical analysis in the subsequent sections. 5. The Adoption of LSVCC Legislation and Venture Capital Investment by Jurisdiction: A Univariate Analysis In Table 2 we present the industry statistics averaged for the years 1977-2001, and the years before and after the introduction of the LSVCC legislation in each jurisdiction. We also present data relating the number of VC investments to other economic factors in each jurisdiction, including the number of federal and provincial incorporations in each jurisdiction, real GDP growth, and the Toronto Stock Exchange (TSE) index. We observe significant increases in the number of VC investments in provinces that have introduced LSVCC legislation. Based on this one-dimensional view of the data, it is widely believed that the LSVCC legislation in Canada has increased the amount of venture capital and private equity finance.13 But increases in venture capital in each Canadian jurisdiction are not necessarily attributable to the introduction of LSVCC legislation.

In the following section, we consider a multitude of factors that may affect the supply of and

demand for venture capital in Canada, and more precisely consider whether the introduction of LSVCC

are more economically and statistically rigorous than that posted by Venture Economics. 13

For example, the Canadian Venture Capital Association quarterly newsletter (“Enterprise” posted on www.cvca.ca)

frequently expresses this view. Similar sentiments have been expressed in various Canadian newspapers in recent years.

13 legislation has actually generated an increase in Canadian VC investments. [Table 2 About Here] 6. Multivariate Analysis: Demand and Supply Simultaneous Equation Estimates In this section the demand and supply equations are described first, and empirical methods and results are presented thereafter. We use the traditional definition of the demand for venture capital; i.e., the number of entrepreneurial firms seeking venture capital financing. However, we use a somewhat different definition of the supply of venture capital. This variable has traditionally been defined in terms of venture capital fundraising; i.e., the contributions from institutional and other providers of capital to professional venture capital funds (see, e.g., Gompers and Lerner (1998), Black and Gilson (1998) and Jeng and Wells (2000)). As noted earlier, a significant portion of the capital invested in LSVCCs in any given year remains uninvested (the overhang problem). This is likely a consequence of two factors: first, the need to maintain some degree of liquidity in the portfolio against redemptions; second, the inability of LSVCC managers to find firms sufficiently promising to invest in (which may in turn result from the comparative lack of ability of LSVCC managers and the unwillingness of entrepreneurs to take on LSVCC investors). Because of the magnitude of the overhang, we believe that the supply of venture capital is better proxied by the number and dollar amounts of investments made by venture capitalists in entrepreneurial firms. We estimate the following simultaneous equations both in numbers of investments, and in dollar values invested. (1) VC Demand = α1 + β11 Real Interest Rate + β12 TSE Return (lagged) + β13 Real GDP Growth (lagged) + β14 Trend + β15 Tech Bubble + β16 Provincial Incorporations (lagged) + β17 Federal Incorporations (lagged) + ε1 (2) VC Supply = α2 + β21 Real Interest Rate + β22 TSE Return (lagged) + β23 Real GDP Growth (lagged) + β24 Trend + β25 Tech Bubble + β26 Provincial LSVCC Legislation + β27 Federal LSVCC Legislation + ε2 The equations and variables are described in detail below. The dependent variables are measured in aggregate levels in each jurisdiction – British Columbia, Alberta, Manitoba and Saskatchewan (jointly),

14 Ontario, Québec, and the Maritime provinces (jointly) – and are defined below. We also use variables for the number of investments and dollar value of investments for the different stages of entrepreneurial development (start-up, expansion, buyout and turnaround). The independent variables are described below. The estimates are robust to a wide variety of alternative specifications not presented (available from the authors upon request). The results are also quite robust to the use of different time periods in our empirical tests.14 The Demand Equation (1) The first variable in the demand equation (1), the average real 5-year corporate lending rate in the year of the investment, is included. VC investments in Canada typically have a duration of from three to seven years, with an average of five years (Cumming and MacIntosh, 2001). Changes in the interest rate may affect overall business activity (and derivatively, the demand for venture capital) and/or the rate of substitution between venture capital and competing debt products. Consistent with Black and Gilson (1998), Gompers and Lerner (1998) and Jeng and Wells (2000), we include a variable for the prior-year’s stock market return in equation (1) (the “TSE Return” variable). Better stock market performance in the previous year may inspire an increase in entrepreneurial activity and therefore greater demand for venture capital. Similarly, we include the prior-year’s GDP growth in the jurisdiction to account for the expected impact that this variable will have on entrepreneurial activity. Because the left-hand-side variables are measured in levels, and because there may exist trends over time in the demand for outside financing of entrepreneurial ventures (e.g., because of changes in information technology that facilitate the flow of information between investors and entrepreneurs, or because of changes in scale requirements), we include a trend term (1, 2, 3… 25) for the years covered by the data (1977-2001). De-trending the data will help to avoid spurious correlations between the variables of interest (see, e.g., Powell, 1966; Johnson et al., 1984). We also include a dummy variable for the tech bubble (equal to 1 in years 1999 and 2000, and 0 in all other years; alternative specifications, and 14

For example, an earlier version of this paper that was presented at a number of conferences with data from 1977 – 1999

(and without the Tech Bubble variable, defined below) yielded almost identical results.

15 exclusions of the variable altogether, did not materially affect the results). This variable is included because widespread speculation in technology stocks appears to have driven prices to levels well in excess of those justified by fundamental analysis during this period of time. This will plausibly have had a material effect on the demand for venture capital. The variables for the number of incorporations in a jurisdiction enable the demand equation to be identified. A unique aspect of the Canadian market is the fact that new companies may incorporate under the laws of one of the provincial jurisdictions, or under the federal statute (Daniels, 1991; Cumming and MacIntosh, 2000a, 2002a). A federal incorporation is more expensive than a provincial incorporation. Higher incorporation fees and extra-provincial fees make incorporating federally typically more than twice as expensive as incorporating provincially for small firms that only do business in one province (Cumming and MacIntosh, 2000a). Incorporating federally is often viewed by entrepreneurs as more favorable than incorporating provincially, even though the differences in law are often more optical than substantive (Cumming and MacIntosh, 2002a). Our working hypothesis is that increases in the number of incorporations in a jurisdiction will increase the demand for venture capital.

To the extent that

corporations signal their quality by incorporating federally, we expect this relationship to be strongest for federal incorporations. 15 The Supply Equation (2) As in the demand equation (1), the supply equation includes macroeconomic variables for interest rates, the TSE return and real GDP growth. The interest rate variable is included to account for the opportunity cost of providing funds over a long duration (with higher interest rate lowering supply). Greater returns on the TSE index are suggestive of higher exit values and returns to venture capital investing, and therefore should be associated with an increase in venture investing.16 Similarly, the GDP variable accounts 15

We lag the variables for the number of incorporations by 2 years to account for the fact that venture capitalists will

typically not finance a firm that has just incorporated, and a firm will typically not seek venture capital immediately after incorporating. Firms typically have at least a short track record before seeking venture financing (Sahlman, 1990; Gompers and Lerner, 1999). The results are quite robust to alternative specifications. Relatedly, see McCahery and Vermeulen (2001) and Vermeulen (2001) on European corporate law structure on entrepreneurship; see also Armour (2002) on the effect of insolvency law on entrepreneurship across countries. 16

We do not include variables for other stock exchange indices as indices are highly correlated, and collinearity problems

would result. The result that increases in stock market indices increase venture capital activity is robust to alternative variables.

16 for the possibility that VC firms may receive more funds for investment in the year following high levels of economic growth. As with the demand equation, we include a trend term in the supply equation to account for changes in technology and tastes over time with respect to the financing of small privately held firms (e.g., due to the development of capital markets, better syndication networks, better information flow, etc.). This comports with the widely held notion that the venture capital industry has been a growth industry nearly world-wide over the past several decades. We also include a dummy variable for the tech bubble, as defined above, which may well have affected the appetite of investors to commit funds to small entrepreneurial ventures. The supply equation is identified through the inclusion of the LSVCC variables. The provincial LSVCC dummy variables are zero in each year preceding the adoption of legislation allowing for the formation and operation of a LSVCC in that jurisdiction, and one in the year of the legislation and each year thereafter. The federal LSVCC dummy is similarly defined as zero in each year prior to the adoption of provincial legislation allowing a federally incorporated LSVCC to operate in that province, and one in the year of adoption of the legislation and each year thereafter. A significant positive coefficient indicates that the introduction of the legislation has increased the total supply of venture capital in the jurisdiction. An insignificant coefficient suggests that the legislation has merely substituted one form of venture capital for another without affecting the total level of venture capital funding. A negative coefficient suggests that the LSVCC legislation has both displaced other types of funds and reduced the aggregate supply of venture capital. In sum, either a significant negative coefficient or an insignificant coefficient are consistent with the view that the LSVCCs have crowded out other types of venture capital funds. The provincial LSVCC variable is not used in Alberta, where LSVCCs are not permitted to operate. Similarly, the federal LSVCC variable is not applicable for Québec, British Columbia and Alberta. There is no expected ‘spill-over’ in investment activity from the introduction of LSVCC legislation from one province to another. As explained above and in Table 1 (see item #26), there are geographic restrictions on LSVCC investment activities – investees generally have to be situated in the same jurisdiction as the LSVCC fund. As described below (see also the Appendix), we nevertheless consider efficiency gains

17 from system estimation (i.e., not just simultaneous equation demand and supply estimates in a single jurisdiction, but also across jurisdictions). Empirical Evidence In Tables 3a and 3b we present the regression estimates for equations (1) and (2) using simultaneous equations for demand and supply within each jurisdiction separately. Likewise, in Table 4a and 4b we also used simultaneous equations for each stage of development separately. We do not estimate the equations jointly across all the Canadian jurisdictions, as a bootstrap experiment indicated separate estimation is preferable for the 25 observations (1977-2001) and there is no efficiency gain from system estimation (see the Appendix and Table 5). We estimate the equations measured in both numbers of investments (Table 3a) and dollar values invested (Table 3b) to check the robustness of the results. The results are similar, but the adjusted R2 values in Table 3a (ranging from 0.747 to 0.933) are somewhat higher than those in Table 3b (ranging from 0.639 to 0.937); therefore, our discussion below focuses on Table 3a, although most of the empirical results are unaffected by the choice of dependent variable). Likelihood ratio tests and information criteria indicated that the equations in numbers of investments (Table 3a) were a better fit for the data, and confirmed the suitability of the included right-hand-side variables. [Tables 3a,b About Here] The results in Tables 3a and 3b confirm the importance of macroeconomic factors in affecting the demand for and supply of venture capital. Interest rates are significantly and negatively related to venture capital investment levels in both the demand and supply equations in all jurisdictions. Increases in the prior year’s TSE return and real GDP growth generate significant and positive changes in the supply of and demand for venture capital in most jurisdictions. The TSE return is significant in more jurisdictions than real GDP growth. The trend terms in all of the equations were also positive and significant, as expected, indicating the increasing importance over time of entrepreneurial finance in Canada. The provincial LSVCC coefficients in each of the jurisdictions in Tables 3a and 3b are insignificant. The coefficients for the federal LSVCCs are mostly insignificant, although in Table 3a the coefficient for the Maritimes is significant and negative, and the coefficient for Ontario is negative and at the margin of significance (significant at the 10% level).

18

These results are consistent with the view that both the provincially and federally incorporated LSVCCs have crowded out other forms of venture capital funds, leading to no overall increase in the pool of venture capital in Canada. We cannot tell with certainty which funds have been crowded out. However, a scrutiny of Figure 4 is suggestive. Between 1992 and 2001, the total share of funding controlled by the LSVCCs increased dramatically.

During this same period of time, however, the aggregate share of corporate,

hybrid/institutional/foreign and government funds shrunk considerably. This is consistent with crowding out. Similarly, between 1992 and 1999, the absolute dollar value of capital flowing to private funds increased very little, causing the aggregate share of such funds to drop steadily over time. This too is consistent with crowding out. There appears to have been a large increase in private funding in 2000 (one of the years of the “tech bubble”), but in 2000 and 2001 private funds remained a much smaller portion of the total pool than they were in 1992. This suggests that the phenomenon of crowding out has affected all types of non-LSVCC funds. Why would LSVCC funds crowd out other funds? This is easiest to understand in relation to those investors providing capital that are taxable entities, such as corporations and wealthy individuals. Because the LSVCCs are able to give investors generous tax benefits that are not available to nonLSVCC investors, the required rate of return on LSVCC capital will be lower than the comparable rate for private funds. This allows LSVCCs to pay more for deals than funds with taxable investors, while still meeting their required rate of return. This will result in LSVCCs bidding up deal prices and reducing returns to funds with taxable investors, resulting in less willingness of taxable investors to contribute funds (cf. Gompers and Lerner, 2002). Not all investors, of course, are taxable – and in particular, pension funds, the largest contributors to private funds in Canada (Halpern, 1997; see Gompers and Lerner, 1998, for U.S. evidence, and Mayer et al., 2002, for European evidence). The use of the limited partnership form allows taxable gains to be passed directly through to these investors, reducing the aggregate tax burden of the fund and its investors to zero. Even for funds that cater entirely to tax-exempt investors, however, the LSVCCs have a tax advantage. First, most of an LSVCC’s contributed capital is in the form of RRSP contributions. Even though the LSVCC will be organized as a corporation, the tax code allows it to elect to effect an increase in capital that mirrors its profits. This increase in capital nullifies the application of tax at the corporate

19 level and becomes a deemed dividend in the hands of the shareholders. However, since shareholders’ RRSP contributions are tax exempt, this device allows a LSVCC to effectively replicate the ‘passthrough’ feature of the limited partnership. Second, individual investors reap an immediate tax benefit that translates into the equivalent of a return on investment of up to 323.73% (see note 7), and this return is realized in the tax year of the contribution. In short, the LSVCC structure allows for the replication of the pass-through feature of the limited partnership, with a tax subsidy added on top. Once again, this lowers the LSVCCs’ required rate of return relative to private funds. The variables recording the number of incorporations in each provincial jurisdiction in the demand equations are insignificant. By contrast, the coefficients for the federal incorporations variable are positive and significant in Ontario, Alberta and the Maritimes, although insignificant in the other jurisdictions. This evidence is consistent with the proposition that higher quality entrepreneurial firms attempt to signal their quality by incorporating in the more expensive federal jurisdiction (see Cumming and MacIntosh, 2000a, 2002a, for supporting evidence on jurisdiction shopping in Canada). Robustness Checks: Values versus Numbers; Different Stages of Entrepreneurial Firm Development Tables 4a and 4b provide estimates of the demand and supply equations similar to the ones reported in Tables 3a and 3b. One difference is in the choice of dependent variables. Instead of comparing specific jurisdictions, we use different stages of entrepreneurial firm development (Start-up, Expansion, Buyout, Turnaround, and all of these stages together comprise the ‘Total’ category). The other difference in Table 4 lies in the choice of provincial LSVCC variable: the Ontario variable is used because Ontario is the dominant venture capital jurisdiction.

(The results are robust to other

specifications, available upon request.) [Tables 4a,b About Here] Several items in Table 4 are noteworthy. The empirical results in the ‘Start-up’ and Expansion columns (in addition to the “Total’ column) are very similar. In respect of both supply and demand equations, those variables that are statistically significant are largely the same. In each case, the signs of the significant coefficients are as expected and exhibit roughly comparable magnitudes. In addition, the provincial LSVCC dummy is insignificant, the federal LSVCC dummy is significant (with a negative

20 coefficient), and the trend variable positive and significant in all three columns. These results suggest that crowding out is strongly present both in the start-up and expansion stages of financing. While the statistical results for buyout and turnaround financings are also consistent with some crowding out, the empirical results are less robust. The provincial LSVCC dummy is still insignificant, but the federal LSVCC dummy is insignificant (as opposed to being significant and negative for start-up and expansion financings), and the adjusted-R2 in these equations is much lower than for start-up and expansion financings. This evidence is consistent with the view that the most pronounced crowding out has occurred in relation to start-up and expansion financings (which constituted over 90% of the aggregate pool of Canadian venture capital in 2001). Table 4 also indicates that, for the turnaround stage variable, the prior year’s GDP growth is negative and significant. Turnaround stage investing is, by definition,17 investing in firms that are not earning their cost of capital. It is therefore quite intuitive that turnaround investments increase when there is a decrease in real GDP growth. Probably the most dramatic result in Tables 4a and 4b is in respect of the federal LSVCC dummy. In each regression, the coefficient is not merely statistically significant and negative, but economically large. Taken together, the two tables suggest that the presence of federal LSVCCs has resulted in more than 400 fewer venture capital investments per year (Canada wide), representing nearly $1 billion in value. As the other columns in these tables indicate, almost all of this represents lost start-up and expansion financing. This suggests extremely energetic crowding out. Taken together, Tables 3a, 3b, 4a and 4b indicate that our results are robust to alternative specifications (other specifications not reported are available upon request).

The Appendix further

considers the robustness of the econometric methods by use of a bootstrap experiment. 7. Summary and Conclusion Starting in 1983 and accelerating in the early 1990’s, many Canadian provinces adopted legislation allowing labour unions to sponsor co-called “labour sponsored venture capital corporations”, 17

See e.g. www.cvca.ca, www.evca.com.

21 or LSVCCs. These are essentially a highly specialized type of mutual fund, open to individuals at all points on the economic spectrum, that invest in small entrepreneurial companies in the same manner as private venture capital funds. However, unlike publicly traded mutual funds (and broadly similar to their private venture fund counterparts), such funds typically have investor lock-ins of eight years. While LSVCCs often have divided mandates, the major goal of the LSVCC programs has been to foster the growth of small and medium-sized firms in the sponsoring jurisdiction by augmenting the aggregate pool of venture capital available to such businesses. Generous provincial and federal tax incentives have induced a large flow of funds from individual investors into LSVCCs, so that at present the LSVCCs control over half of the total venture capital pool in Canada. The primary aim of this paper has been to determine whether the LSVCCs have “crowded out”, or displaced other types of venture capital funds, with a view to determining whether the LSVCC programs have in fact been successful in expanding the pool of venture capital. To this end we use a data set derived from data presented in the Canadian Venture Capital Association Annual Reports for 19782002, covering the data for the 25 years 1977 – 2001. The empirical evidence that we present suggests that the LSVCCs have not met their goal of expanding the pool of venture capital, and may in fact have led to some contraction. With total number of investments (and alternatively total funding) as the dependent variable, dummy variables used to reflect the adoption of the LSVCC legislation at the provincial level were uniformly insignificant, while a trend variable (reflecting the fact that venture capital the world over has been a growth industry over the period of time covered by our data) was both positive and highly significant. This is consistent with crowding out and inconsistent with the view that the provincial LSVCCs have increased the pool of venture capital. A dummy variable reflecting the adoption of federal LSVCC legislation (permitting an LSVCC to incorporate federally) was negative and statistically significant, suggesting that the federal LSVCCs have so energetically crowded out other funds as to lead to an overall reduction in the pool of venture capital. The coefficients for this dummy suggest that the existence of federal LSVCCs has led to 400 fewer investments per year on a Canada-wide basis, representing approximately $1 billion per year in value. Our empirical results also suggest that the lion’s share of crowding out has been at the start-up and expansion stages of financing. All of our regression results exhibit unusually high adjusted-R2 statistics and are robust to alternative specifications. We have suggested that this crowding out is a natural consequence of the tax advantage of the LSVCCs. This advantage lowers the LSVCC’s required rate of return. This in turn allows the LSVCCs

22 to outbid other types of funds for entrepreneurial investments, lowering rates of return and discouraging the establishment of non-LSVCC funds. That LSVCCs have crowded out other forms of funds (and private funds in particular) is not necessarily problematic from a public policy point of view, if the LSVCCs are a superior organizational form capable of generating higher returns than other fund types. However, LSVCCs do not appear to be a superior form of venture capital organization. On the contrary, our brief theoretical discussion suggests that we can expect LSVCCs to have markedly higher agency costs than private funds and to experience lower returns. While we have no direct measure of agency costs, our data does suggest that LSVCC profitability has been extremely poor, greatly lagging not only a benchmark of U.S. private fund returns, but even a Canadian stock market index. While we do not have data that directly compares the profitability of LSVCCs with private Canadian funds, Brander et al. (2002) produce evidence that LSVCC profitability is in fact significantly (in both a statistical and an economic sense) lower than that of Canadian private funds. Thus, the crowding out of private funds by LSVCCs appears in net to have weakened, rather than strengthened the Canadian venture capital industry by effectively transferring control of the supply of venture capital to an inferior organizational form. The harm occasioned by LSVCC funds is magnified by the fact, just noted, that the existence of federal LSVCC funds actually appears to have caused a reduction in the aggregate pool of venture capital. While a full evaluation of LSVCCs must take into account the split mandate of these funds, we have noted that many of the funds appear to operate on a purely for-profit basis. Moreover, the most common form of defence of the LSVCC programs is that they have increased the overall pool of venture capital at a time when capital contributions to private funds were stagnating, and this appears to have been the primary motivation for the creation of LSVCCs (Osborne and Sandler, 1998). Our evidence suggests that the LSVCCs have in fact played a causal role in keeping the private funds on the sidelines, through the mechanism of driving up deal prices and reducing the returns to private funds. The evaluation of crowding out in this paper does not take into account the tax expenditures that governments have made in respect of the LSVCC programs (in addition to grants made to various funds to encourage their establishment (Osborne and Sandler, 1998)). These tax expenditures are enormous. While a full accounting remains to be done, Osborne and Sandler indicate that in a single year (1996), the aggregate tax cost (excluding the tax expenditures associated with deductions for registered retirement savings programs) was CAN$470 million (measured in 1996 dollars) (Osborne and Sandler, 1998).

23 While the tax credits and investment deductability were made less generous in subsequent years, in the aggregate, these expenditures may well be in the billions of dollars. This evidence suggests that the various Canadian governments that have launched LSVCC programs should take a sober second look at the utility of these tax expenditures. The evidence also suggests similar empirical research on the effect of government sponsorship of venture capital in other countries is warranted. Appendix: Bootstrap Experiment Equations (1) and (2) in Tables 3a and 3b were estimated separately in each jurisdiction. Efficiency gains may arise from joint estimation across provinces. We consider a bootstrap experiment (see, e.g., Davidson and MacKinnon, 1993) to test the efficiency gain from system estimation over the western provinces (British Columbia, Alberta, Saskatchewan and Manitoba) and eastern provinces (Ontario, Québec, the Maritime provinces) separately (the data do not warrant system estimation over all the jurisdictions together). We report the results of the experiment in Table 5 for the variables measured in terms of the number of investments. The results indicate that for the available number of observations in the data, there is no efficiency gain from system estimation across more than one jurisdiction at a time. [Table 5 About Here] The bootstrap experiment for other specifications (including different methodologies, dependent and independent variables) yielded similar results and are available upon request.

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27 Megginson, W., and K. Weiss, 1991. “Venture Capitalist Certification in Initial Public Offerings.” Journal of Finance 46, 879-903. Osborne, D., and D. Sandler, 1998. “A Tax Expenditure Analysis of Labour-Sponsored Venture Capital Corporations.” Canadian Tax Journal 46, 499-574. Peng, L., 2002. “Building A Venture Capital Index.” Yale Center for International Finance Working Paper. Powell, A.A., 1966. “A Complete System of Demand Equations for the Australian Economy Fitted by a Model of Additive Preferences.” Econometrica 34, 661-675. Sahlman, W.A., 1990. “The Structure and Governance of Venture Capital Organizations.” Journal of Financial Economics 27, 473-521. Schweinbacher, A., 2002. “An Empirical Analysis of Venture Capital Exits in Europe and the United States.” Working Paper. University of Namur. Smith, B.G., 1997. “Comment.” In P. Halpern, ed., Financing Innovative Enterprise in Canada, University of Calgary Press, 674-677. Sorenson, O., and T. Stuart, 2001. “Syndication Networks and the Spatial Distribution of Venture Capital Investments.” American Journal of Sociology 106, 1546-1588. Vaillancourt, Francois. “Labour-sponsored venture capital funds in Canada: Institutional aspects, tax expenditure and employment creation”. In P. Halpern, ed., Financing Innovative Enterprise in Canada, University of Calgary Press, 571-592. Vermeulen, E.P.M., 2001. “Towards a New ‘Company’ Structure for High-Tech Start-ups in Europe.” Working Paper, Tilburg University.

Figure 1. Geographic Distribution of Venture Capital in Canada: 1977-2001 1200

1000

# Investments

800

600

400

200

0 77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

Year # Ontario

# Québec

# Alberta

# British Columbia

# Saskatchewan & Manitoba

# Maritimes

# Foreign

01

29 Figure 2. Geographic Distribution of Venture Capital in Canada: 1977-2001 3000

$Can Invested (millions of 1992 dollars)

2500

2000

1500

1000

500

0 77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

Year $ Ontario

$ Québec

$ Alberta

$ British Columbia

$ Saskatchewan & Manitoba

$ Maritimes

$ Foreign

01

30 Figure 3. Venture Capital Funds in Canada: 1988-2001

18000 16000 14000 12000

Can$ (millions of 1992 dollars)

10000 8000 6000 4000 2000 0 88

89

90

91

92

93

94

Year

New Venture Funds

Capital for Investment

95

96

97

98

Capital Under Management

99

00

01

31 Figure 4. Venture Capital Under Management by Investor Type in Canada: 1992-2001

18 16 14 12 10 $Can (billions of 1992 dollars) 8 6 4 2 0 92

93

94

95

96

97

98

99

00

Year

Corporate

Government

Hybrid / Institutional Direct / Foreign

Labour Sponsored

Private Independent

01

32 Figure 5. Selected Indices 1992 - 2002 700 The Peng (2001) data stops at 1999. The Venture Economics PostVenture Capital Index (PVCI) indicates an index value of 361.36 as at 06/28/2002 (based on venture-backed companies over the past 10 years). The Peng (2001) index is based on Venture Economics data, but there are some differences in the index computation methods.

600

Percentage Return

500

400

300

200

100

0

-100 Date

Globe LSVCC Peer Index

Globe Canadian Small Cap Peer Index

TSE 300 Composite Index

US VC Index (Peng, 2001, Figure 7)

33 Table 1. Legislation Governing Labour-sponsored Investment Funds in Canada: An Overview, By Jurisdiction Saskatchewan (1992), Nova Scotia (1994), and Prince Edward Island (1992) are similar to Part X.3 of the Federal Income Tax Act. Québec

Federal Government

British Columbia

Manitoba

Ontario

New Brunswick

I. THE STATUTE AND RELATED DETAILS 1. What is the legislation called? Act to Create Fonds de solditarité

Part X.3 of the Federal

The Employee Investment

The Manitoba Employee

Labour Sponsored

New Brunswick Income

du Québec (FTQ); And Act to

Income Tax Act.

Act.

Ownership Fund

Venture Capital

Tax Act and An Act

Corporation Act.

Corporations Act

create the Fonds de development de la Confederation des syndicats

Respecting the Workers Investment Funds.

nationaux pour la cooperation et l'emploi (Fondaction CSN) 2. When was it introduced? 1983 (Fonds de solditarité FTQ)

1988

1989

1991

Finance Canada

Ministry of Small Business,

Department of Industry,

Tourism and Culture

Trade and Tourism

1992

1993/1994

1995 (Fondaction CSN) 3. What government department is responsible for it? Ministry of Finance, Quebec

Ontario Ministry of Finance

New Brunswick Department of Finance

4. What is the rationale for this statute? To permit establishment of a labour-

To allow for establishment

To permit establishment of

To permit establishment of

To allow for the establish-

To permit establishment of

sponsored investment fund directed

of national labour-

a labour-sponsored invest-

a labour-sponsored invest-

ment of labour-sponsored

labour-sponsored investment funds that promote

by the FTQ that invests in Quebec

sponsored investment

ment fund that promotes

ment fund that promotes

investment funds that

enterprises with the goal of creating,

funds that will supply risk

job creation and protection

capital retention and a

supply risk capital to small

capital retention, a stable

maintaining or preserving jobs;

capital to small and

in all parts of British Colu-

stable economy, worker

and medium-sized enterp-

economy, and job creation

facilitates training of workers in

medium sized enterprises

mbia through risk capital

ownership, employment

rises and thereby contri-

and protection in New

economic matters, stimulates the

and thereby contribute to

supply to value-added

and continued resident

bute to economic develop-

Brunswick and, especially

economy through strategic invest-

Canadian economic

small- and medium-sized

ownership of firms in

ment, job creation and

in relation to the Workers

ments; and invites workers to part-

development, job creation

firms and that facilitates

Manitoba and that contri-

protection in Ontario.

Investment Fund, that

icipate in economic development

and protection.

economic and financial

butes to other goals, such

contribute to other goals,

education for workers.

as corporate social resp-

such as worker participat-

onsibility and worker

ion in economic matters.

through subscription to Fund shares.

economic education.

34 Québec

Federal Government

British Columbia

Manitoba

Ontario

New Brunswick

5. How many funds can be created? One Fund is established by each Act; An indefinite number.

An indefinite number, though only Originally one, Crocus Invest-

i.e., an Act for the Fonds de solditarité

one has been authorized by the

ment Fund. Amendments to the

An indefinite number.

national funds and one

An indefinite number of

(FTQ); an Act for Fondaction (CSN)

provincial government to date.

Act are being considered to

provincial fund.

allow for more than one fund. 6. Who can create a fund? The respective Acts

A union, as defined by federal

A labour body or other work-rel-

created the Fonds

law, that represents workers in

ated organization (with more than of Labour (MFL) is specif-

The Manitoba Federation

A provincial labour body; an org-

A union, as defined under the Fed-

solditarité; and Fondaction

more than one province or that is 150,000 members in British Colum ied as the Crocus Fund

or an entity registered under Part Workers Investment Fund, the New

composed of two or more affiliates bia), as defined by provincial law. sponsor

X.3 of the Federal Income Tax Act Brunswick Federation of Labour

anization of worker co-operatives; eral Income Tax Act; in the case of

7. How many funds have been established under this statute so far (March 1997)? Two; the Fonds de solditarité (FTQ)

Several are registered; however,

One. The Crocus Investment

Twenty, including the First Ontario One provincial fund; the Workers

and Fondication (CSN)

only two -- Working Ventures CanaFund

One. The Working Opportunity

Fund; legislative changes are

Investment Fund (and national

dian Fund, Inc., and Canadian Med-

under consideration to allow for funds, such as the Working Vent- the Working Ventures Canadian

ical Discoveries Fund, Inc. -- curr-

more Funds at the discretion of ures Canadian Fund). One Fund's Fund, Inc., and the Canadian Med-

ently operate fully (i.e., they both

the Minister.

raise capital and invest) as nat-

Investment Fund, Inc. So far, only

registration has been subsequentlyical Discoveries Fund, Inc., are withdrawn

ional funds in up to five provinces.

fully operative (i.e., they both raise capital and invest) as national funds in New Brunswick

8. What kinds of shares can a fund issue? Class A (common) shares

Class A (common) shares

Class A (common) shares

Class A (common) shares

Class A (common) shares

issued to individuals;

issued to individuals;

issued to individuals

issued to individuals;

issued to individuals;

Class A (common) shares issued to individuals;

Class G shares without

Class B shares issued to

Class G shares issued to

Class B shares issued to

Class B shares issued to

voting rights have been

the labour sponsor; others

Manitoba's Minister of

the labour sponsor; others

the labour sponsor; others

issued to the FTQ and the

determined as necessary

Finance; Class I shares

determined as necessary

determined as necessary

by the fund

by the fund

Class A shares only

Class A shares only

government of Quebec.

by the fund and as

issued to institutional inv-

The Fund administrators

approved by the Minister

estors (e.g., pension

may issue other categ-

of Finance

funds); and Class L shares

ories of shares which do

issued to the labour

not confer voting rights at

sponsor

the shareholders meeting 9. Which receive a tax benefit? Class A shares only

Class A shares only

Class A shares only

Class A shares only

35 Québec

Federal Government

British Columbia

Manitoba

Ontario

New Brunswick

10. What is the tax benefit? 15% provincial credit

15% federal credit with or without 15% provincial credit

15% provincial credit

15% provincial credit

(along with matching

a matching credit in every province (along with matching

(along with matching

(along with matching

(along with matching

federal credit). This

except Alberta and Newfoundland federal credit). This

federal credit). This

federal credit). This

federal credit). This

applies to a maximum of

(national funds obtain the second applies to a maximum of

applies to a maximum of

applies to a maximum of

applies to a maximum of

$3500 in annual share

credit only by satisfying govern-

$3500 in annual share

$3500 in annual share

$3500 in annual share

purchases per taxpayer

ment needs on a province-by-prov-purchases per taxpayer

purchases per taxpayer

purchases per taxpayer

purchases per taxpayer

$3500 in annual share

15% provincial credit

ince basis). This applies to a maximum of $3500 in annual share purchases per taxpayer. 11. Who can be a (common) shareholder? Any person. Quebec residency is

Any individual resident of

Any individual resident of British

one of the factors determining if an

Canada at the time of

Columbia (defined as being empl- at the time of buying

Any resident of Manitoba

individual is eligible for tax credits.

buying shares

oyed on a continuing basis for at

Any resident of Ontario at

Any resident of New

the time of buying shares

Brunswick at the time of

shares

buying shares

least 20 hours per week). 12. How long must shares be held? Until shareholder's retirement (age 60- Eight years (previously, it

Eight years

Seven years

65, or 55, if the shareholder avails him-was five years)

Eight years (previously, it

Eight years (previously, it

was five years)

was five years)

Yes. Shares can be redeemed

Yes. Shares can be redeemed

self of his right of retirement or early retirement). 13. Are there any exceptions? Yes. Shares can be redeemed earlier Yes. Shares can be redeemed under special circumstances, e.g.,

Yes. Shares can be redeemed

Yes. Shares can be redeemed

earlier in the event of the holder's earlier in the event of the holder's earlier in the event of the holder'searlier in the event of the holder's earlier in the event of the holder's

planned retirement, a return to school, death, severe illness/disability, or death, severe illness/disability,

holder's death, severe illness/

terminal illness, investment in one's

bankruptcy, job loss, (persisting

disability, retirement or financial in the event of sales/transfers

in the event of sales/transfers

company, emigration, an urgent need event of sales/transfers (per set

for at least six months) or in the

hardship or in the event of sales/ (per set conditions)

(per set conditions)

for liquidity, and a serious reduction

event of sales/transfer (per set

transfers (per set conditions)

change of nationality or in the conditions)

in income

death, severe illness/disability, or death, severe illness/disability, or

conditions) 14. Are any payroll deductions encouraged?

Yes. Quebec employers must remit

No

No

Yes. Manitoba employers must No

Yes, but only for the Workers Inv-

deductions to the fund if the lesser of

remit deductions to the fund if

estment Fund. NB employers must

fifty employees or 20% of the total

the lesser of fifty employees or

remit deductions to this fund if the

workforce so request

20% of the total workforce so

lesser of 50 employees or 20% of

request

the total workforce so request

36 Québec

Federal Government

British Columbia

Manitoba

Ontario

New Brunswick

II. RULES GOVERNING SHARE DISTRIBUTIONS 15. Is there a limit on how much capital can be raised per year through share sales? Not presently. There was

No

Yes. No more than a total

Yes. No more than a total

a temporary ceiling

of $40 million can be

of $30 million (or as deter-

imposed by provincial

raised annually

No

No

mined by the provincial

authorities in the period

government) can be raised

1993-1994

annually 16. Does the Act allow for the sale of shares by representatives trained by the Fund, including employees and/or Fund representatives?

Yes

No

No

Yes

Yes (in the case of First

No

Ontario Fund) 17. What public authority monitors a fund's sales activity? The Commission des

The securities commission

The British Columbia

The Manitoba Securities

The Ontario Securities

The New Brunswick

valeurs mobilieres du

or the appropriate authority

Securities Commission

Commission

Commission

Department of Justice

Québec

in each province where

Protecting the public in

sales occur 18. What is the role of regulatory authorities? Protecting the public in

Protecting the public in

Protecting the public in

Protecting the public in

Protecting the public in

share sales transactions,

share sales transactions,

share sales transactions,

share sales transactions,

share sales transactions,

share sales transactions,

information disclosure

information disclosure

information disclosure

information disclosure

information disclosure

information disclosure

requirements, etc.

requirements, etc.

requirements, etc.

requirements, etc.

requirements, etc.

requirements, etc.

No.

Not applicable.

No.

19. What provinces are currently open to national funds? No. (But Saskatchewan is

Yes.

open.)

Yes. (Nova Scotia and Prince Edward Island are also open.

20. What is the required period of fund shareholding? Until shareholder's age of retirement. Eight.

Eight.

Seven.

Eight.

Eight.

21. Does the jurisdiction allow for Union-directed share distributions? Yes.

No.

Restrictions of subsequent capital-

Deficiency taxes.

No.

Yes.

Yes (First-Ontario LSVCC).

No.

22. What are the investment level enforcement measures (see also #31)? raising.

Temporary suspension or revoc-

Temporary suspension or revoc- Deficiency taxes.

ation of fund registration.

ation of fund registration.

Deficiency taxes.

37 Québec

Federal Government

British Columbia

Manitoba

Ontario

New Brunswick

III. FUND DECISION MAKING 23. Who directs a fund? A Board of Directors, a majority of

A Board of Directors, at least one- A Board of Directors, at least one- A Board of Directors, a majority A Board of Directors, at least one- A Board of Directors, at least one-

whom are nominated by the FTQ, i.e., half of whom are nominated by the half of whom are nominated by the of whom are nominated by the

half of whom are nominated by the half of whom are nominated by the

10 members

labour sponsor

labour sponsor

labour sponsor

Manitoba Federation of Labour

labour sponsor (in the case of the Workers Investment Fund, the New Brunswick Federation of Labour).

24. Who else sits of a Board of Directors? -- 2 members elected by shareholders Shareholder represen-

Shareholder represen-

Elected or appointed

Shareholder represen-

-- 4 members representing: individual tatives elected at an

tatives elected at an

representatives of Class A,

tatives elected at an

Shareholder representatives elected at an

enterprises, financial institutions, soc- annual general meeting

annual general meeting

Class G and Class I

annual general meeting

annual general meeting

ial-economic interests, and a fourth -- and others as determined

and others as determined

shareholders

and others as determined

and others as determined

the 17th member is the President/CEO by the labour sponsor

by the labour sponsor

by the labour sponsor

by the labour sponsor

of the Fund IV. REQUIREMENTS OF INVESTMENT 25. In what kinds of business must a fund invest? A small- or medium-sized

A small- or medium-sized

A small- or medium-sized

A small- or medium-sized

company/partnership

company/partnership

company/partnership

company/partnership

ny/partnership (defined as having company/partnership

(defined as having no more

(defined as having no more

in a new and/or value-

(defined as having a max-

no more than 500 employees and (defined as having no more

than $50 million in assets;

than 500 employees and

added sector (e.g., manu-

imum of $50 million in

$50 million in assets). At least 10%than 500 employees and

or the net value of which is

$50 million in assets)

facturing and processing

assets). One-quarter of

of total investments must go to

industries, high technol-

newly-raised capital must

very small companies (defined as

ogy, tourism, aquaculture).

go towards deal sizes of

having no more than 50 employ-

less than $1 million.

ees and $5 million in assets)

a maximum $20 million).

A small- or medium-sized compa- A small- or medium-sized

$50 million in assets).

26. Where can a business be located? Anywhere, as long as the

At least one-half of company act- At least one-half of company act- The majority of a com-

majority of employees

ivity (e.g., defined as 50% of sal-

ivity (e.g., defined by 50% of sal-

pany's assets and work-

At least one-half of company act- At least one-half of company activity (e.g., defined as 50% of sal- ivity (e.g., defined as 50% of sal-

reside in Québec

aries and wages paid) must take

aries and wages paid) and most

force must reside in

aries and wages paid) must take

aries and wages paid) must take

place in Canada

assets must reside in B.C.

Manitoba

place in Ontario.

place in New Brunswick

27. What is the nature of the investment? Any financial assistance in the form of New equity in a company,

New equity in a company,

New equity in a company,

New equity in a company,

New equity in a company,

loan, underwriting, equity, shares, etc. et al

et al

et al

et al

et al

38 Québec

Federal Government

British Columbia

Manitoba

Ontario

New Brunswick

28. What is the required level of fund capital in equity (i.e., no debt securities) investments? 60% of previous year's average.

60% within one year.

80% within three years of capital

60% of previous year's

raising.

average.

70% within two years.

60% within one year.

29. Are there limits as to how a business can use a fund's investment? No

No

Yes. For instance, a company

Yes. For instance, the

Yes. For instance, a company can-No

cannot re-lend the money or inv-

money cannot be used

not invest the money in land unrel-

est in activity unrelated to the firm to unionize workers

ated to the firm or outside Canada

30. What level of total capital must be invested in business projects? At least 60% of the previous year's

60% of capital accumulated by

80% of capital must be

At least 60% of capital of the

50% of capital must be

60% of capital accumulated by

average net assets.

each year's end must be placed

placed in eligible projects

previous year's average net

placed in projects within

each year's end must be placed in

in projects by the following year.

within three years of it

capital. For the period 1996-97, one year of having it and

projects by the following year. In

(Special provisions apply for inv-

having been raised

the requirement was 75%. A

the case of national funds, the pro-

70% within two years

estments in very small companies,

majority of assets should supp-

vincial government determines ind-

i.e., with up to $10 million in assets

ort worker ownership and

ividual agreements for re-invest-

participation in some form

ment of sales proceeds in N.B.

31. What happens if this level is not met? The fund is restricted in

The fund pays a 20% deficiency

A fund's registration may

subsequent capital raising

tax and additional penalties (includ be temporarily suspended

The fund's registration may

The fund pays a 20%

The fund pays a 20% deficiency

be permanently revoked

deficiency tax. A rebate

tax and additional penalties (inclu-

ing possible revocation of a poss- or revoked, depending

on this tax is available

ding possible revocation of a fund's

ible revocation of a fund's registr- upon the circumstances

if appropriate action is

registration) depending upon the

ation) depending upon the case.

taken by the fund.

circumstances.

32. How are the rest of the assets to be invested? In reserves of liquid securities (e.g.,

Primarily, in reserves of liquid sec- Primarily, in reserves of liquid sec- Primarily, in reserves of liquid

cash, government bonds) or in other

urities (e.g., cash, government

vehicles according to the investment

urities (e.g., cash, government

Primarily, in reserves of liquid sec- Primarily, in reserves of liquid sec-

securities (e.g., cash, govern-

urities (e.g., cash, government

urities (e.g., cash, government

bonds) in the start-up period. The- bonds). Generally, assets must

ment bonds) or as determined

bonds). Generally, assets must

bonds) in the start-up period. The-

policy approved by the Board of Dir.

reafter, as determined by a fund.

by the fund.

be invested domestically.

reafter, as determined by a fund.

Yes. For instance, the

No

be invested domestically.

33. Are there other investment-related program requirements? Yes. For instance, a fund is enc-

Yes. For instance, the fund is

ouraged to provide education to

encouraged to emphasize work-

provide training to workers

workers on economic and finan-

er ownership, economic educ-

on economic and financial

cial matters and give priority to comation and empowerment of work-

economic awareness and

matters and to give

munity and regional economic

ers, and corporate social

empowerment of workers.

economic development

development.

responsibility

fund is encouraged to

No

Yes. The Workers Investment Fund is encouraged, for instance, to promote

39 Québec

Federal Government

British Columbia

Manitoba

Ontario

New Brunswick

V. RESTRICTIONS ON INVESTMENT 34. Is a fund restricted from investing in certain firms or sectors? No

No

Yes. A fund is restricted

Yes. A fund is restricted

Yes. No more than 15%

from investing is natural

from investing is natural

of a fund's total investment

resource industries (e.g.,

resource industries (e.g.,

can go towards publicly-

fishing, forest products,

agriculture, mining, oil and

traded enterprises

mining), the financial

gas), the financial sector

sector, land development

land development and

and retail

retail

No

35. How much can a fund invest in a single business? No more than 5% of the

The lesser of $15 million or

No more than $5 million

No more than 10% of

No more than $10 million

No more than $10 million

fund's total capital (or up

10% of fund capital at the

per company for a period

total fund capital at the

or 10% of fund capital

or 10% of fund capital

to 10% under special

time of an investment

of two years

time of an investment

at the time of an invest-

at the time of invest-

ment, whichever is less

ment, whichever is less

No

circumstances) at the time of an investment 36. Is a fund restricted as to its controlling share in a business? No

No

Yes. Majority control is

No. Majority control is

Yes. Majority control is

not permitted except under

encouraged if it facilitates

permitted by the Ontario

special circumstances

worker buyouts/owners

Minister of Finance on a

(e.g., worker buyouts/

hip

temporary basis in select

ownership or financial

situations (e.g., worker

distress)

buyouts, financial distress)

40 Table 2. Canadian Venture Capital Summary Statistics (1977-2001)* Ontario Full Date LSVCC Legislation Introduced

Pre-LS

Québec Post-LS

Full

1992

Pre-LS

Post-LS

British Columbia

Alberta

Pre-LS

Full

Full

1983

Post-LS

Manitoba & Saskatchewan Full

N/A**

1989

Pre-LS

Post-LS

Maritimes Full

1991***

Pre-LS

Post-LS

1993****

Mean Number of Venture Capital Investments per Year

181.920

58.867

366.500

203.520

15.833

262.790

63.640

12.917

110.460

30.880

31.640

6.357

63.818

11.920

2.647

31.625

Mean Value of VC Investments (millions1992 $Can) per Year

338.830

57.128

761.390

221.690

20.025

285.370

76.335

9.019

138.470

40.947

26.869

5.510

54.052

11.925

2.669

31.596

Mean #VC Investments / Mean Provincial Real GDP

0.0007

0.0003

0.0013

0.0014

0.00015

0.0018

0.0008

0.00023

0.0013

0.0004

0.0007

0.00018

0.0014

0.0003

0.00008

0.0007

Mean Value VC Investments / Mean Provincial Real GDP

0.001

0.0003

0.0025

0.0015

0.00019

0.0019

0.0009

0.00016

0.0016

0.0005

0.0006

0.00015

0.0012

0.0003

0.00008

0.0007

Mean #VC Investments / Mean TSE Index

0.039

0.023

0.060

0.038

0.00982

0.047

0.013

0.00575

0.019

0.008

0.007

0.00283

0.012

0.003

0.00100

0.005

Mean Value VC Investments / Mean TSE Index

0.061

0.023

0.116

0.043

0.01242

0.052

0.014

0.00401

0.022

0.010

0.006

0.00246

0.011

0.003

0.00101

0.005

Mean #VC Investments / Mean #Prov. Incorporations

0.004

0.002

0.007

0.010

0.00210

0.012

0.003

0.00083

0.005

0.002

0.006

0.00110

0.011

0.002

0.00050

0.004

Mean Value VC Investments / Mean #Prov. Incorporations

0.007

0.002

0.015

0.011

0.00265

0.013

0.003

0.00058

0.006

0.002

0.005

0.00095

0.010

0.002

0.00050

0.004

Mean #VC Investments / Mean #Fed. Incorporations

0.074

0.026

0.143

0.032

0.00185

0.042

0.201

0.07186

0.309

0.089

0.192

0.03342

0.390

0.078

0.01420

0.207

Mean Value VC Investments / Mean #Fed. Incorporations

0.128

0.026

0.281

0.035

0.00234

0.045

0.209

0.05018

0.357

0.122

0.162

0.02897

0.329

0.079

0.01432

0.207

* Real GDP data is over 1976-2000; Incorporation data is over 1975-1999. Full refers to the Full Sample. Pre-LS refers to the pre LSVCC period in each province. Post-LS refers to the post LSVCC period in each province. ** Not applicable; Alberta has not introduced LSVCC legislation. *** Manitoba (1991); Saskatchewan (1992). The Canadian Venture Capital Association does not separately present data for Manatioba and Saskatchewan. **** New Brunswick (1993-1994); Prince Edward Island (1992); Nova Scotia (1994); Newdoundland has not introduced LSVCC legislation. The Canadian Venture Capita Association does not separately present data for the Maritime provinces.

T a b le 3. D em an d a n d S u p p ly o f V e n tu re C a p ital in C a n ad ian J u ris d ic tio n s, 19 7 7 - 2 0 01 P a rt A . D ep e n d en t V ariab le s M ea su red in N u m b e r o f In v es tm e n ts C o e ffic ie n t (t-s ta tis tic) O n ta rio V a ria b le C o ns ta n t

5 Y e ar R e a l Interes t R ate

L as t Y e ar's T S E Ind ex R etu rn

S u p p ly

Q uébec

D e m an d

S u p p ly

B ritis h C o lu m b ia

D e m an d

S u p p ly

D e m an d

A lb e rta S u p p ly

M an ito b a & S as k atch e w a n

D e m an d

S u p p ly

D e m an d

M aritim e s S u p p ly

D e m an d

-34 .1 07

-36 .4 70

-61 .4 08

-52 .1 24

-2.06 7

2 .74 5

3 .32 8

6 .08 0

-13 .3 94

-12 .3 09

-3.67 6

-2.75 4

(-1.0 1 7)

(-0.9 9 7)

(-1.4 7 0)

(-1.0 9 2)

(-0.1 3 4)

(0.12 1)

(0.44 5)

(0.64 9)

(-1.7 2 9)*

(-0.9 6 7)

(-1.1 9 0)

(-0.4 2 5)

-46 8 7.4 00

-49 1 7.7 00

-51 6 8.0 00

-52 2 9.0 00

-17 6 4.1 00

-17 3 5.2 00

-33 6 .82 0

-52 0 .27 0

-56 0 .20 0

-56 2 .52 0

-43 4 .57 0

-48 1 .64 0

(-6.5 4 4)*** (-7.6 1 4)*** (-4.9 7 3)*** (-6.3 4 9)*** (-6.2 6 6)*** (-6.3 2 0)***

(-2.0 3 4)**

(-3.4 0 4)***

(-3.3 4 7)***

(-3.2 2 3)***

(-7.4 5 6)*** (-6.9 1 1 )***

1 86 .7 50

1 80 .1 90

2 64 .7 90

2 38 .8 50

1 37 .6 70

1 43 .7 10

2 0.1 5 6

2 3.6 8 8

3 3.0 5 9

3 2.4 7 2

2 4.2 5 9

2 6.7 1 3

(2.17 5)**

(2.34 0)**

(2.27 9)**

(2.31 2)**

(3.47 9)***

(3.92 2)***

(1.09 5)

(1.61 8)

(1.78 0)*

(1.65 2)*

(3.67 5)***

(3.81 1)***

L as t Y e ar's P ro v inc ia l

9 07 .3 10

9 42 .7 60

4 13 .8 70

5 37 .1 60

-28 8 .18 0

-33 5 .62 0

-6.77 2

-2.87 9

1 34 .1 70

1 39 .5 00

1 26 .1 30

1 20 .1 80

R e al G D P G ro w th

(1.84 2)*

(2.17 2)**

(0.57 4)

(0.82 5)

(-1.2 0 5)

(-1.4 2 3)

(-0.0 7 1)

(-0.0 3 8)

(1.05 7)

(1.11 1)

(2.15 7)**

(1.90 2)*

2 5.8 4 1

3 2.1 7 9

3 4.1 0 7

1 0.0 9 6

T ren d

2 9.4 7 1 (8.57 1)***

T e c h B ub b le

P ro v inc ia l LS V C C L eg is latio n

(9.85 3)*** (10 .4 50 )*** (11 .4 80 )*** (8.30 6)***

2 .84 9

3 .27 7

4 .81 2

4 .85 6

2 .38 5

1 .96 6

(5.47 9)***

(7.04 8)***

(6.24 0)***

(9.68 2)***

(6.98 2)***

(6.80 9)***

1 81 .0 00

1 83 .5 70

2 86 .2 60

2 74 .1 20

6 7.1 4 8

6 8.5 6 0

2 9.5 2 5

2 8.5 9 4

-10 .8 89

-10 .8 15

1 8.9 5 8

2 0.0 8 1

(3.24 3)***

(3.68 0)***

(4.19 9)***

(4.43 1)***

(3.18 9)***

(3.37 1)***

(2.37 8)***

(2.90 9)***

(-0.8 7 8)

(-0.8 6 4)

(4.02 9)***

(3.99 7)***

-15 .6 56

NA

-2.92 8

NA

-8.99 1

NA

NA

NA

1 .84 5

NA

-1.99 4

NA

(-0.4 9 5) F e de ral L S V C C Le gis la tion

9 .19 2 (8.49 6)***

-55 .9 75

(-0.0 6 3) NA

NA

(-0.7 3 1) NA

NA

(0.32 7) NA

NA

NA

(-1.7 3 8)* P ro v inc ia l Inc o rpo ratio ns

NA

(2 Y e ars P rio r) F e de ral In c o rp ora tion s fro m P ro v in c e

NA

A d jus ted R 2

-0.00 1

NA

0 .02 5

0 .92 9

-0.00 2

NA

(-0.9 3 6) NA

(2.48 6)** 0 .92 1

NA

(-0.1 8 6)

(-0.8 1 4)

(2 Y e ars P rio r)

-1.17 6

(-0.8 2 2)

0 .00 0

NA

(0.11 9) 0 .92 7

0 .93 3

* S ign ific an t a t th e 10 % le v el; ** S ign ific an t a t the 5% lev e l; *** S ig n ific a n t a t th e 1% le v e l.

0 .00 0

NA

(-0.2 5 2) 0 .02 7

NA

(0.96 3) 0 .90 7

0 .91 0

-0.00 1

NA

(-1.4 0 7) 0 .03 0

0 .80 5

0 .00 0

NA

(-0.0 7 2) NA

(2.34 3)** 0 .74 7

-6.96 9

-0.00 3

0 .83 1

0 .00 0 (-0.3 2 0)

NA

(-0.1 1 8) 0 .83 3

NA

(-2.1 8 3)**

0 .02 6 (1.76 6)*

0 .91 9

0 .91 2

42 Table 3. Dem and and Supply of Venture Capital in Canadian Jurisdictions, 1977 - 2001 Part B. Dependent Variables M easured in M illions of Real 1992 $Can Invested Coefficient (t-statistic) Ontario

Québec Dem and

Supply

Dem and

Alberta Dem and

Constant

-113.070

-118.170

-59.343

-57.716

-12.573

-13.281

7.657

14.184

-10.456

-8.207

-2.081

-1.474

(-0.875)

(-0.848)

(-1.158)

(-1.005)

(-0.392)

(-0.292)

(0.792)

(1.179)

(-1.040)

(-0.527)

(-0.753)

(-0.260)

-11137.0

-11563.0

-548.270

-863.930

-353.630

-356.190

-364.570

-393.250

(-1.630)

(-1.580)

(-4.004)*** (-4.414)*** (-4.344)*** (-4.962)*** (-4.625)*** (-5.488)*** (-2.560)*** (-4.541)*** Last Year's TSE Index Return

Supply

Dem and

M aritim es

Dem and

-5231.100 -5251.600 -2643.100 -2444.200

Supply

M anitoba & Saskatchewan

Supply

5 Year Real Interest Rate

Supply

British Colum bia

Variable

Supply

Dem and

(-6.987)*** (-6.370)***

388.040

376.170

200.710

187.300

164.210

176.950

39.107

45.068

18.843

16.966

21.810

23.416

(1.165)

(1.203)

(1.425)

(1.402)

(1.973)**

(2.998)***

(1.643)

(2.536)**

(0.782)

(0.670)

(3.690)***

(3.759)***

Last Year's Provincial

3113.200

3172.400

1074.400

1138.700

-219.020

-325.590

-21.577

-15.974

124.700

121.240

110.290

108.640

Real GDP Growth

(1.637)

(1.797)*

(1.212)

(1.343)

(-0.443)

(-0.828)

(-0.174)

(-0.174)

(0.760)

(0.743)

(2.106)**

(1.936)*

Trend

Tech Bubble

Provincial LSVCC Legislation

58.838

52.268

32.183

33.167

14.782

9.703

3.426

4.185

3.588

3.824

1.852

1.654

(5.045)***

(5.353)***

(8.995)***

(9.245)***

(4.989)***

(4.716)***

(5.094)***

(7.264)***

(3.782)***

(5.861)***

(6.109)***

(6.534)***

910.460

915.060

380.000

373.940

135.320

140.260

94.760

93.175

-11.062

-11.612

30.434

31.072

(4.198)***

(4.503)***

(4.530)***

(4.643)***

(3.133)***

(4.243)***

(5.900)***

(7.816)***

(-0.689)

(-0.714)

(7.219)***

(6.961)***

-27.635

NA

1.130

NA

-32.338

NA

NA

NA

3.066

NA

-0.547

NA

(-0.280) Federal LSVCC Legislation

-101.480

(.025) NA

NA

(-0.948) NA

NA

(0.463) NA

NA

NA

(-1.013) Provincial Incorporations

NA

(2 Years Prior) Federal Incorporations from Province

NA

Adjusted R 2

-0.002

NA

0.047

0.851

-0.001

NA

(-0.396) NA

(1.418) 0.844

NA

(0.065)

(-0.444)

(2 Years Prior)

0.483

(-0.256)

0.000

NA

(0.139) 0.906

0.909

* Significant at the 10% level; ** Significant at the 5% level; *** Significant at the 1% level.

0.000

NA

(-0.185) 0.197

NA

(3.223)*** 0.843

0.891

0.000

NA

(-1.956)* 0.050

0.893

0.000

NA

(-0.147) NA

(2.970)*** 0.844

-3.926

-0.007

0.639

0.000 (-0.248)

NA

(-0.209) 0.792

NA

(-1.391)

0.014 (1.098)

0.937

0.933

43 T a b le 4 . D e m a n d a n d S u p p ly o f V e n tu r e C a p ita l in C a n a d a b y S ta g e , 1 9 7 7 - 2 0 0 1 P a r t A . D e p e n d e n t V a r ia b le s M e a s u r e d in N u m b e r o f In v e s tm e n ts C o e ffic ie n t (t-s ta tis tic ) T o ta l V a r ia b le

S u p p ly

C o n s ta n t

5 Y e a r R e a l In te re s t R a te

L a s t Y e a r 's T S E I n d e x R e t u r n

L a s t Y e a r 's R e a l G D P G r o w t h

T re n d

T e c h B u b b le

O n t a r io L S V C C L e g is la t io n

S ta rt-u p

9 7 .7 1 3

-1 2 0 .2 3 0

3 5 .1 1 0

-6 5 .6 4 8

3 9 .8 1 6

1 4 .1 3 1

5 .8 9 5

1 6 .7 2 8

1 8 .2 1 5

(-1 .4 2 6 )

(0 .5 5 8 )

(-1 .6 6 2 )*

(0 .3 0 7 )

(-1 .3 7 0 )

(0 .5 3 5 )

(1 .8 1 2 )

(0 .5 2 4 )

(2 .3 1 8 )* *

(1 .6 9 1 )*

S u p p ly

Dem and

S u p p ly

Dem and

-1 3 2 2 4 .0

-1 5 8 8 7 .0

-8 2 3 7 .7 9 0

-9 9 8 6 .7 0 0

-4 4 1 6 .3 0 0

-5 4 1 8 .7 0 0

-3 0 6 .7 5 0

-2 4 4 .3 1 0

-2 5 2 .7 9 0

-2 3 4 .0 0 0

(-6 .4 2 5 )* * *

(-5 .8 1 4 )* * *

(-6 .2 6 5 )* * *

(-4 .7 0 2 )* * *

(-4 .9 1 3 )* * *

(-2 .0 0 6 )* * *

(-1 .4 0 4 )

(-1 .7 8 7 )*

(-1 .4 7 4 )

5 7 3 .6 8 0

5 9 6 .3 1 0

3 4 7 .7 9 0

3 6 3 .4 8 0

1 9 2 .1 3 0

2 0 0 .0 4 0

1 4 .0 7 8

1 3 .6 5 4

1 9 .2 7 6

1 8 .9 2 2

(2 .0 9 4 )* *

(2 .1 2 5 )* *

(1 .9 1 7 )*

(2 .0 1 0 )* *

(1 .5 9 4 )

(1 .5 9 6 )

(0 .7 1 6 )

(0 .6 9 0 )

(1 .0 6 2 )

(1 .0 4 9 )

1 9 4 5 .8 0 0

2 1 8 8 .2 0 0

1 2 0 6 .0 0 0

1 3 9 7 .6 0 0

1 0 2 8 .8 0 0

1 0 7 8 .4 0 0

4 5 .4 1 7

5 1 .2 5 7

-3 2 5 .5 1 0

-3 4 0 .7 1 0

(0 .8 8 0 )

(0 .9 6 4 )

(0 .8 2 3 )

(0 .9 5 5 )

(1 .0 5 9 )

(1 .0 6 3 )

(0 .2 8 7 )

(0 .3 2 0 )

(-2 .2 2 4 )* *

(-2 .3 3 4 )* *

1 0 2 .0 4 0

1 0 3 .3 1 0

6 0 .2 6 9

6 0 .3 1 2

3 8 .3 2 9

3 9 .7 6 8

1 .7 7 9

1 .4 8 8

1 .4 8 2

1 .7 8 6

(8 .0 2 7 )* * *

(7 .3 3 6 )* * *

(7 .1 2 0 )* * *

(6 .6 3 3 )* * *

(6 .9 9 4 )* * *

(6 .3 7 2 )* * *

(2 .0 2 5 )* * *

(1 .5 1 9 )

(1 .7 9 2 )*

(1 .9 8 7 )* *

5 3 8 .3 8 0

5 5 9 .7 6 0

2 4 3 .1 9 0

2 5 8 .2 4 0

2 8 0 .8 2 0

2 8 7 .5 5 0

2 0 .9 8 4

2 0 .8 5 2

-6 .3 6 2

-6 .9 4 1

(3 .2 3 5 )* * *

(3 .2 9 9 )* * *

(2 .2 0 6 )* *

(2 .3 6 2 )* *

(3 .8 3 4 )* * *

(3 .7 9 4 )* * *

(1 .7 5 7 )*

(1 .7 4 2 )*

(-0 .5 7 7 )

(-0 .6 3 6 )

1 6 .3 3 8

NA

5 .1 2 1

NA

1 3 .9 3 7

NA

-2 .6 2 7

NA

2 .4 1 8

NA

-4 1 4 .0 6 0

NA

(0 .2 0 9 ) NA

-2 7 1 .6 1 0

NA

-0 .0 0 6

NA

NA

0 .0 2 1

0 .9 2 0

-1 5 4 .5 0 0

NA

-0 .0 0 4

NA

NA

0 .0 1 4

0 .8 9 6

* S ig n if ic a n t a t t h e 1 0 % le v e l; * * S ig n if ic a n t a t t h e 5 % le v e l; * * * S ig n if ic a n t a t t h e 1 % le v e l.

9 .1 1 4

NA

-0 .0 0 3

NA

NA

0 .0 0 8

0 .9 0 5

3 .3 6 2

NA

0 .0 0 0 1 8

NA

-0 .0 0 0 4

0 .6 4 7

0 .0 0 0 0 0 0 2 (0 .0 0 1 )

NA

(-0 .6 6 0 ) 0 .6 3 7

NA

(0 .2 9 9 )

(0 .8 4 7 )

(1 .9 1 8 )* 0 .9 1 5

(0 .6 0 5 )

(0 .7 4 8 )

(-1 .8 5 0 )*

(2 .4 1 3 )* * 0 .8 9 8

(-0 .7 2 4 )

(-2 .0 6 6 )* *

(-1 .9 8 6 )* *

(2 .3 3 8 )* * 0 .9 2 6

(0 .5 3 5 )

(-2 .4 1 2 )* *

(-2 .0 3 3 )* *

( 2 Y e a r s P r io r ) A d ju s t e d R 2

Dem and

(-6 .1 8 5 )* * *

( 2 Y e a r s P r io r ) F e d e r a l I n c o r p o r a t io n s

S u p p ly

T u rn a ro u n d

-1 5 5 .5 8 0

(-2 .4 3 6 )* * P r o v in c ia l I n c o r p o r a t io n s

Dem and

B uyout

S u p p ly

(0 .2 3 8 ) F e d e r a l L S V C C L e g is la t io n

E x p a n s io n

Dem and

-0 .0 0 0 2 (-0 .4 2 5 )

0 .5 0 3

0 .5 0 3

44 T a b le 4 . D e m a n d a n d S u p p ly o f V e n tu r e C a p ita l in C a n a d a b y S ta g e , 1 9 7 7 - 2 0 0 1 P a rt B . D e p e n d e n t V a r ia b le s M e a s u r e d in M illio n s o f R e a l 1 9 9 2 $ C a n In v e s te d C o e ffic ie n t (t-s ta tis tic ) T o ta l V a ria b le

S u p p ly

C o n s ta n t

5 Y e a r R e a l In te re s t R a te

L a s t Y e a r 's T S E I n d e x R e t u r n

L a s t Y e a r 's R e a l G D P G r o w t h

T re n d

T e c h B u b b le

O n t a r io L S V C C L e g is la t io n

S u p p ly

-3 5 1 .7

1 6 6 .0

-2 2 6 .7 4 0

1 0 7 .1 6 0

-1 3 9 .8 4 0

7 6 .2 3 3

-2 .2 8 2

-4 7 .2 0 2

1 3 .9 8 5

1 2 .9 2 0

(-1 .0 8 7 )

(0 .3 4 4 )

(-1 .1 0 5 )

(0 .3 5 2 )

(-1 .1 2 3 )

(0 .4 2 1 )

(-0 .1 4 6 )

(-1 .5 9 5 )

(1 .8 1 2 )*

(1 .3 1 3 )

2

D em and

S u p p ly

D em and

-2 3 8 4 5 .0

-2 9 8 6 4 .0

-1 4 2 9 6 .0

-1 8 2 3 4 .0

-8 7 4 4 .7 0

-1 0 9 5 5 .0 0

-6 8 3 .6 2 0

-5 5 1 .4 5 0

-1 7 8 .9 5 0

-1 6 8 .3 8 0

(-4 .2 5 3 )***

(-3 .5 5 5 )***

(-4 .1 4 4 )***

(-3 .5 8 4 )***

(-3 .9 8 5 )***

(-2 .2 3 4 )***

(-1 .5 0 1 )

(-1 .1 8 2 )

(-0 .9 9 3 )

9 0 1 .7 9 0

9 5 7 .4 9 0

5 7 8 .6 9 0

6 1 5 .7 3 0

3 0 1 .3 1 0

3 2 0 .0 0 0

2 0 .7 1 7

2 1 .1 0 1

3 .4 2 9

3 .3 4 1

(1 .1 0 8 )

(1 .2 0 1 )

(1 .1 2 2 )

(1 .2 3 2 )

(0 .9 6 1 )

(1 .0 2 4 )

(0 .5 3 2 )

(0 .5 0 8 )

(0 .1 7 6 )

(0 .1 7 3 )

4 5 5 5 .7 0 0

5 2 3 9 .2 0 0

2 7 2 9 .7 0 0

3 1 7 6 .4 0 0

1 8 0 3 .3 0 0

1 9 6 2 .1 0 0

2 0 .7 1 7

2 8 7 .2 4 0

-1 6 5 .6 0 0

-1 6 6 .1 7 0

(0 .6 9 4 )

(0 .8 1 2 )

(0 .6 5 6 )

(0 .7 8 5 )

(0 .7 1 4 )

(0 .7 7 6 )

(0 .5 3 2 )

(0 .8 5 5 )

(-1 .0 5 5 )

(-0 .1 7 3 )

1 7 7 .9 0 0

1 7 7 .3 6 0

1 0 1 .3 1 0

1 0 0 .9 2 0

6 9 .0 5 9

7 1 .0 3 8

7 .2 4 5

3 .5 1 5

1 .3 5 2

1 .3 3 8

(4 .7 7 5 )***

(4 .4 5 3 )***

(4 .2 7 7 )***

(4 .0 4 0 )***

(4 .8 9 4 )***

(4 .5 7 9 )***

(3 .7 7 0 )***

(1 .6 4 9 )*

(1 .6 1 1 )

(1 .4 1 7 )

1 7 4 6 .3 0 0

1 7 9 8 .7 0 0

5 9 4 .1 4 0

6 2 8 .4 0 0

1 0 9 9 .1 0 0

1 1 1 5 .5 0 0

4 6 .2 0 4

5 0 .3 2 3

5 .3 3 9

5 .2 6 7

(3 .5 3 3 )***

(3 .7 2 9 )***

(1 .8 9 6 )*

(2 .0 8 0 )**

(5 .7 7 2 )***

(5 .9 0 0 )***

(1 .9 5 2 )*

(2 .0 0 7 )**

(0 .4 5 0 )

(0 .4 5 0 )

1 4 .9 1 8

NA

1 0 .6 7 0

NA

2 2 .1 8 7

NA

-3 2 .2 8 1

NA

-0 .1 4 5

NA

-9 3 0 .7 3 0

NA

(0 .0 8 9 ) NA

-6 0 6 .8 1 0

NA

-0 .0 1 4

NA

NA

0 .0 4 9

0 .8 3 6

-3 4 0 .2 8 0

NA

-0 .0 0 9

NA

NA

0 .0 3 2

0 .7 6 2

* S ig n if ic a n t a t t h e 1 0 % le v e l; * * S ig n if ic a n t a t t h e 5 % le v e l; * * * S ig n if ic a n t a t t h e 1 % le v e l.

1 2 .2 7 0

NA

-0 .0 0 5

NA

NA

0 .0 1 7

0 .8 8 3

1 .6 1 5

NA

0 .0 0 1

NA

0 .0 0 0 1

0 .7 4 1

0 .0 0 0 0 3 (0 .1 3 0 )

NA

(0 .0 8 4 ) 0 .7 5 8

NA

(0 .1 3 4 )

(1 .5 2 8 )

(1 .7 3 8 )* 0 .8 8 5

(-0 .0 9 6 )

(0 .5 0 7 )

(-1 .5 8 4 )

(1 .9 8 7 )** 0 .7 5 1

(-2 .4 5 3 )

(-1 .7 5 1 )*

(-1 .6 0 2 )

(1 .9 0 7 )* 0 .8 3 4

(0 .3 5 6 )

(-1 .8 9 7 )*

(-1 .5 5 1 )

( 2 Y e a r s P r io r ) A d ju s t e d R

S u p p ly

(-3 .7 6 0 )***

( 2 Y e a r s P r io r ) F e d e r a l I n c o r p o r a t io n s

T u rn a ro u n d

D em and

(-1 .8 4 4 )* P r o v in c ia l I n c o r p o r a t io n s

D em and

Buyout

S u p p ly

(0 .0 8 0 ) F e d e r a l L S V C C L e g is la tio n

E x p a n s io n

S ta rt-u p

D em and

-0 .0 0 0 1 (-0 .1 3 5 )

0 .3 9 7

0 .3 9 9

Table 5. Bootstrap Experiment 1000 Replications. Dependent variables measured in number of investments. Supply & Demand System Estimation Supply & Demand System Estimation Across Jurisdictions in Each Jurisdiction

Demand

Maritimes

Supply

Demand

Québec

Supply

Demand

Ontario

Supply

Coefficient Mean

Standard Deviation

Coefficient Mean

Standard Deviation

Constant

-26.920

51.801

-32.460

46.824

Interest Rate

-4603.000

985.510

-4675.350

975.570

TSE Return

215.970

122.490

184.255

116.975

GDP Growth

635.815

743.720

906.635

703.995

Trend

28.291

7.475

29.430

6.913

Tech Bubble

200.435

79.728

181.360

76.956

Provincial LSVCC

-20.290

73.536

-13.392

67.047

Federal LSVCC

-36.528

74.241

-59.317

70.707

Constant

-43.894

66.730

-37.520

62.432

Interest Rate

-4896.650

943.445

-4913.750

963.655

TSE Return

202.900

111.140

182.550

111.160

GDP Growth

658.690

654.805

919.715

607.825

Trend

24.802

4.720

25.903

4.589

Tech Bubble

197.045

70.837

184.540

68.996

Provincial Incorporations

0.000

0.003

-0.001

0.002

Federal Incorporations

0.027

0.026

0.026

0.026

Constant

-72.348

57.408

-61.784

54.369

Interest Rate

-5259.500

2055.150

-5226.500

1867.500

TSE Return

228.095

176.910

275.610

160.010

GDP Growth

955.290

1001.060

362.845

947.915

Trend

32.381

5.567

32.010

5.616

Tech Bubble

271.085

89.071

288.495

90.052

Provincial LSVCC

2.394

132.590

2.934

124.185

Constant

-59.303

99.677

-59.419

99.881

Interest Rate

-5217.700

1340.900

-5278.800

1343.750

TSE Return

181.760

169.910

238.415

163.730

GDP Growth

1200.100

1022.760

536.415

934.545

Trend

34.863

6.506

34.287

6.522

Tech Bubble

250.360

93.380

274.730

88.866

Provincial Incorporations

-0.003

0.007

-0.002

0.007

Federal Incorporations

0.000

0.007

0.001

0.007

Constant

-2.364

4.656

-3.592

4.468

Interest Rate

-418.105

84.341

-436.625

85.524

TSE Return

24.168

9.784

23.889

9.120

GDP Growth

106.935

83.161

124.340

77.265

Trend

2.124

0.630

2.394

0.591

Tech Bubble

19.990

6.481

18.849

6.514

Provincial LSVCC

0.183

5.947

-1.789

5.741

Federal LSVCC

-5.070

6.358

-7.242

5.962

Constant

-4.645

16.079

-2.614

14.908

Interest Rate

-461.220

107.040

-485.370

102.700

TSE Return

27.371

9.762

26.570

9.465

GDP Growth

92.863

88.495

120.940

83.662

Trend

1.797

0.659

1.969

0.612

Tech Bubble

21.824

6.976

19.824

6.925

Provincial Incorporations

0.000

0.004

0.000

0.004

Federal Incorporations

0.018

0.028

0.025

0.026

Table 5 continues on the following page…

47 Table 5. Bootstrap Experiment (continued) 1000 Replications. Dependent variables measured in number of investments. Supply & Demand System Estimation Supply & Demand System Estimation Across Jurisdictions in Each Jurisdiction

Supply Demand Demand

British Columbia

Supply

Manitoba and Saskatchewan

Demand

Alberta

Supply

Coefficient Mean

Standard Deviation

Coefficient Mean

Standard Deviation

Constant

3.396

9.933

3.517

9.632

Interest Rate

-339.635

210.425

-341.530

214.945

TSE Return

20.010

24.067

21.141

22.876

GDP Growth

-21.701

136.585

-4.607

119.645

Trend

2.908

0.665

2.850

0.658

Tech Bubble

28.195

15.766

29.637

15.892

Constant

8.932

19.218

5.550

19.223

Interest Rate

-637.480

258.095

-518.780

275.195

TSE Return

25.468

20.569

23.054

20.578

GDP Growth

-11.843

110.030

1.843

107.600

Trend

3.590

0.764

3.268

0.773

Tech Bubble

27.816

13.592

28.552

13.712

Provincial Incorporations

-0.001

0.001

-0.001

0.001

Federal Incorporations

0.047

0.029

0.030

0.031

Constant

-12.998

10.970

-13.308

10.245

Interest Rate

-554.465

241.955

-557.230

226.690

TSE Return

33.198

26.303

31.339

25.997

GDP Growth

73.264

194.305

132.010

184.695

Trend

5.003

1.760

4.821

1.704

Tech Bubble

-11.822

17.509

-11.196

17.753

Provincial LSVCC

3.954

17.640

0.920

16.800

Federal LSVCC

-5.793

19.619

-0.718

18.043

Constant

-20.757

30.038

-13.049

30.213

Interest Rate

-540.730

263.295

-550.670

256.170

TSE Return

29.902

30.848

32.285

31.316

GDP Growth

89.901

170.975

139.165

167.975

Trend

4.848

0.680

4.861

0.664

Tech Bubble

-11.944

17.464

-10.812

17.746

Provincial Incorporations

0.002

0.006

0.000

0.006

Federal Incorporations

-0.016

0.091

-0.006

0.091

Constant

-6.204

22.726

-2.305

23.386

Interest Rate

-1760.750

378.750

-1773.450

377.815

TSE Return

125.405

59.963

140.045

61.074

GDP Growth

-162.175

351.445

-300.990

359.275

Trend

10.317

2.685

10.114

2.602

Tech Bubble

68.706

29.515

65.770

29.530

Provincial LSVCC

-11.600

34.063

-8.678

32.201

Constant

-8.126

51.452

3.373

52.304

Interest Rate

-1679.000

371.585

-1726.650

400.720

TSE Return

124.000

48.302

146.410

52.169

GDP Growth

-159.535

357.795

-359.955

362.555

Trend

8.106

2.154

9.215

2.272

Tech Bubble

69.036

26.830

68.386

28.119

Provincial Incorporations

0.000

0.003

0.000

0.003

Federal Incorporations

0.109

0.073

0.025

0.075