Bilateral relations and venture capital financing in India

Abstract

This chapter tries to find a novel link between bilateral trade relationships and foreign venture capital funding for Indian start-ups. The empirical analysis using longitudinal data from 2004 to 2020 for venture capital funding in India suggests that foreign venture capital funding increases with bilateral trade ties with the partner country. For a 1% increase in total trade volume between the partner country and India, the funding amount for Indian start-ups increases by 0.01%. We find a quadratic relationship between funding amount and bilateral trade ties, with foreign venture capital funding reducing after an optimal trade ties level. We find that this funding–bilateral ties relationship depends on the stage of financing and the region where the start-up firm is located. Our chapter reinforces that domestic policy should focus on early-stage start-ups, as they are less likely to receive large-scale foreign venture capital funding. Also, policymakers in India should initiate region- and state-specific initiatives in line with the Startup India initiative to reduce the spatial disparities in start-up funding space.