What affects the VC spatial clustering in China? Research on determinants of location selection and VC performance

Abstract: As a key propeller for the economy development and technology industrialization, venture capital (VC) has attracted the attention of both academics and policy makers around the world. In China, the spatial distribution of VC industry exhibits a high degree of agglomeration: More than 60% of Chinese VC firms cluster in Beijing, Shanghai, Zhejiang and Guangdong and VC investment performance in these four provinces behaves significant better than other non VC clustering regions. With the knowledge of Finance and Regional Economics, this paper aims to examine the determinants of VC location selection and the reasons behind the provincial preference of VC investment in China using panel data regression. Besides, we test whether the location factor could have an impact on the VC performance and to what extent it could exert the influence. We find if the local government recruits more high-tech employers in the research work, takes active measures to introduce foreign capital and highly develops the tertiary industry, more VC institutions will fund their target firms in the province. Controlling for characteristics of VC firms that provide their funds as well as transaction-specific factors, we find location factor could exert a positive effect on the VC investment performance and the exit IRR of VC projects in VC clusters is significantly higher than those invested in non VC clustering regions.