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Investing with the Government: A Field Experiment in China

Author

Listed:
  • 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.

Suggested Citation

  • Emanuele Colonnelli & Bo Li & Ernest Liu, 2022. "Investing with the Government: A Field Experiment in China," NBER Working Papers 30161, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:30161
    Note: AP CF DEV EFG IFM ITI POL PR
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    Cited by:

    1. Zhang, Jing & Fan, Yueqi & Liu, Ye, 2024. "The effects of government venture capital: New evidence from China based on a two-sided matching structural model," Journal of Corporate Finance, Elsevier, vol. 84(C).
    2. Ge, Guoqing & Xue, Jian & Zhang, Qian, 2024. "Industrial policy and governmental venture capital: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 84(C).
    3. Hu, Xiao & Wang, Jiayi & Wu, Banggang & Xiang, Shuting, 2023. "Venture capital firms' lead orientation and entry to new investment markets," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).

    More about this item

    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D2 - Microeconomics - - Production and Organizations
    • D20 - Microeconomics - - Production and Organizations - - - General
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • G0 - Financial Economics - - General
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • G4 - Financial Economics - - Behavioral Finance
    • O0 - Economic Development, Innovation, Technological Change, and Growth - - General
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O25 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Industrial Policy
    • 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
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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