Law enforcement quality and venture capital Efficiency: Evidence from China

This study examines how regional variations in law enforcement quality influence venture capital (VC) efficiency across Chinese provinces, despite the existence of a unified national legal system. Drawing on a comprehensive dataset comprising 20,982 VC investment rounds from 2000 to 2018, we find that regions with stronger law enforcement are significantly more likely to experience successful VC exits. These findings remain robust even after addressing potential endogeneity concerns and conducting comprehensive robustness tests. Further investigation reveals three key mechanisms through which enhanced law enforcement quality contributes to VC performance: the promotion of innovation efficiency, the alleviation of financing constraints, and the reinforcement of social trust between investors and investee firms. Moreover, the analysis indicates that this positive relationship is weakened by factors such as syndicated investments, geopolitical risks, linguistic differences between VCs and portfolio companies, increased geographical distance, and international VC involvement. Overall, our findings highlight the critical role of regional law enforcement in supporting the development of emerging industries through the venture capital ecosystem.