Uncertainty, venture capital and entrepreneurial enterprise innovation—Evidence from companies listed on China's GEM

Abstract The innovation activities of entrepreneurial enterprises face high uncertainty. While entrepreneurs are experts in this aspect, venture capital (VC) still plays an important role. This study attempts to verify the direct and indirect effects and transmission mechanism through which VC promotes innovation. The interactive relation between VC and uncertainty is examined especially. Using the data of companies listed on China’ s Growth Enterprise Market (GEM), empirical analysis is conducted based on a newly constructed composite weighted innovation index. The results show that VC involvement can significantly improve the innovation level of entrepreneurial enterprises. After multiple rounds of robustness tests and resolving self-selection bias and endogeneity problems using propensity score matching and a treatment effects model, we find the core conclusions remain the same. Further analyses reveal that the greater the degree of uncertainty faced by enterprises, the higher the innovation level. VC can strengthen this positive relation even further. Additionally, VC positively moderates the incentive effect of management shareholdings on innovation, while innovation is indirectly promoted by the partially mediating mechanism of research and development investment. From the perspectives of innovation and uncertainty, this paper deepens our understanding of VC value-added services and provides policy suggestions about how both entrepreneurial and financing parties can cooperate in innovation and create value jointly.