Abstract
The role of venture capital as mediator and gatekeeper is well acknowledged and geographical barriers for open innovation have been questioned, but venture capital firms’ distant investments have been investigated only rarely. The strategic benefits accrued from corporate venture capital (CVC) investment depend on the selection of target ventures. Prior research, however, overlooked the incurred information cost for identifying a potential target. Considering that innovative ventures often reside in distant locations, this paper aims to investigate what factors alleviate the information cost for CVCs when identifying target ventures in distant locations. We expect a CVC’s target selection in distant locations will be limited to the ventures under a tight appropriability regime, ventures within the same industries as a CVC’s business units, and ventures with pre-existing investors that a CVC has prior ties with. The hypotheses are tested with the data on CVC investments in the U.S. between 2006 and 2013. The results empirically support the hypotheses.
Highlights
Corporate venture capital (CVC) refers to the capital raised by established firms to acquire minority equity stakes in privately held ventures for strategic purposes [1]
While the degree of the strategic benefits accrued from CVC investment is tied to identifying appropriate target ventures [9,10,11], less attention has been given to the constraints and challenges
Identifying suitable target ventures in distant locations is related to creating strategic benefits from CVC investment, and this study provides several practical implications for formulating an effective CVC investment strategy
Summary
Corporate venture capital (CVC) refers to the capital raised by established firms to acquire minority equity stakes in privately held ventures for strategic purposes [1]. CVC is one of the means to access external sources of knowledge, and its role in fostering open innovation is well documented [2,3], enhancing the productivity of research and development (R&D) activity [4,5]. It helps investing firms with the identification of emerging technologies [6] and appropriate candidates for strategic alliances [7] or mergers and acquisitions (M&A) [8]. This is because a venture’s lack of tangible assets or historical track record can increase information costs, and because innovative ventures tend not to reveal their technological inventions to corporate investors for fear of technology misappropriation [12,13]
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