The Differential Effect of Government- and Private-backed Venture Capital on Firm Performance : Certification vs . Value-Add

Abstract

The government has taken the dual role of filling the equity gap inherent in the investment of early-stage firms and inducing private venture capital investment. From the perspective of the latter role, the literature has examined whether the government-backed venture capital (GVC) substitutes or complements private-backed venture capital (PVC). Whereas many studies found that GVC substitutes PVC from fund level analysis, other studies have found GVC complements PVC from firm level analysis. So far few scholars have shown empirically but were unable to explain how complementarity of GVC and PVC on raising portfolio firm’s performance takes place. Thus, this paper aims to explain the mechanism behind complementarity of GVC and PVC by arguing that GVC takes the certification role and PVC takes the value-adding role. We predict that while increased equity participation by GVC increases the opportunities of obtaining long-term debt, increased equity participation by PVC increases the operating efficiencies of the portfolio firms. We find support for our arguments by carrying out fixed effects panel estimation on 3,342 venture capital backed firms in South Korea from 1994-2010.