Gold or green finger? Government involvement in venture capital investments and target firms' green innovations

The potential problem of insufficient investments from private venture capital firms provides a strong rationale for government involvement. However, its role in driving green innovations—an important innovation that integrates environmental benefits to align with regulatory pressures—remains underexplored. Drawing upon Resource Dependency Theory and incorporating Bureaucrat Tournament Theory, our study examines how government involvement in venture capital investments affects target firms' production of green innovations. Using a plausibly exogenous, top-down policy on government guidance funds in China and employing a staggered difference-in-differences approach, we find that target firms funded exclusively by government-supported venture capital firms are associated with fewer green innovations than those supported exclusively by private venture capital firms. Furthermore, the effects are more pronounced when the target firms are funded by government-supported venture capital firms associated with higher-level government and located in regions with greater government intervention. This study sheds new light on the intricate interplay between financial and technological innovations, adding to the venture capital literature by examining the lens of government involvement and investments. It also yields important strategy and policy implications.