The comovement between venture capital and innovation in China: what are the implications?

This study investigates the long-run co-movement between venture capital and technological innovation for 28 provinces (including autonomous regions) in China, using the panel cointegration and panel-based error correction model over the 2001–2012 period. Our results confirm that venture capital and innovation have long-run cointegrated relationships as well as bidirectional causality for the whole country. Analysis of sub-samples again discovers similar results in both the eastern and central regions, but not in the western region. The policy implication shows that China’s development of innovations should be based on more venture capital input and that the government should establish a long-run innovation policy to accelerate the development of venture capital. We also offer several constructive suggestions for governments in the western provinces.