Coming to Rescue or Going to Waste? Government Venture Capital in the U.S.-China Trade War
63 Pages Posted: 25 Sep 2022 Last revised: 30 Jan 2023
Date Written: January 29, 2023
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
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