Analysis Of The Impact Of Government Subsidies On Venture Capital Projects

Along with the central government's proposal to create a new engine for Chinese economic development through "mass entrepreneurship and innovation," local governments have introduced various supportive policies to encourage "double creation." In order to accelerate the flow of social capital to those innovative projects with higher risks.Venture capital can effectively promote the start-ups' innovation activities by contract design,but when the venture capital supported projects have R&D externalities,the government subsidy policy will influence incentives of both venture capital and related enterprises.Based on principal-agent model,we consider both the spillover effects of the innovation project and the double moral hazard problem between venture capital and enterprise.In the framework of contract design of convertible preferred stock,we analyze the influence of government intervention on incentives of venture capital and enterprise,and eventually the impact on social welfare.This study found that contract design alone will lead to the market failure in the case of R&D externality,and the government intervention can mititage or solve the problems to improve the social welfare.However,different subsidy policies may have different effects.For the single innovation project,both ex post subsidy and public service policy can achieve efficient motivation for both parties,but the former leads to larger improvement on social welfare.Investment guarantee policy will cause incentive distortion,but it may improve social welfare in some circumstance.For the industry with many projects,public service policy will achieve better welfare effect than ex post subsidy due to the cost advantage from its public good nature.And investment guarantee policy now has an uncertain impact on social welfare.In general,venture capital can effectively alleviate the capital bottleneck of small and medium-sized start-up companies,strengthen the R&D incentives of start-up companies,and objectively promote industrial technological progress.Although the contract design represented by convertible preferred stock can effectively solve the problem of double moral hazard between venture capital and start-up companies,the participation parties only consider the maximization of their own interests when there is a strong spillover effect of innovation activities.The choice of innovative projects and their respective levels of investment are not necessarily socially optimal.In this case,the government needs to intervene appropriately to guide venture capital to choose those strategically emerging industries with higher social value,and encourage the initial investment.Companies choose projects that have higher social returns.Based on this,the paper also proposes corresponding countermeasures:(1)The government should establish a support system that focuses on venture capital and supplemented by government subsidies to promote the development of SMEs.(2)In supporting venture capital and start-ups,they should mainly rely on ex post subsidies.(3)In addition to direct subsidies,the government should also pay attention to indirect support measures.No matter what kind of subsidy method the government adopts,it is often difficult to completely solve the problem of rent-seeking,and indirect public service packages can not only solve the above problems,but also produce higher people's livelihood benefits.