The innovation and performance impacts of venture capital investment on China’s small- and medium-sized enterprises

ABSTRACT

This study examines the impacts of venture capital (VC) on performance and innovation of China’s small- and medium-sized enterprises (SME). Using unbalanced panel data of 2699 VC-backed and non-VC backed firms in China’s pilot over-the-counter equities market, namely the National Equity Exchange and Quotation (NEEQ) market, during 2005–2014, we find that venture capital financing not only spurs innovation in the Chinese market, but also exhibits significantly positive impact on financial performance. Empirical evidence reveals that syndication of venture capital investment as well as the reputation of venture capitalists helps to create value for VC-backed firms. However, no evidence is found that foreign VC-backed firms perform better than domestic VC-backed ones. The results are robust to a variety of specifications. Our findings imply that the VC financing is an effective channel to promote the development of SMEs at China’s multi-layer capital market and syndicated VC investments and venture capitalists with high reputation shall be encouraged to play a bigger role in nurturing innovation and entrepreneurship in the future.

KEYWORDS:

• Venture capital
• innovation
• research and development
• patent
• firm value

JEL CODES:

• G24
• O32
• O34

Acknowledgement

Financial supports from Ningbo Science and Technology Bureau Technology for Innovation Team [No. 2011B81006] and Soft Science Project [No. 2015A10008] for Dr. Xiuping Hua and Miss Miao Wang are gratefully acknowledged. Research [grant No. XK14006] from Academy of Financial Research, Zhejiang University for Dr. Xiuping Hua, Miss Miao Wang, and Miss Yali Wang is also gratefully acknowledged.

Disclosure Statement

No potential conflict of interest was reported by the author(s).