The Research On The Government Function During The Development Of China’s Venture Capital Market

Venture capital funds from ordinary investors，which managed by professionalventure capital firms. A general way of equity investment is to invest to those emergingenterprises with huge potential of development, and to provide them with managementand consulting services, where ultimately through selling property to obtain high yield.In essence, it is a investment regime that supports emerging enterprises to get highvalue-added benefits via innovation activities.Venture capital provides means of financing for small and medium enterprisesengaged in hi-tech industry, which objectively promotes technological progress andinnovation, and also plays an important role in promoting a country’s high-tech industrialdevelopment and economic growth. Recalling the history of the development of ventureinvestment in the world, governments were all actively got involved in. Especially inChina, the first venture capital company that was established in1985-a new technologyventure capital company, was funded and set up by the government. Since then, ourgovernment has gradually introduced a series of laws and regulations to promote thedevelopment of venture investment, and has taken a direct investment, governmentguidance funds, government loans, government guarantees, government subsidies,government procurement and so on to involve in the operation of the venture capitalmarket. Development of venture capital in China with strong government involvement, isa part of the national science and technology policy and a way of government expandinginvestment in science and technology.This paper combines with large amounts of data on the development of venturecapital market in china, analyses and builds a series of economic models, includingrisk-sharing model, reputation model, phased-investment model, tournament model,game model of government-led venture capital institutions, subjective game model. Ituses game analysis, empirical analysis and normative analysis to analyze the reasons forgovernment intervention in the venture capital market in China, also the limitation, theproblems and role it should play. The article also compares with the developed countries,especially U.S. venture capital development and government intervention and gives acomprehensive and in-depth discussion on government intervention in the venture capital market in China, which aims to provide theoretical foundations and policyrecommendations to promote the development of China’s venture capital and governmentintervention.The article is arranged as following:First, the article analyzes the reasons for government intervention in the Chineseventure capital market. The main reason for government intervention in venture capital isthat it plays an active role in promoting scientific and technological progress andtechnological innovation，This paper analyzes the causes of positive externalities inChina’s venture capital market， discusses the role of venture capital to promotetechnological innovation mechanism, namely the Realization Form of positiveexternalities in venture capital，especially including the effect of increased capital, theadded value and the improved innovation tendencies. On this basis, the articlesummarizes the historical stage of China’s government intervention in the venture capitalmarket and the specific form of the intervention, then compares with those in the UnitedStates, Europe and Japan.Second, the article discusses the limitations of government intervention in China’sventure capital market. During the operation of venture capital, the problem ofinformation asymmetry are widespread between the ordinary investors and venturecapital firms, venture capital firms and emerging companies, which will inevitably leadto adverse selection and moral hazard problems. This paper summarizes the performanceof adverse selection problems and moral hazard problems in China’s venture capitalmarket, introduces mechanism to solve these problems which are formed during theventure capital itself continued practice, development and improvement, which includingreward mechanism, risk-sharing mechanism, reputation mechanism,management-involvement mechanism, phased-investment mechanism, tournamentmechanism and so on. The role is limited when the government facing the problem ofinformation asymmetry in the venture capital market, its main function is to providenecessary legal and institutional security during the market adjustment mechanismformalization.Third, the paper studies the problems caused by government intervention in China’sventure capital market. The development of venture capital in China has its own characteristics, with strong government involvement. According to the data ofgovernment intervention in China’s venture capital, the paper analyzes the problemscaused by government intervention. Firstly, excessive government intervention leads tothe irrational structure of venture capital sources, and results in the follow-up questionsof lack of total supply of venture capital and the small scale of venture capital funds;Secondly，the government-leading venture capital institutions accounted for a largeproportion of China’s venture capital companies, the article analyzes the problems ofrent-seeking that exists in risk investment institutions selecting project, low return onassets and investment excesses; Thirdly, the paper analyzes the limitations of some of theexisting provisions of the government laws, regulations and legal regulations which areincomplete on the development of venture investment.Finally, the article discusses the role of government that should play in China’sventure capital market. Venture capital activities have positive externalities that couldresult in market failure, so the government should focus on adjusting the benefits andcosts of the venture capital firms and emerging businesses to make sure their privatebenefits and social benefits match. Government should play an active role on theestablishment of the external environment for the development of venture capital,including tax policy environment, legal environment, exit environment of venture capitaland personnel environment.Government should supervise and regulate the problems ofrent-seeking and corruption that are in the process of government-leading venture capitalfirms’ project selection. It should also take positive and effective way to shape theculture of innovation and integrity for the development of venture capital.