Capital Market Integration for Innovation-Led Growth
Abstract: This paper studies how capital market integration shapes innovation-led growth. I develop a multi-country endogenous growth model in which venture capitalists channel household savings to domestic and foreign entrepreneurs. In the model, locations are heterogeneous in innovation opportunities and VCs face bilateral frictions that make cross-border investments more costly. A reduction in frictions reallocates savings towards higher-return innovation opportunities, reducing misallocation and increasing growth. To quantify this framework, I use micro-level data on venture capital deals to construct bilateral investment matrices across US states and EU countries. In the US, a large share of startup funding is provided by out-of-state investors. In Europe, financing is more home-biased, and cross-border flows within the EU are no larger than funding coming from the US. I calibrate the model to match these investment patterns and study the effects of deeper financial integration. Lowering intra-EU investment frictions to US levels would increase cross-border VC, strengthen innovation agglomeration in high-return hubs, and raise aggregate productivity growth.
Presentations (including scheduled): EEA 2026; 19th Annual Meeting of the Portuguese Economic Journal (2026); XXIX Workshop on Dynamic Macroeconomics (2026); PSE-CEPR Policy Forum 2026; 25th RIEF Doctoral Meeting (2026); 8th PhD Workshop at Queen Mary University London (2026); 6th Workshop for Women in Macroeconomics, Finance and Economic History (2026).
Economic Integration, Knowledge Spillovers and Growth