Mixed government and private funding leads to better success in innovation and enterprises.
Brander et al. 11 [James Alan Brander (born 1953) is a Canadian economist and a professor of Asia-Pacific International Trade, University of British Columbia. He is known as co-author of a seminal 1986 article in The American Economic Review, with Tracy R. Lewis, on "Oligopoly and Financial Structure: The Limited Liability Effect", as well as his work in international trade with Barbara Spencer, particularly the Brander–Spencer model, in which a government can enhance national welfare by subsidizing domestic firms to aid in their competition against foreign markets. Qianqian Du studies a common organizational structure of venture capital investments: syndication and networks. She also examines the role of government in venture capital investments and this study was included in the private equity report of the 2010 World Economic Forum in Davos. For her study of financial analysts, she shows sharing the same cultural backgrounds with the covered firms could improve an analyst’s forecasting performance. This paper won the CICF Best Paper Award and the TCFA Award for the Best Paper on Corporate Finance in 2013. In her recent research, she examines the implications of extreme analyst forecasts. Dr. Thomas Hellmann is a Professor of Entrepreneurship and Innovation at the Saïd School of Business, University of Oxford. He is the Academic Director of SBS Entrepreneurship Centre and the Academic Advisor of the Oxford Foundry.; Review of Finance (2015); pgs. 571-572; “The Effects of Government-Sponsored Venture Capital: International Evidence.”]
This article examines enterprises funded by government-sponsored venture capitalists (GVCs). We find that enterprises funded by both GVCs and private venture capitalists (PVCs) obtain more investment than enterprises funded purely by PVCs, and much more than those funded purely by GVCs. Also, markets with more GVC funding have more VC funding per enterprise and more VC-funded enterprises, suggesting that GVC finance largely augments rather than displaces PVC finance. There is also a positive association between mixed GVC/PVC funding and successful exits, as measured by initial public offerings (IPOs) and acquisitions, attributable largely to the additional investment. 1. Introduction Governments around the world have taken a strong interest in venture capital (VC). This interest stems in part from the important role venture capitalists have played in the development of some of the world’s most influential enterprises. More broadly, VC provides significant support in many countries for entrepreneurial enterprises that are major sources of innovation, employment, and productivity growth. In addition, there is a sizable body of research in economics emphasizing potential market failures associated with innovation and entrepreneurial finance—market failures that might create a reasonable economic rationale for government intervention in VC markets. 2 It is therefore not surprising that many governments encourage the provision of VC finance to entrepreneurial ventures. The global public sector commitment to VC is substantial, including forgone taxes, outright subsidies, preferential regulation, and public provision of investment capital. In our data, VC firms owned or supported by governments invested over $4 billion per year in privately held enterprises around the world. Over a quarter of all enterprises financed by VC received some government sponsored VC funding. However, there is also considerable resistance, or at least scepticism, regarding the role of government in VC finance as expressed, for example, in Cohen and Noll (1991) and Lerner (2009). Critics doubt whether governments can improve upon private sector VC activity and many fear that government activity in VC markets might be associated with problems arising from political pressures, rent-seeking, and general bureaucratic inefficiency.