Can government venture capital guidance funds promote urban innovation? Evidence from China

Abstract Due to externalities and market failure, innovation activities are facing insufficient investment. Venture capital guidance funds (VCGFs) are an important policy implemented by China's government to guide private capital to participate in innovation and entrepreneurship activities, and it can have an important impact on scientific and technological innovation. Based on the panel data of 285 cities in China, this paper empirically analyzed the impact of VCGFs on innovation and its mechanism. VCGFs can significantly promote urban innovation and this role is sustained for three years following VCGF establishment. Further research shows that VCGFs do not have a direct impact on innovation but promote innovation by promoting the accumulation of innovative talent and capital, and the capital accumulation effect of VCGFs is the main path through which they promote urban innovation. Corruption is also a factor that restricts the effectiveness of an innovation policy. Thus, China's top‐down anticorruption campaigns can strengthen the ability of VCGFs to promote urban innovation. This paper opens the black box to show the mechanism through which VCGFs impact urban innovation, affirms the important role of the government in the regional innovation system, and clarifies the debate on government innovation policy.