We examine whether venture capital (VC) investment enhances corporate innovation in Korea. Using a matched sample of 802 firms from 1998 to 2012, we find that, in general, VC-backed firms are more innovative than non-VC-backed firms. We also find that the positive influence of VC investment largely comes from the ability of VC firms to reduce information asymmetry between investors and ventures: VC funds managed by independent venture capitalists significantly enhance corporate innovation, whereas those managed by governmental venture capitalists do not. Furthermore, this positive influence becomes more pronounced where there is greater information asymmetry. Finally, we show that funds with profit-based compensation structures are more likely to encourage corporate innovation than those with fee-based compensation structures. (JEL G24, G28, O3)

Keywords: Venture Capital Investment; Corporate Innovation; Information Asymmetry; Compensation Structure.