Can Governments Foster the Development of Venture Capital?

Abstract

By exploiting a unique policy experiment in China and difference-in-differences methodology, I
find that government investments crowd in private investments, with a multiplier of 0.88-0.93.
The impact is most pronounced in less developed regions. I further show micro-level evidence of
the crowding-in effects through network linkages among limited partners and VC firms, consistent
with the signaling role of government investments. However, I also find a negative performance
gap between government and private VCs as measured by IPO exits. Evidence suggests that the
agency and the political frictions of governments can explain the negative performance gap.

Keywords: government investments, venture capital

JEL Classification: G24; G28; H76; O38