No risk no funding The distinct effects of institutional strength and institutional stability on venture capital investments

Abstract

Research on the impact of institutions on venture capital investments has revealed a puzzling picture. While institutional theory predicts that higher developed institutions should promote investments, the empirical evidence for venture capital investments is surprisingly ambiguous. This study connects the institution-based view and the unique characteristics of venture capital investors by examining the distinct effects of institutional strength and institutional stability on venture capital investments. Empirical results from 58,062 individual companies, nested in 104 countries, show that ventures attract higher investments in countries with higher institutional strength but lower institutional stability. However, both institutional strength and institutional stability increase the survivability of those funded ventures. Hence, we promote a dynamic perspective on institutional effects for founders, investors, and policy-makers, since these institutional effects differ between institutional strength and stability as well as between different firm characteristics, strategies, and performance dimensions.