Government Venture Capital: Investing for the Common Good?

This paper examines the rationale behind the sharp increase in direct Government investments in Venture Capital (GVCs) over the past two decades. We find that GVCs are not pure profit maximizers but rather seek to capture positive externalities. Using EU data from 2002 to 2020, we find that GVCs have lower performance but that they target more innovative and geographically dispersed firms. Furthermore, we derive the conditions under which GVCs can crowd in private investments and show consistent empirical evidence. These findings suggest that governments have a role to play in promoting innovation and entrepreneurship.