Third-Country Partnering: A New Syndication Strategy in Cross-Border Venture Capital Investments

Abstract

The international business studies have broadly recognized that partnering with local firms will help offset liability of foreignness. However, high environmental uncertainty increases the difficulty of partnering with local VCs and thus decreases the likelihood of such partnership. To deal with the constraint and pursue business opportunities in such environment, we suggest that foreign firms may partner with firms from a third country which shares shorter institutional distance than the host country. These partners not only render lower partner-level uncertainty than local partners, but also since they usually have rich host country experience they may play similar or even better roles as local partners. Using the data of foreign venture capital firms investing in China during 1997-2008, we find support for the proposition. This study contributes to the literature on using partnering to manage uncertainty in the environment by suggesting that when facing environmental uncertainty (in this study province-level legal uncertainty in China) foreigners may collaborate with certain firms with lower partner-level uncertainty.