Working Paper: NBER ID: w30161
Authors: Emanuele Colonnelli; Bo Li; Ernest Liu
Abstract: We study the demand for government participation in China’s venture capital and private equity market. We conduct a large-scale, non-deceptive field experiment in collaboration with the leading industry service provider, through which we survey both capital investors and the firms managing the invested capital by deploying it to high-growth entrepreneurs. Each respondent evaluates synthetic profiles of potential investment partners, whose characteristics we randomize, under the incentive that they will be introduced to real partners matching their preferences. Our main result is that the average firm dislikes investors with government ties. We show that such dislike is not present with government-owned firms, and this dislike is highest with best-performing firms. Additional results and surveys suggest political interference in decision-making is the leading mechanism why government capital is unattractive to private firms. We feed administrative microdata and our experimental surveys into a simple model of two-sided search to discuss the equilibrium effects of government participation. Overall, our findings point to the limits of a model of “state capitalism” that strongly relies on the complementarity between private firms and government capital to drive high-growth entrepreneurship and innovation.
Keywords: government participation; venture capital; private equity; China; field experiment
JEL Codes: C93; D20; D22; G0; G18; G28; G3; G38; G4; O0; O14; O16; O17; O25; O3; O38; O4; O40; O47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government ties (H10) | GP preferences for government capital (H54) |
| government ownership of GPs (L32) | dislike for government ties (P16) |
| high-performing private GPs (I11) | dislike for government capital (P16) |
| GPs dislike LPs with government ties (G38) | GP interest in establishing investment relationships (G24) |