Abstract
Cross-border venture capital (VC) investments play an important role in the scaling up of high-growth companies. However, policymakers worry that foreign VC investments transfer the majority of economic activity to the investor country. On the one hand, startups welcome the foreign capital, expertise, and networks that accompany cross-border investments. On the other hand, policymakers are concerned that cross-border investments predominantly benefit foreign economies and fail to develop the local entrepreneurial ecosystem. This paper describes a framework for how policymakers can develop a set of policies toward cross-border VC investments. The paper examines available data and trends about the role of cross-border investing, focusing on Europe, Israel, and Canada. Then, the paper explains the underlying economic challenges and develops a policy framework. The analysis shows that in addition to policies that aim to attract foreign investors, there are also important policies for the development of the domestic VC market. The analysis encompasses policies that are both financial and non-financial in nature. A core insight for policymakers is to retain a balance of initiatives, attracting foreign investors while simultaneously making sure to strengthen the country’s domestic VC industry and innovation ecosystem. The mix of policies will adjust as the domestic ecosystem matures.
Highlights
Venture capital (VC ) was a local industry
(4) Conclusions: A core insight for policymakers is to retain a balance of initiatives, attracting foreign investors while simultaneously making sure to strengthen the country’s domestic venture capital (VC) industry and innovation ecosystem
After the crash of the tech bubble, returns proved to be very negative for all classes of investors: government and government supported funds as well as private sector.3. It appeared that overall the industry had not started with the right profile of investors, nor a set of best practices to replicate the success of the US industry (Duruflé et al 2018). This led to a reset: most financial institutions and pension funds left the asset class; Labor Sponsored Venture Capital Corporations (LSVCC) were phased out outside Quebec and in Quebec they left early stage direct VC investment and turned to indirect investment; provincial governments shifted from direct investment to indirect investment; pension funds that remained in the asset class because they had economic development objectives did the same; the federal government, through BDC, maintained a direct investment arm but in parallel increased its indirect investment capacities and later supported the set up of fund-of-funds dedicated to invest in VC funds through the Venture Capital Action Plan (VCAP) and the Venture Capital Catalyst Initiative (VCCI)
Summary
Venture capital (VC ) was a local industry. Geographic proximity of an investor firm to its portfolio company was considered crucial for identifying investment opportunities, monitoring, adding value, and achieving higher performance (Devigne et al 2018; Mäkelä and Maula 2006; Sorenson and Stuart 2001). Foreign investors, attracted by new opportunities and new markets, are investing outside their home country at growing rates. This has led to an increase in both the amount of foreign investment and the number of international exits by VC-backed companies. Policymakers lack a unified framework for analysing the issues associated with cross-border venture capital investments. A lack of high-quality data and evidence about cross-border VC investments impedes making informed policy decisions. This study builds on a review of the academic literature (see Devigne et al 2018), as well as a summary of publicly available data, to develop a new framework analysing policy options for cross-border venture investing.
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