Working Paper

[1] Government as an Equity Investor: Evidence from Chinese Government Venture Capital through Cycles (Job Market Paper)


Abstract: This paper studies the behavior and performance of government venture capital (GVC) through the market cycles. I construct the first comprehensive database of government involvement in venture capital (VC) in China from 1999 to 2018. With over USD 1 trillion raised and an explosive growth rate of 25% annually, China has become the second-largest venture market globally. GVC is an essential feature of the Chinese VC market, accounting for 40% of the deals and 50% of raised funds. Compared with private venture capital (PVC), GVCs invest more in local, manufacturing, and early-stage deals. Also, GVCs underperform PVCs by 30%. Next, across venture market cycles, GVC behavior is less cyclical than their private counterparts: GVCs tend to raise more money and invest more during downturns. More interestingly, the performance of GVC is also less cyclical: the performance gap between GVC and PVC is reduced by 60% during downturns. A likely channel for this improved performance is governments' "deep pockets" because the results are driven by fiscally healthy cities. This improvement is not explained by a change in VC quality and other unobservable government assistance during downturns. Overall, I believe a government's policy orientations and its ability to deploy capital locally during challenging times are crucial to understanding GVC’s role in the capital markets and the broader economy.

[2] Coming to Rescue or Going to Waste? Government Venture Capital in the U.S.-China Trade War (with Joy Chen and Kaiji Gong)


Abstract: Based on a novel dataset of venture capital (VC) funds and startups in China, we study the role of government-funded VCs (GVCs) in supporting entrepreneurship during the U.S.-China trade war. Employing a difference-in-differences strategy, While the trade war resulted in a substantial reduction in the likelihood of independent venture capital (IVC) funds investing in industries with higher trade war exposure, it had little impact on GVCs. Further analysis suggests that GVCs' investment behavior is likely driven by policy initiatives rather than differences in investment expertise or investment and exit opportunities, as technology-intensive companies with heightened trade war exposure were more likely to receive follow-on financing from GVCs. Companies located in prefectures with a higher density of GVC activities filed more patents in response to the trade war shocks, suggesting that a more active presence of GVCs in the local economy results in a "compete-for-financing" effect that mitigates the problem of underinvestment in innovation during economic downturns. Meanwhile, we find limited evidence of misallocations in GVC investments or adverse selection of startups seeking GVC financing in the short term.


[3] Riding Out the COVID-19 Storm: How Government Policies Affect SMEs in China (with Joy Chen, Zijun Cheng, and Kaiji Gong)

China Economic Review, Forthcoming


Abstract: Based on a nationally representative survey on SMEs in China, we study the impact of government policy interventions on SMEs during the COVID-19 pandemic. Our findings are three-fold. First, relief policies in the form of payment deferrals and exemptions significantly improve SMEs' cash flows and further stimulate their operational recovery. This effect is more pronounced for firms with larger shares of high-skilled employees. Second, financial support policies do not appear to be effective in alleviating SMEs' cash constraints or encouraging the reopening of small businesses, potentially due to difficulties in accessing policy-oriented loans and misallocation of credit. Last, regional and local lock-down policies decrease SMEs' incidence of reopening and delay their expected reopening in the near future, likely by reducing consumer demand. Our findings shed new light on the policy debates on supporting SMEs during the COVID-19 pandemic.


[4] Entrepreneurial Spillovers from Venture Capital (with Josh Lerner and Tong Liu)

[5] Job Creation with Rapid Technological Progress: Skill Demands and Amenity Provision (with Yiqing Mo and Xincheng Qiu)