Tax Incentive and Venture Capital Fundraising

Abstract

This study examines the determinants of fundraising of venture capital firms in South Korea, with a focus on the effects of tax incentives. Specifically, we investigate how macroeconomic factors, general partner (GP) characteristics, and changes in tax incentives affect venture capital fundraising at both the industry and GP level, using a novel dataset from the Disclosure Information of Venture Capital Analysis (DIVA). To isolate the effect of tax incentives, we consider as a treatment variable an increase in income tax deductions for individual venture capital fund investors in 2018 and estimate its effect on venture capital fundraising. The results show that the treatment group has a significantly higher probability of raising funds and raising a higher number and amount of funds than the control group has after 2018. To the best of our knowledge, this study is the first to examine the determinants of venture capital fundraising in South Korea and to empirically demonstrate the effect of tax incentives on venture capital fundraising.