Venture Capital Networks and Investment Performance in China

Abstract

We investigate the relationship between venture capital (VC) networks and investment performance in China. Distinct features of China's VC networks are captured in our econometric model through the inclusion of an index of network stability and a dummy variable that indicates a VC firm's connections with the Chinese state. Our econometric analysis shows that a VC firm's position in its network, its network stability and close connections with the state all contribute to its investment performance. Comparison with the findings in Hochberg et al. (2007) indicates that networks are more important for investment performance in China than in the US. Moreover, our analysis suggests that familiarity with local culture and customs and understanding of the idiosyncrasies of China's markets and institutions are important for the success of a VC firm in China.