Coming to Rescue or Going to Waste? Government Venture Capital in the U.S.-China Trade War

Abstract

We study the role of government-funded VCs (GVCs) in the U.S.-China trade war. We document that the trade war contributed to a downturn in China's VC market by substantially reducing the investment rate of independent VC funds. In contrast, GVC investments were unaffected, likely driven by policy initiatives. Innovative startups in high-exposure industries became more likely to receive follow-on financing from GVCs, and those located in prefectures with higher ex-ante GVC activity filed more patents. These results suggest that GVC activity in the local economy leads to a "compete-for-financing" effect that mitigates underinvestment in innovation during market downturns.

Keywords: Venture Capital, Trade War, Innovation, Industrial Policy, China

JEL Classification: E22, F13, F14, G24, G28