Economic issues include:

• The New Economy

• Investment in computing

• Venture capital funding

Econometric issues include:

• Structural breaks

• Unit roots, non-stationarity and spurious regressions

Data issues include:

• Measuring the New Economy

The issue

In this chapter we will look at the relationship between computing investment and venture capital financing in the New Economy. Computing investment has been essential to the growth of the New Economy: Yang and Brynjolfsson (2001) argue that computerisation is the most pervasive technological change this era. IT (information technology) investments promoted improved macroeconomic performance, culminating from large increases in productivity and growth in the 1990s onwards, particularly in the US. Increasing GDP growth was accompanied by reduced volatility in GDP. This is because IT innovations played a key role in promoting greater flexibility; for example, innovations such as price comparison sites (e.g. dealtime.com and kelkoo.com) increased micro-economic flexibility via increased price transparency.

The New Economy grew rapidly from the 1990s onwards and its growth was enabled by venture capital injections. Venture capital is of particular importance because young entrepreneurs are responsible for a substantial proportion of the innovative New Economy investments. These entrepreneurs do not have profits retained from existing production. So venture capital funds are important in providing them finance for their new investments.

In this chapter we will explore the relationship between New Economy investment and venture capital funding.