Does public policy towards venture capital promote local innovation? Evidence from China's establishment of fund town

Abstract

This paper explores how a place-based policy in China, the fund towns, affects local innovation. Using the staggered establishments of fund towns in various Chinese cities, we find that the establishment of fund towns has positive effects on local innovation. The increasing investments by the venture capital firms offered by the establishment of fund towns are the plausible underlying channel through which fund towns promote local innovation. Additional tests reveal there exist a spillover effect, that is, the innovation in nearby cities increase after the establishment of fund towns.