When External Shocks Attract Capital: Export Controls and Venture Capital Allocation in China

U.S. export controls were designed to slow China's semiconductor industry. They did the opposite for venture capital. Using deal-level data on 19,485 Chinese ICT startups from 2014 to 2023, we find that after the 2018 escalation of U.S. export controls, Chinese semiconductor startups became 6 percentage points more likely to receive financing, raised about 12% more capital, and advanced through financing stages faster than comparable ICT startups outside the targeted category.

The mechanism is institutional. Export-control lists don't just restrict — they reclassify. By naming a sector a matter of national security, the United States effectively elevated semiconductors in Chinese investors' opportunity structure. Government venture capital then acted as a coordinator: certifying which firms were aligned with the reclassified category, and selectively backing those facing private-capital retrenchment.

The implication is uncomfortable for U.S. industrial policy: coercive interventions targeting strategic sectors abroad can paradoxically accelerate the very capital flows they were meant to restrain.

Institutional change triggered by cross-border intervention has become increasingly salient amid geopolitical rivalry. Yet how such change, exemplified by export controls, affects venture capital allocation within target economies remains insufficiently understood. We argue that export controls are not merely external constraints but constitute institutional reclassification: they elevate targeted categories into matters of national security and reshape investors' evaluations of the opportunity structure, thereby redirecting venture capital toward these categories. Using a difference-in-differences design around the 2018 escalation of U.S. export controls against China, which most directly targeted the semiconductor sector, we find that Chinese semiconductor startups became 6 percentage points more likely to receive financing, raised about 12% more financing, and progressed faster to subsequent financing stages relative to other information and communications technology startups. We further show that government venture capital acts as an opportunity coordinator through opportunity certification and selective compensation. These findings contribute to institutional theory and entrepreneurship research by showing that export controls can paradoxically redirect venture capital toward the very industries they are meant to restrain.

The paper is in late-stage revision in preparation for submission to Management Science. A working paper PDF is available on request to academics, journalists, and policy researchers.

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• Yikai Cao — Department of Management Science and Engineering, Stanford University
• Wanru Deng — School of Economics, Shanghai University
• Guankai Zhai — Department of Management Science and Engineering, Stanford University
• Charles Eesley — Department of Management Science and Engineering, Stanford University

Stanford Technology Ventures Program (STVP) and Stanford Center on China's Economy and Institutions (SCCEI).