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Governors’ Tenure and Venture Capital Firms’ Early-stage Investing: A Subnational Institutional Perspective

Authors:
Rui Shen at Zhejiang University
Rui Shen
Qingyun Lu at Zhejiang University
Qingyun Lu
Jun Yang
Jun Yang
Jun Yang
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Can Li
Can Li
Can Li
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Abstract and Figures

Drawing on the subnational institutional perspective, the study examines the role of governors in shaping the institutional environment and altering venture capital (VC) firms’ perceived risks associated with early-stage investments. Using data about provincial governors and VC investments in China from 2000 to 2016, we find that VC firms’ early-stage investment relates to the local governor’s tenure in a U-shaped manner considering the varying level of political uncertainty jointly shaped by the governors’ incentives and capabilities over the tenure. The U-shaped relationship is steeper when the provincial governor is promoted to the current position and has substantial local experience, while is flatter for government-backed VC firms. Incorporating the political business cycle perspective, the study contributes to the institutional theory literature by highlighting the role of politicians who serve as subnational institutional agents in VC firms’ risky decisions. It also enriches the VC literature by adding a novel explanation of early-stage investments.
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Small Bus Econ
https://doi.org/10.1007/s11187-025-01005-6
RESEARCH ARTICLE
Governors’ Tenure andVenture Capital Firms’ Early‑stage
Investing: ASubnational Institutional Perspective
RuiShen · QingyunLu· JunYang· CanLi
Accepted: 21 January 2025
© The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature 2025
Abstract Drawing on the subnational institutional
perspective, the study examines the role of gover-
nors in shaping the institutional environment and
altering venture capital (VC) firms’ perceived risks
associated with early-stage investments. Using data
about provincial governors and VC investments in
China from 2000 to 2016, we find that VC firms’
early-stage investment relates to the local gover-
nor’s tenure in a U-shaped manner considering the
varying level of political uncertainty jointly shaped
by the governors’ incentives and capabilities over
the tenure. The U-shaped relationship is steeper
when the provincial governor is promoted to the
current position and has substantial local experi-
ence, while is flatter for government-backed VC
firms. Incorporating the political business cycle
perspective, the study contributes to the institu-
tional theory literature by highlighting the role of
politicians who serve as subnational institutional
agents in VC firms’ risky decisions. It also enriches
the VC literature by adding a novel explanation of
early-stage investments.
Plain English Summary How does the gover-
nor’s tenure impact venture capital (VC) invest-
ments in early-stage startups in China? This study
explores the relationship between the tenure of
provincial governors and VC firms’ decisions to
invest in early-stage startups within their regions.
The findings reveal a U-shaped relationship: VC
firms are less likely to invest in early-stage ven-
tures during the middle of a governor’s tenure due
to the higher likelihood of policy changes, which
increases political uncertainty. Promoted gover-
nors and governors with substantial local experi-
ence tend to amplify this U-shaped relationship,
while government VC firms are less affected by
such uncertainty, thus weakening the relationship.
The main implication of our study is that gover-
nors should recognize the influence of their tenure
on VC firms’ investment decisions and create a sta-
ble and attractive investment environment to foster
innovation and entrepreneurship.
Keywords Venture capital· Political uncertainty·
Early-stage investment· Governor tenure
JEL classification G24· L26· M13
R.Shen· Q.Lu· J.Yang
School ofManagement, Zhejiang University, Hangzhou,
China
e-mail: ruishen@zju.edu.cn
Q. Lu
e-mail: qingyunlu@zju.edu.cn
J. Yang
e-mail: yangjun_0708@zju.edu.cn
C.Li(*)
Business School, China University ofPolitical Science
andLaw, Beijing, China
e-mail: lican329@126.com
Content courtesy of Springer Nature, terms of use apply. Rights reserved.
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