Can Governments Foster the Development of Venture Capital? -Yue Fei- Toulouse School of Economics

Article: https://www.tse-fr.eu/sites/default/files/TSE/documents/sem2018/finance/fei.pdf

Key Points in the Article: Exploring a novel dataset and a unique policy experiment, this paper examines the role of government intervention in the emergence of venture capital (VC) in China during 1999-2013. Using difference-in-difference methodology, I find that the central government program leads to increased local investment from both government and private VCs, which doubles the number of successful companies. I present two micro-level transmission channels of the crowding-in effects: through networks formed by previous investments and co-ownership in VC affiliates. The positive impact is most pronounced in relatively less developed regions during the early development of the VC sector. Evidence suggests a possible downside of government intervention: government VCs underperform private VCs in terms of exits through initial public offerings (IPOs) and mergers and acquisitions, potentially due to agency conflicts.

Question: 5 Marks - Discuss the government's impact on venture capital.