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How to guide venture capital to startups? Evidence from China's Science and Technology Innovation Board

Author

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  • Bi, Ruigang
  • Kou, Zonglai
  • Zhou, Min

Abstract

Venture capital (VC) plays a vital role in supporting startups. However, in many developing economies, venture capitalists' tendency to prioritize later-stage over early-stage investments constrains their capacity to fund startups. China's recent Science and Technology Innovation Board (STAR) market establishment, with its focus on innovation ability over profitability, enables high-tech startups to list at early stages. This improves exit prospects for VCs investing to the early-stage startups. Employing a regression discontinuity design, our empirical analysis demonstrates that the STAR market establishment attracts additional capital to the VC market and guides VCs toward earlier-stage startups. Mechanism analysis indicates these effects stem from improved VC exit returns rather than heightened exit activities. Our findings underscore the efficacy of specialized stock markets for startups in channeling venture capital towards small and early-stage enterprises. These findings provide valuable insights for developing countries seeking to leverage VC for startup growth.

Suggested Citation

  • Bi, Ruigang & Kou, Zonglai & Zhou, Min, 2024. "How to guide venture capital to startups? Evidence from China's Science and Technology Innovation Board," Journal of Asian Economics, Elsevier, vol. 95(C).
    • Handle: RePEc:eee:asieco:v:95:y:2024:i:c:s1049007824001295
    DOI: 10.1016/j.asieco.2024.101834
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    More about this item

    Keywords

    Venture capital; Startups; Stock market; Regression discontinuity design;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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