Going Abroad, Friends on Board: Cross-Border Venture Capital and Syndication Strategy in China

Zhiyi Qiu,Ye Yang,Rong Chen

doi:10.1177/21582440211007484

Zhiyi Qiu, Ye Yang + Show 1 more

Open Access

https://doi.org/10.1177/21582440211007484

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Abstract

Cross-border venture capitals (CBVCs) are increasingly prevailing in recent decades, inter alia in emerging markets like China. The venture capital (VC) firms investing outside their home countries are faced with foreignness which is broadly regarded as liability. The primary aim of this article is to contribute to our understanding how foreignness affects VC’s strategy when entering emerging markets, particularly with respect to the foreignness originated from cultural distance. The data consist of over 5,000 CBVC deals taking place in China mainland from 1988 to 2016. Our empirical study shows that, with foreignness growing, it turns from liability into advantage in the context of CBVCs. We find an inverse U-shape relationship between foreignness and syndication, with VC firm’s reputation as the moderator. Besides, foreign VC firms establish local subsidiary when faced with foreignness, which serves as alternative to syndication. The key contribution of this article is that foreignness turns from liability into advantage in emerging markets, which exerts a curvilinear impact on the entry strategy of VC firms. This study advances the knowledge of foreignness and VC strategy, and sheds new light on entrepreneurial activities in emerging markets.

Highlights

As start-ups and unicorns prevailing around the world, cross-border venture capital (CBVC) is a blooming phenomenon in the recent decades; its percentage over total venture capital (VC) deals grows from 15% in the early 1990s to around 40% by the 2008 crisis (Aizenman & Kendall, 2012)
The foreign VC firms operating in emerging markets need to fully understand their identity of foreignness and adjust entry strategy
This article focuses on the entry strategy vis-à-vis syndication and subsidiary location

Summary

Introduction

As start-ups and unicorns prevailing around the world, cross-border venture capital (CBVC) is a blooming phenomenon in the recent decades; its percentage over total venture capital (VC) deals grows from 15% in the early 1990s to around 40% by the 2008 crisis (Aizenman & Kendall, 2012). Such percentage in Asia was even once as high as 70% (Dai et al, 2012). Why do VC firms finance portfolios overseas in spite of higher cost owing to the long distance? Portfolio financed by CBVCs is more likely to succeed in Initial Public Offering (IPO) (H. Chen et al, 2010)

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