While extant research has demonstrated the positive impact of government venture capital (GVC) on innovation within its portfolio firms, the externalities exerted on local peers (defined as unfunded firms operating in the same city and industry sector as the portfolio firms) remain underexplored. To address this research gap, this study analyzes 23,164 GVC investment events in China from 2008 to 2023 and construct city–industry investment shocks to investigate this external effect. We find that GVC entry significantly enhances local peers' innovation performance, generating a distinct innovation ripple effect. Mechanism analysis reveals that this effect operates through two complementary channels: a demonstration-learning effect, whereby local peers learn from GVC-backed benchmarks to reduce innovation uncertainty, and an escape competition effect, which motivates peers to innovate under intensified market pressure. Notably, digital transformation strengthens of both mechanisms by enhancing local peers’ information-processing capacity and resource allocation flexibility. Further analysis indicates that the ripple effect is strongest among local peers with larger firms or those with higher total factor productivity (TFP), in more competitive or high-tech industries, and when GVC targets mature or non-state-owned enterprises (non-SOEs). These findings advance the understanding of GVC from a firm-level financing instrument to an ecosystem-restructuring innovation shock, enrich theories of policy-induced peer effects, and offer practical implications for cluster-level industrial upgrading.
Wang et al. (Wed,) studied this question.