Can Governments Foster the Development of Venture Capital?

Résumé

Exploring a novel dataset and a unique policy experiment, this paper examines the role of government intervention in the emergence of venture capital (VC) in China during 1999-2013. Using difference-in-difference methodology, I find that the central government program leads to an increase in local investment from both government and private VCs, which doubles the number of successful companies. I present two micro-level transmission channels of the crowding-in effects: through networks formed by previous investments and through co-ownership in VC affiliates. The positive impact is most pronounced in relatively less developed regions and during the early development of the VC sector. Evidence also suggests a possible downside of government intervention: government VCs underperform private VCs in terms of exits through initial public offerings (IPOs) and merges and acquisitions, potentially due to agency conflicts.