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Government as Venture Capitalists in AI

Author

Listed:
  • Martin Beraja
  • Wenwei Peng
  • David Y. Yang
  • Noam Yuchtman

Abstract

Venture capital plays an important role in funding and shaping innovation outcomes, characterized by investors’ deep knowledge of the technology, industry, and institutions, as well as their long-running relationships with the entrepreneurship and innovation community. China, in its pursuit of global leadership in AI innovation and technology, has set up government venture capital funds so that both national and local governments act as venture capitalists. These government-led venture capital funds combine features of private venture capital with traditional government innovation policies. In this paper, we collect comprehensive data on China’s government and private venture capital funds. We draw three important contrasts between government and private VC funds: (i) government funds are spatially more dispersed than private funds; (ii) government funds invest in firms with weaker ex-ante performance signals but these firms exhibit growth rates exceeding those of firms in which private funds invest; and (iii) private VC funds follow government VC investments, especially when hometown government funds directly invest on firms with weaker ex-ante performance signals. We interpret these patterns in light of VC funds’ traditional role overcoming information frictions and China’s unique institutional environment, which includes important frictions on mobility and information.

Suggested Citation

  • Martin Beraja & Wenwei Peng & David Y. Yang & Noam Yuchtman, 2024. "Government as Venture Capitalists in AI," NBER Working Papers 32701, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32701
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    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • H19 - Public Economics - - Structure and Scope of Government - - - Other
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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