Cross-border Venture Capital Investments Research Articles

Social Capital and Cross-Border Venture Capital Investments in China

In the context of the Chinese market, foreign cross-border venture capitalists have devised specific strategies to mitigate the challenges associated with the liabilities of foreignness, such as risks and information asymmetry. They have strategically leveraged social capital to not only decrease investment risk but also to influence their investment preferences and behaviors. To investigate the influence of different types of social capital on the investment decisions of cross-border venture capitalists, hypotheses are proposed and tested using regression analysis. Our research reveals several key findings in this regard. Firstly, cross-border venture capitalists with a robust structural social capital network exhibit a greater propensity to invest in early-stage companies. This suggests that well-established connections and partnerships within the Chinese entrepreneurial ecosystem provide a level of comfort and confidence when investing in ventures at their infancy. Interestingly, relational and cognitive social capital, though undoubtedly valuable, do not significantly impact the decision to make early-stage investments. Furthermore, we have observed that venture capitalists with higher levels of structural and cognitive social capital are more inclined to form syndications. Collaborative partnerships and shared knowledge networks seem to be crucial factors that drive syndication decisions. Lastly, venture capitalists endowed with substantial structural and relational social capital tend to allocate larger investment amounts, signifying the influence of business or personal relationships and network connections on the scale of their investments.

Cross-Border Venture Capital Investments

Cross-Border Venture Capital Investments

Partnering with Bridging-economy Firms and Locals: Cross-Border Venture Capital Investments

The international business literature advocates that firms entering a new foreign market partner with local firms. However, for Western firms, high environmental and partner uncertainty in emerging economies severely constrains the ability to form partnerships with local firms in the host country. Extending the multi-party collaboration literature, we suggest that Western firms form a multi-party collaboration involving local firms from the country targeted for market entry and firms from a “bridging economy”— a third country with (1) an institutional environment more closely resembling to the Western country, (2) active business collaborations with the host country, and (3) well-established firms in the industry of interest. The bridging-economy partner can play a critical role in dealing with venture-, partner-, and environment-level uncertainties. We test the hypotheses based on data on Western VC investments in China during 1997-2008 when China’s VC industry was emerging. We provide evidence for the value of multi-party collaborations involving both a partner from the host country and a bridging country for the internationalization strategies of Western firms.

The Effect of Policy Uncertainty on VC Investments Around the World

This study documents a significant negative relationship between policy uncertainty and venture capital (VC) investment in startups across emerging venture capital markets (i.e., outside the United States). The adverse effect of policy uncertainty is exacerbated for younger and early-stage startups. By contrast, the effect is attenuated for startups that have headquarters in cities with a high concentration of global VC investment, in countries with more developed stock markets, or if the VC is led by a bank or a corporate entity. Using close national elections and term limits to alleviate endogeneity concerns, we find that the baseline results continue to hold. Furthermore, we also find that policy uncertainty reduces the amount of cross-border VC investment. Finally, this study provides evidence that uncertainty increases the number of financing rounds, decreases the fraction of investment amount during the first round, and reduces the likelihood of successful exit through acquisition.

Subjective valuation of tangible and intangible heritage neighbourhood attributes

Using 23-year panel data of cross-border venture capital investment and global air network expansion as a natural experiment, this paper investigates the effect of air travel on cross-border capital mobility. We find international airlines have a significant facilitating effect on venture capital mobility. Based on the difference-in-differences estimate, for our research period one additional flight per day leads to an increase in VC investment between the city pair by 0.14 deals on average per year (1.08 times the mean value). The heterogeneous analysis indicates that, with more air connections, emerging industries and firms in earlier developmental stages receive more investment, and non-syndication investment increases more than syndication investment. In addition, we find the effect significantly increases with geographical distance: city pairs that are far away from each other experience a larger increase in VC flow after flight connections exist. Lastly, the evidence suggests that most of this increase in capital flows happens in wealthier cities. Connections between poor cities show little effect on VC flow. The paper presents evidence on the role of the global air network in reducing information transmission cost and raising the expectation for future growth potential. All results are shown to be robust using alternative VC investment measures and the regression discontinuity method.

Global air network and cross-border venture capital mobility

Using 23-year panel data of cross-border venture capital investment and global air network expansion as a natural experiment, this paper investigates the effect of air travel on cross-border capital mobility. We find international airlines have a significant facilitating effect on venture capital mobility. Based on the difference-in-differences estimate, for our research period one additional flight per day leads to an increase in VC investment between the city pair by 0.14 deals on average per year (1.08 times the mean value). The heterogeneous analysis indicates that, with more air connections, emerging industries and firms in earlier developmental stages receive more investment, and non-syndication investment increases more than syndication investment. In addition, we find the effect significantly increases with geographical distance: city pairs that are far away from each other experience a larger increase in VC flow after flight connections exist. Lastly, the evidence suggests that most of this increase in capital flows happens in wealthier cities. Connections between poor cities show little effect on VC flow. The paper presents evidence on the role of the global air network in reducing information transmission cost and raising the expectation for future growth potential. All results are shown to be robust using alternative VC investment measures and the regression discontinuity method.

Global Air Network and Cross-border Venture Capital Mobility

Using 23-year panel data of cross-border venture capital investment and global air network expansion as a natural experiment, this paper investigates the effect of air travel on cross-border capital mobility. We find international airlines have a significant facilitating effect on venture capital mobility. Based on the difference-indifferences estimate, for our research period one additional flight per day leads to an increase in VC investment between the city pair by 0.14 deals on average per year (1.08 times the mean value). The heterogeneous analys indicates that, with more air connections, emerging industries and firms in earlier developmental stages receive more investment, and non-syndication investment increases more than syndication investment. In addition, we find the effect significantly increases with geographical distance: city pairs that are far away from each other experience a larger increase in VC flow after flight connections exist. Lastly, the evidence suggests that most of this increase in capital flows happens in wealthier cities. Connections between poor cities show little effect on VC flow. The paper presents evidence on the role of the global air network in reducing information transmission cost and raising the expectation for future growth potential. All results are shown to be robust using alternative VC investment measures and the regression discontinuity method.

Does Property Appropriation Hazard Matter in Cross-border Venture Capital Syndication?

Extant research demonstrates that property appropriation hazard may play a crucial role in shaping the international expansion mode of emerging market enterprises, but many of its implications are yet to be discussed thoroughly, for instance, the contexts and mechanisms that property appropriation hazard affect the strategies of emerging market venture capital (VC) firms. In this study, we examine the effect of property appropriation hazard on cross-border transactions, focusing on the syndication choice of cross-border VC investments. Utilizing in-depth data concerned with specific cross-border VC deals, this study suggests as the property appropriation hazard of home market increases, the VCs from emerging markets are more likely to syndicate with local VCs in host market. Furthermore, Bilateral investment treaties between home market and host market of the VCs can negatively moderate the positive relationship between property appropriation hazard and local VC participation. At firm level, we find bank affiliation has negative moderating effects on the positive relationship between property appropriation hazard and local VC participation. While considering the role of prior local experience of the VC form emerging markets, we find the moderating effect of prior host market successful exit experience on the relationship between property appropriation hazard and local VC participation shows no significant results.

Cross-Border Venture Capital Investments: What Is the Role of Public Policy?

(1) Background: Cross-border venture capital (VC) investments play an important role in the scaling up of high-growth companies. However, policymakers worry that foreign VC investments transfer the majority of economic activity to the investor country. On the one hand, start-ups welcome the foreign capital, expertise, and networks that accompany cross-border investments. On the other hand, policymakers are concerned that cross-border investments predominantly benefit foreign economies and fail to develop the local entrepreneurial ecosystem. This paper describes a framework for how policymakers can develop a set of policies toward cross-border VC investments. (2) Methods: The paper examines available data and trends about the role of cross-border investing, focusing on Europe, Israel, and Canada. Then, the paper explains the underlying economic challenges and develops a policy framework. (3) Results: The analysis shows that in addition to policies that aim to attract foreign investors, there are also important policies for the development of the domestic VC market. The analysis encompasses policies that are both financial and non-financial in nature. (4) Conclusions: A core insight for policymakers is to retain a balance of initiatives, attracting foreign investors while simultaneously making sure to strengthen the country’s domestic VC industry and innovation ecosystem. The mix of policies will adjust as the domestic ecosystem matures.

Cross-Border Venture Capital Investments: What is the Role of Public Policy?

Cross-border venture capital (VC) investments play an important role in the scaling up of high-growth companies. However, policymakers worry that foreign VC investments transfer the majority of economic activity to the investor country. On the one hand, startups welcome the foreign capital, expertise, and networks that accompany cross-border investments. On the other hand, policymakers are concerned that cross-border investments predominantly benefit foreign economies and fail to develop the local entrepreneurial ecosystem. This paper describes a framework for how policymakers can develop a set of policies toward cross-border VC investments. The paper examines available data and trends about the role of cross-border investing, focusing on Europe, Israel, and Canada. Then, the paper explains the underlying economic challenges and develops a policy framework. The analysis shows that in addition to policies that aim to attract foreign investors, there are also important policies for the development of the domestic VC market. The analysis encompasses policies that are both financial and non-financial in nature. A core insight for policymakers is to retain a balance of initiatives, attracting foreign investors while simultaneously making sure to strengthen the country’s domestic VC industry and innovation ecosystem. The mix of policies will adjust as the domestic ecosystem matures.

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

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.

Cross-border venture capital investments: The impact of foreignness on returns

Against the background of the growing internationalization of venture capital (VC) investing, this is the first global comparison of the returns generated by individual domestic and cross-border deals. We examine investments worldwide during 1971–2009 and find that cross-border investments significantly underperform compared with equivalent domestic investments. Returns are negatively affected by geographic distances, cultural disparities, and institutional differences between the home and host countries. Returns on cross-border and domestic deals also decline after the late 1990s. International portfolio diversification and the saturation of domestic markets may explain why VC investors make cross-border investments despite poor expected returns.

Legal System and Syndication Strategy: Cross-border Venture Capital Investments in China

We investigate how venture capital investors (VCs) apply syndication strategy to deal with high legal uncertainty when investing in a foreign country. Using the data of foreign VCs investing in Chi...

Cross-border VC investment in Canadian firms: implications for exit patterns

Over the last few years, growth in the flow of venture capital (VC) in Canada has been driven primarily by increased reliance on foreign, primarily US, investors This is a situation that is not unique to Canada. Other countries (for example, Ireland and several EU nations) have small domestic VC stocks but are geographically situated near countries with relatively large stocks of VC. This paper reports research that shows this to be a mixed blessing. On the one hand, foreign investors make relatively large investments, thereby addressing the downward-skewed size distribution of VC funds in the Canadian VC market. Moreover, compared with domestic investors, foreign VCs’ participation is associated with higher propensities of successful exits through IPOs, greater capital availability, and shorter time to exit. On the other hand, this research also documents a relationship between foreign VCs’ participation and lower payments at exit per dollar of VC investment, raising concerns about the monetary returns to Canadian founders and early-stage, higher risk, Canadian syndicate VCs. The link between cross-border VC investment and higher likelihood of VC exit through cross-border M&As is also noteworthy. These empirical findings address the role of foreign VCs in financing Canadian growth firms, and help provide a yet more comprehensive understanding of the Canadian VC market.

Determinants of Cross-Border Venture Capital Investments in Emerging and Developed Economies: The Effects of Relational and Institutional Trust

Frequent and open interaction between venture capitalists (VCs) and entrepreneurs is necessary for venture capital investments to occur. Increasingly, these investments are made across jurisdictions. The vast majority of these cross-border investments are carried out in a syndicate of two or more VCs, indicating the effects of intra-industry networks needing further analysis. Using China as a model, we provide a novel multidimensional framework to explain cross-border investments in innovative ventures across developed and emerging economies. By analyzing a unique international dataset, we examine worldwide venture capital investment flows from 2000–2012 and consider the effects of geographical, cultural, and institutional proximity as well as institutional and relational trust. We find trust to mitigate the negative effects of geographical and cultural distance, where institutional trust is more relevant for investments in emerging economies, and relational trust is more relevant for investments in developed economies.

Responding to uncertainty: syndication partner choice by foreign venture capital firms in China

Cross-border venture capital investment has grown dramatically. Drawing upon observations about the liability of foreignness, previous research has shown that foreign venture capitalists (VCs) tend to partner with local VCs in order to offset information asymmetry and the liabilities of foreignness. Much of the literature has suggested that local VCs should help reduce operational uncertainty. This paper examines syndication partner choice in China, which today is likely the most uncertain environment in which foreign VCs operate on a large scale. This provides an ideal environment for understanding partner selection under uncertainty. Our results show that foreign investors are more likely to choose Chinese investors in later rounds and in more mature portfolio firms. While foreign firms with more Chinese experience are more likely to co-invest with Chinese VCs, the older foreign VC firms are less likely to do so. Remarkably, having a Chinese office made foreign VCs less likely to co-invest. In seed-stage investments, when uncertainty is the greatest, foreign firms are least likely to co-invest with Chinese VCs, and this was not affected by the maturation of the market, while at the later stage, when uncertainty is lowest, they are most likely to co-invest.

Local Partnering in Foreign Ventures: Uncertainty, Experiential Learning, and Syndication in Cross-Border Venture Capital Investments

If partnering with local firms is an intuitive strategy with which to mitigate uncertainty in foreign ventures, then why don’t organizations always partner with local firms, especially in uncertain...

Government Venture Capital and Cross-Border Venture Capital Investment

Do government venture capital (GVC) funds crowd-in or crowd-out international private venture capital (PVC) investment? The crowding-in effect arises when international PVC benefits from government subsidies through the enhancement of an entrepreneurial ecosystem and investment syndication. The crowding-out effect arises when GVC competes with PVC, bidding up deal prices and lowering returns, thereby spurring local PVCs to invest internationally. We examine data from 26 countries from 1998 to 2013. The analysis indicates that, on average, mixed structured GVC investments crowds-in, and pure-structured GVC investments crowds-out domestic and foreign PVCs. Moreover, the effect of both structures is greater on domestic PVC compared to foreign PVC.

Cross Border Venture Capital Investment: A Network of Emerging Trust

Cross Border Venture Capital Investment: A Network of Emerging Trust

What Shapes Venture Capital Firms’ Expansion across the Globe? Country-Specific Factors and Firm-Specific Factors

“Globalization” has recently been a prominent theme in the venture capital (VC) industry. According to the Deloitte Touche Tohmatsu 2009 Global Venture Capital Survey, 52% of VCs already invest outside their home countries (Madhavan and Iriyama [2012]). Once exclusive to OECD countries, cross-border VC investment opportunities are now emerging in countries such as China and India (Saxsenian [2006]). Originally, this trend was promoted by Western venture capitalists. For example, Kleiner Perkins Caufield &amp; Byers (KPCB), one of the top-tier venture capital firms in Silicon Valley, has operated satellite offices in Beijing and Shanghai since 2007. <b>TOPICS:</b>Private equity, statistical methods, global, portfolio construction