Government venture capital, corporate innovation, and firm value: evidence from small and medium sized firms in China

Student thesis: PhD Thesis


Steadily rising importance of governmental venture capital firms (hereafter, GVC) in many countries attracts researchers to evaluate their performance and impacts (Lerner, 1999; Gompers and Lerner, 2004; Bottazzi et al., 2008; Howell, 2014; Guerini and Quas, 2016; Zhang and Mayes, 2018; Dong et al., 2021). Despite the well-noted rationale of addressing market failures by filling in “funding gap” of entrepreneurial start-ups or innovative firms (Alperovych et al., 2020), empirical evidence on GVC performance or impact is rather mixed. Some prior studies document the successful experiences of promoting both the local venture capital markets and corporate innovation activities, such as the Small Business Investment Company (SBIC) in the US and the Yozma Program in Israel (Lerner, 1999; Gompers and Lerner, 2004; Howell, 2014). But others warn about a bunch of failures of government efforts in fostering venture capital industries and enhancing firm productivities, such as in Canada and European countries (Cumming and Macintosh, 2006; Brander et al., 2008; Cumming et al., 2017; Grilli and Murtinu, 2014). Overall evidence in this strand of studies suggests that GVC funds do not add extra value to their investees, underperform their private peers, or even crowd-out private investment (Alperovych et al., 2020).
The institutional features of the China’s venture market are very unique. China is renowned for state capitalism (Lazzarini, 2015; Li et al., 2015; Bardhan, 2016; Sun and Cao, 2018; Lazzarini et al., 2020). The Chinese state has played an important role of coordinating between various industrial and innovation policies, but misallocation of innovation resources by governments are not unusual (Boeing, 2016; Wei et al., 2017). Although a substantial body of economic research indicate potential negative consequences of government sponsored or supported venture capital investments in some developed countries (Cumming and Macintosh, 2006; Brander et al., 2008; Wallsten, 2000; Grilli and Murtinu, 2014; Alperovych et al., 2020), China have embraced the development of GVC without reservation since 1997, in particularly after 2009, and shifted a large proportion of government capital supply from subsides to venture capital. Thus, China’s state sponsored or supported VC industry has developed very fast in the last two decades and ranked top 1 in the world in term of total investment value since 2019.
Despite the policy interest, due to a lack of detailed data, there is relatively little well-identified empirical evidence evaluating how GVC affect innovative activities and performance of relatively young or small- and medium sized companies (hereafter, SME) in China. Only a very limited number of studies examine whether China’s GVC affect portfolio firms, such as Zhang and Mayes (2018), Ke and Wang (2020) and Dong et al. (2021), and almost all of them suggest GVC underperform their private peers, or generate negative consequences on investees. Zhang and Mayes (2018) show that portfolio companies backed by GVC underperform those backed by PVC in going public. Ke and Wang (2020) find that on average GVC underperform domestic PVC in both exit and innovation performance. Dong et al. (2021) document that GVC negatively affects green innovation, which is potentially attributed to the risk aversion and adverse selection of the GVC managers.
Building upon the existing literature that examines the impacts of GVC, we employ the sample with 13475 companies in the China’s National Equities Exchange and Quotations (NEEQ) market over the period of 2009 to 2020. The institutional features of China’s NEEQ make it a unique experience to explore. Being established upon over-the-counter equities market in Beijing, the NEEQ market is widely known as the New Third Board, namely the third-tier national equity trading revenue just after Shanghai and Shenzhen stock exchanges. Since its formal registration, it has been dedicated to providing equity financing support and trading service for innovative, high-growth SME in China. The development of NEEQ has gradually boosted the financial and innovation practice of SME by offering trading systems and infrastructures, improving market liquidity, and enhancing information disclosure quality, and so on. To mitigate endogeneity and establish causality, we employ propensity score matching (PSM) event study approach and difference-in-differences (DID) technique, providing conforming evidence that supports our hypothesis. To test the robustness of the results, we use alternative samples, econometric models and variable definitions.
In the first empirical chapter, we examine the impacts of venture capital (VC), particularly government venture capital (GVC), on innovation activity of China’s small- and medium-sized enterprises (SME). Using a difference-in-differences framework, our study finds that firms backed by GVC achieve higher patent number than their counterparties, however, they cannot obtain significantly higher proportion of novel patents. These results demonstrate that GVC can only increase patent quantity of portfolio firms, instead of patent quality. The GVC-backed firms patent more than non-GV-backed firms but these patents are not substantive and more incremental. We further disentangle two potential mechanisms: devoting resource channel and value-added channel. GVC investments facilitate their portfolio firms to obtain higher long-term leverage but lower short-term leverage, firms invest more funds in innovation activity after receiving funding. No evidence is found that GVC investors provide value added service to improve innovation capability of portfolio firms.
The second empirical chapter empirically examines the impacts of syndication investment of venture capital (VC), particularly government venture capital (GVC) with other types of venture capitals, on innovation activity of China’s small- and medium-sized enterprises (SME). Our study find that firms backed by syndication investment achieve a better innovation capability than their counterparties, however, the increase in patents activities do not translate to better firm performance for GVC-backed firms. Firms backed by syndication investments achieve better innovation capability in terms of patents number, the proportion of novel patents, citing number, family size and citation number, which indicates the interplay of GVC and PVC play an important role in helping Chinese SMEs to improve innovation capability in this pilot over-the-counter equities market. We further investigate that GVC investments facilitate their portfolio firms to obtain higher long-term leverage but lower average leverage. In addition, we investigate additional evidence that indicates that firms backed by syndication investments get their patent approval from patent application faster than non-GVC-backed firms and therefore achieve higher patent number. However, no evidence is found that syndication firms can outperform PVC backed firm in terms of ROA, ROE, sale growth, and employee growth, suggesting that the increase in patents activities do not translate to better firm performance for GVC-backed firms.
The third empirical chapter studies whether and how governmental venture capital firms (GVC) affect success of innovative companies in China’s third-tier equity market. Using a comprehensive set of data for Chinese small and medium sized firms listed in NEEQ, we find, compared to insignificant impacts of standalone investments from only GVC or private venture capital firms (PVC), syndicated investing of GVC and PVC significantly enhances success chance of firm graduation (IPO) to main stock markets. We also identify the three mechanisms through which syndications help firms graduate to main stock markets, namely resource allocation, information sharing, and innovation nurturing. Further investigation based on a quasi-natural experiment indicates that syndication impacts are more pronounced for nine key sectors that were supported by a national innovation-driven development strategy. Moreover, GVC as a later-stage investor in the syndication are more likely to enhance firm performance than those being an earlier-stage investor, which indicates that they play a facilitating rather than leading role in value creation process.
Date of AwardNov 2022
Original languageEnglish
Awarding Institution
  • University of Nottingham
SupervisorXiuping Hua (Supervisor)



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