How does venture capital spur the innovation of environmentally friendly firms? Evidence from China

Abstract

Previous literature has discussed the relationship between venture capital (VC) and green innovation; however, green innovation is seldom noted as having been created by both environmentally friendly and pollution-intensive firms, even though most VCs are actually invested only in environmentally friendly firms. Thus, this study focuses on the relationship between VC and the green innovation of environmentally friendly firms. The analysis combines traditional patent data with homogenous citation data to jointly examine the quantity and quality of VC-funded firms' green innovation. Results suggest that VC support not only improves firms' success rate of patent application but also increases the innovation “value” represented by increased citation. The Chinese government has asked government VC (GVC) to be a long-term strategic investment for environmentally friendly firms. However, we found that GVC negatively affects green innovation, which may be caused by the risk aversion and adverse selection of the GVC manager. By comparing the roles of experienced foreign VC and full-sample VC, we confirmed that the investment skills of developed countries could enhance the quantity and quality of green innovation in China.