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

See all articles by Joy Chen

Joy Chen

Cheung Kong Graduate School of Business

Robin Kaiji Gong

HKUST Business School

Jinlin Li

Harvard Kennedy School; Peking University

Date Written: July 2, 2023

Abstract

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

Suggested Citation

Chen, Joy and Gong, Kaiji and Li, Jinlin, Industrial Policy in a New Era: Government Venture Capital in the U.S.-China Trade War (July 2, 2023). Available at SSRN: https://ssrn.com/abstract=4218297 or http://dx.doi.org/10.2139/ssrn.4218297

Joy Chen (Contact Author)

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

Kaiji Gong

HKUST Business School ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Jinlin Li

Harvard Kennedy School ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Peking University ( email )

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871
China

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