Determinants of Cross-Border Venture Capital Investments in Emerging and Developed Economies: The Effects of Relational and Institutional Trust

Daniel Hain,Daojuan Wang,Sofia Johan

doi:10.1007/s10551-015-2772-4

Daniel Hain, Daojuan Wang + Show 1 more

Open Access

https://doi.org/10.1007/s10551-015-2772-4

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Abstract

Frequent and open interaction between venture capitalists (VCs) and entrepreneurs is necessary for venture capital investments to occur. Increasingly, these investments are made across jurisdictions. The vast majority of these cross-border investments are carried out in a syndicate of two or more VCs, indicating the effects of intra-industry networks needing further analysis. Using China as a model, we provide a novel multidimensional framework to explain cross-border investments in innovative ventures across developed and emerging economies. By analyzing a unique international dataset, we examine worldwide venture capital investment flows from 2000–2012 and consider the effects of geographical, cultural, and institutional proximity as well as institutional and relational trust. We find trust to mitigate the negative effects of geographical and cultural distance, where institutional trust is more relevant for investments in emerging economies, and relational trust is more relevant for investments in developed economies.

Highlights

Venture capitalists (VCs) are specialized financial intermediaries who combine their unique blend of technological competence and financial skills, to provide both financial and managerial support for entrepreneurs in innovative ventures
We find trust to mitigate the negative effects of geographical and cultural distance, where institutional trust is more relevant for investments in emerging economies, and relational trust is more relevant for investments in developed economies
We analyze the effects of geographical, cultural, and institutional proximity as well as institutional and relational trust on cross-border venture capitalists (VCs) flows between country dyads

Summary

Introduction

Venture capitalists (VCs) are specialized financial intermediaries who combine their unique blend of technological competence and financial skills, to provide both financial and managerial support for entrepreneurs in innovative ventures. We argue that institutional and relational trust are both very important in cross-border venture capital deals, but they differ in their influence, depending on the participant composition (foreign only vs foreign and domestic VCs) of the investments and the institutional setup of the destination country (developed vs emerging economy).

Results

Conclusion