Venture capital investment and the performance of entrepreneurial firms: Evidence from China
Abstract We examine the contributions of venture capital investment to entrepreneurial firms in China. Based on a panel dataset of Chinese manufacturing firms, we investigate the performance and R&D activities of venture capital-backed (VC-backed) and non-VC-backed firms during the period 1998 to 2007. We explore whether VC-backed firms in China generally outperform their non-VC-backed counterparts, and if so, whether this outperformance is mainly attributed to the ex-ante screening or ex-post monitoring efforts of venture capitalists (VCs). We then determine whether the different types of VCs and investment approaches affect the ex-post monitoring efforts of VCs, and consequently, the performance and R&D activities of the VC-backed firms. Our analysis shows that VC-backed firms outperform non-VC-backed firms in terms of profitability, labor productivity, sales growth, and R&D investment. First, VCs select firms with higher profitability, labor productivity, and sales growth, as well as firms that invest more in R&D activities. Moreover, the differences in profitability and labor productivity are significantly magnified after VC entry. After receiving investment from VCs, firms on average achieve magnified higher ROS, ROE, and labor productivity compared to non-VC-backed firms. However, no evidence demonstrates the magnified improvement in sales growth or R&D investment of the VC-backed firms after the venture investment is made. We distinguish the screening and value added effects by using propensity score matching. We also use instrumental variables to determine whether the post-investment performance improvements of the firms are driven by the venture capital investment. Finally, we find different types of VCs and investment approaches affect the performance of the firms after the investment is made. Foreign VCs add more value to the firms they invest in compared to domestic VCs. Firms backed by syndicated investment perform better and invest more in R&D after the investment is made compared to those backed by non-syndicated investment and non-VC-backed firms.