The Dance Between Government and Private Investors: Public Entrepreneurial Finance around the Globe

Abstract

This paper examines how government funding programs geared towards early-stage companies interact with private capital markets. Using hand-collected data on 755 government programs worldwide, we find that governments’ allocations to such funding programs have been comparable to global venture capital disbursements in the past decade. Government programs were more frequent in periods with more private venture activity, a relationship that was stronger in nations with better public governance. The programs’ structures often relied on the local private sector. The private sector’s involvement was greater when government programs targeted earlier-stage companies and when rankings of government effectiveness were higher. We find that such government funding programs increased local innovation, particularly when the programs focused on early-stage ventures or collaborated with the private sector. These findings are most consistent with the explanation that the reliance on private capital markets enabled governments to mitigate investment frictions and improve capital allocation. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.