Venture capital as an ecosystem engineer for regional innovation in an emerging market

Can venture capital (VC) firms transform a weak innovation ecosystem into a productive and robust one? While the literature has found VC firms' catalyst role in innovation in developed markets, we know little about whether and how they affect innovation in an emerging market, where formal legal- and market institutions and networks of professional intermediaries for them to play a catalyst role are relatively lacking. We argue that VCs play a different and more proactive role as an “ecosystem engineer” through governing the resource flow and selecting deviation to drive regional innovation performance. Such impact is further positively moderated by the presence of multinational enterprises (MNEs) and increases over time, whereas MNEs' positive moderation declines over time. Empirically, using Stochastic Frontier Modeling, we examine a Chinese provinciallevel panel data of VC activities (1999–2009) and patent applications (2000–2010) and find supportive evidence. Implications are discussed.