Government Venture Capital and Entrepreneurship: Evidence From China

Government venture capital funds (GVCs) are a global phenomenon. GVCs are central players in China's VC market, now the second largest globally. While existing literature often depicts China's GVCs as a successful public effort to promote entrepreneurship, this paper presents an alternative view. It explores the effect of city‐level GVC programs on entrepreneurship, as proxied by the formation of new businesses. Using a hand‐collected 20‐year dataset covering GVC program adoption, early‐stage investments, and new firm formation in 280 prefectural cities and employing difference‐in‐differences and weighted stacked event study methods, I find that Chinese GVCs are associated with a decrease in overall new firm formation. Interview‐based evidence and a triple‐differences analysis by industrial sector suggest that this result is driven by stringent investment restrictions imposed by GVC programs, which absorb private sector capital into GVC funds targeting specific industries, thereby discouraging new firm formation in non‐policy‐supported sectors. These findings offer a cautionary note to global policymakers regarding the complexities of public finance strategies aimed at boosting entrepreneurship.