Industrial Policy in a New Era: Government Venture Capital in the U.S.-China Trade War
66 Pages Posted: 25 Sep 2022 Last revised: 5 Jul 2023
Date Written: July 2, 2023
We study the role of government-funded venture capital (GVCs) as industrial policy instruments amidst the U.S.-China trade war. We document a sizeable disparity in the investment responses of GVCs and independent VCs to trade war shocks, which we demonstrate is indicative of GVCs' industrial policy objectives. VC-backed startups that are more exposed to trade war shocks become more likely to receive GVC support in the form of re-investments, particularly if they exhibit higher levels of innovativeness. Exposed startups that are located in prefectures with stronger ex-ante GVC presence also engage in more innovation. These findings suggest that GVC involvement in the local economy creates a "compete-for-financing" effect among startups facing economic adversity. Our study provides insights into the inner workings of GVC programs in implementing industrial policies and the underlying economic mechanisms.
Keywords: Venture Capital, Trade War, Industrial Policy, Innovation, China.
JEL Classification: L52, F13, F14, G24, G28
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