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The comovement between venture capital and innovation in China: what are the implications?

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Abstract

This study investigates the long-run co-movement between venture capital and technological innovation for 28 provinces (including autonomous regions) in China, using the panel cointegration and panel-based error correction model over the 2001–2012 period. Our results confirm that venture capital and innovation have long-run cointegrated relationships as well as bidirectional causality for the whole country. Analysis of sub-samples again discovers similar results in both the eastern and central regions, but not in the western region. The policy implication shows that China’s development of innovations should be based on more venture capital input and that the government should establish a long-run innovation policy to accelerate the development of venture capital. We also offer several constructive suggestions for governments in the western provinces.

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Notes

  1. We follow the selection of proxy variables in Popov and Rossenboom (2012) as well as in Anokhin and Schulze (2009).

  2. Heterogeneity reflects, for instance, the difference in living standards or economic development among the sample provinces; traditional works mainly use an estimation of instrumental variables (Kortum and Lerner 2000) or a quasi-natural experiment (Bertoni et al. 2010; Arque-Catells 2012) to control for endogeneity in regards to the influence of venture capital on innovation.

  3. We consider the availability of data and the serious deficiencies of venture capital investment data and innovation for Hainan, Qinghai, and Tibet provinces.

  4. We gather Applications, Asset, and Project from the China Statistical Yearbook: the Intellectual Property.

  5. The critical values of panel cointegration tests are tabulated by Pedroni (1999).

  6. Beijing’s negative influence between venture capital and innovation implies that venture capitalists prefer profitable items like REITs and other financial services there. In the future we shall research on whether real estate or other financial industries influence venture capital and innovation.

  7. Wang (2004) and Xu and Zhang (2011) argue that the pattern of traditional manufacturing development in northeast China (including Jilin province) results in high consumption, pollution, and low value-added features in the pursuit of output growth; however, this imbalanced development in the economic structure and a strong dependence on heavy industry reduce local economic growth and restrain R&D input.

  8. Eastern region: Beijing, Fujian, Guangdong, Hebei, Jiangsu, Liaoning, Shandong, Shanggai, Tianjin, and Zhejiang. Central region: Anhui, Henan, Heilongjiang, Hubei, Hunan, Jiangxi, Jilin, and Shanxi. Western region: Chongqing, Gansu, Guangxi, Guizhou, Neimenggu, Ningxia, Shaanxi, Sichuan, Xinjiang, and Yunnan.

  9. This may match the VC-first hypothesis proposed by Hirukawa and Ueda (2011), who define that VC always spurs innovation for new firms especially in the start-up stage.

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Acknowledgments

We thank the editor and anonymous referees for their helpful comments and suggestions. Jun Wen and Xiu-Yun Yang are grateful to National Natural Science Foundation of China for grant No.71673216 as well as 71673215, respectively. Any remaining errors are our own.

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Authors and Affiliations

  1. School of Economics and Finance, Xi’an Jiaotong University, Shaanxi, China

    Jun Wen, Xiu-Yun Yang, Gen-Fu Feng & Bo Sui

  2. Department of Marketing Management, Shih Chien University, Kaohsiung, Taiwan

    Chun-Ping Chang

  3. Institute of China and Asia–Pacific Studies, National Sun Yat-Sen University, Kaohsiung, Taiwan

    Chun-Ping Chang

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  1. Jun Wen
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Correspondence to Chun-Ping Chang.

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Wen, J., Yang, XY., Feng, GF. et al. The comovement between venture capital and innovation in China: what are the implications?. Qual Quant 51, 2489–2506 (2017). https://doi.org/10.1007/s11135-016-0405-3

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