Re-Engineering a Venture Capital Market: The Case of China

Abstract

The U.S. venture capital market is the world’s most developed and most successful venture capital market. Replicating the American experience in the creation of a venture capital market brings up the “simultaneity problem” as coined by Prof. Ronald Gilson – three central inputs must be simultaneously available: (1) capital with the appetite for high-risk high-return investments, (2) specialized investment vehicle which properly incentivize all participants in the venture capital market, and (3) entrepreneurs.China is now the second largest country in venture capital investment, ranking only after the U.S. China offers a fascinating case study of engineering a national venture capital market. This article contributes to the existing literature by exploring the role of law and the government in building up the Chinese venture capital market, and shows that the Chinese government has played a major role in shaping the underpinning legal and regulatory infrastructure of the venture capital market. Based on empirical and comparative evidence, this article finds that the three-factor simultaneity problem has gradually been solved through legislative efforts in providing and encouraging venture capital funding, introducing new business vehicles, as well as encouraging entrepreneurship. The paper also examines the peculiar Chinese problems within each factor and suggests legal solutions to those problems. Several other determinants that have been important to China’s venture capital experience are also discussed in this paper. Ultimately, this paper concludes that the Chinese government has made significant progress in engineering a venture capital market. This can be largely attributed to the evolution of the central government’s role vis-a-vis the fund – from being a direct participant in the capital allocation process, to a facilitator that merely provides seed funding. Nonetheless, in order to realize the industry’s full potential, there is still room for improvement in various social, legal, and economic areas.