The impact of hiring local managers on foreign venture capital performance: evidence from China

Abstract

PurposeThis study examines whether recruitment of local managers helps foreign venture capital (VC) firms mitigate the liability of foreignness measured by cultural differences and improves their performance in relationship-based emerging markets such as China.Design/methodology/approachFrom a data set comprising 1,939 Chinese portfolio companies with first-round investments by 282 foreign lead VC firms during 2000–2015, the study tracks the outcome of each investment until the end of 2018 and collects the background information of partners of lead VC firms. A survival analysis using the Cox hazard model is conducted.FindingsCultural differences of the foreign VC's home country, when compared to China, positively influence the success of VC firms. Recruitment of local managers reinforces this positive influence. The influence of local manager recruitment is more pronounced for VC firms with politically connected local managers, during politically uncertain periods, in industries supported by the government, in provinces with high government intervention and in VC firms with decentralized decision rights given to local managers.Originality/valueThis research complements the international business literature on the advantages of hiring local managers and identifies the channels through which local managers help foreign VC firms obtain relationship-based resources. The findings also have practical implications for those foreign investors who intend to enter into relationship-based emerging markets.