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While there is growing interest about the efficacy of government intervention in entrepreneurial financing, most of research has focused on government venture capitals. Accordingly, less is known about the effects of indirect government intervention as a financer of private venture capital funds. We address this literature gap by exploring how VC investors’ investment behavior is altered by indirect government financing. Using a novel dataset of first rounds of financing by hybrid VC funds between 2005 and 2018 in South Korea, we show that VC syndication and investment size decisions are negatively associated with the proportion of government capital. Hurdle rate, an important element of fund compensation structure, has a moderating effect. Our results offer insight into how indirect government intervention can distort VCs’ investment behavior.
Bureaucratic Project Selection Under Uncertainty: Evidence from the SBIR Program
DePaul University Peter Klein,
Baylor University Ileana Maldonado,
Baylor University Kendall Artz,
Using an inductive theory-development study, and a longitudinal dataset, we examine SBIR agencies’ selection processes and criteria. Building on existing literature on decision-making and symbolic judgment, we test the effectiveness of bureaucrats’ criteria for making investment decisions. We found that bureaucrats’ decisions are largely subjective and have not been adequately captured in existing theory, in which comparative cognitive models of decision-making trumps formal analysis. We also found that treatment effects of SBIR funding on recipients predict –contrary to other findings– inefficient innovation and performance.
The Negative Effect of a Tax Incentive on Business Angels Investing in Technology Start-ups
Ben-Gurion University of the Negev Stav Rosenzweig,
Ben-Gurion University of the Negev Shai Harel,
Governments and policy makers are increasingly conscious of the importance of incentives in stimulating the development of performance. However, the literature offers mixed evidence regarding the impact of policies incentivizing investors – and especially business angels – to invest in technology start-ups. On the one hand tax incentive policies are likely to increase the number of investors and motivate existing investors to consider further investment, but other hand there is evidence that such policies do not attract investors. Using census data on 2,542 Israeli start-ups in seven high-tech industries with 4,774 business angels, we find that the policy, originally designed to increase investments in early stage firms, effectively decreases investments in these firms. We discuss these results and suggest future research.
Government Venture Capital and Start-ups’ Innovation Performance
Chinese University of Hong Kong Ramakrishna Devarakonda,
This paper investigates the role of government financing for start-ups’ innovation in the context of emerging economies. Specifically, we propose that government venture capital backing (GVC) can be an essential institutional financing mechanism that bestows legitimacy to start-ups and thereby promotes their prospects to access external resources and achieve superior innovation performance. Using longitudinal data on venture-backed Chinese biotechnology start-ups founded during 2002-2016 and controlling for potential selection and endogeneity issues, our empirical findings suggest that GVC funding positively influences start-ups’ innovation performance. More importantly, we suggest that the positive role of GVC on start-ups’ innovation performance hinges on aspects of founders’ social ties and credentials.
Production of valuable inventions is essential for start-ups' survival and growth. In transition economies where financing start-up innovation is embryonic, start-ups face barriers to access external resources. In these contexts, GVC helps governments in transition economies spur innovation by legitimizing venture investing and induce other resource providers to participate in sponsoring innovation activities, thereby enhancing start-ups' ability to acquire external resources for innovation. Besides, as start-ups may or may not have access to external legitimacy, GVC endorsement can be particularly valuable for entrepreneurial start-ups that cannot enjoy connections with resource-providers through the political capital or prestige of their organizational members as founders.