Cross-border Venture Capital Investments Research Articles

National distances, international experience, and venture capital investment performance

This study examines how the performance of cross-border venture capital investments is affected by national institutional and cultural distances between the environments of venture capitalists (VCs) and investee ventures. We propose that institutional and cultural distances will decrease VCs' effectiveness in conducting venture capital activities and negatively affect investment performance in terms of exit success, and obtain supportive evidence while controlling for geographic distance. We further analyze how VCs can use their international experience to mitigate the negative consequences of national distances. We find that while broad international experience in diverse countries attenuates the deleterious effects of institutional distance in a significant way, it does not have a similar impact in attenuating the negative effects of cultural distance.

National Distances, International Experience, and Venture Capital Investment Performance

This study examines how the performance of cross-border venture capital investments is affected by national institutional and cultural distances between the environments of venture capitalists (VCs) and investee ventures. We propose that institutional and cultural distances will decrease VCs’ effectiveness in conducting venture capital activities and negatively affect investment performance in terms of exit success, and obtain supportive evidence while controlling for geographic distance. We further analyze how VCs can use their international experience to mitigate the negative consequences of national distances. We find that while broad international experience in diverse countries attenuates the deleterious effects of institutional distance in a significant way, it does not have a similar impact in attenuating the negative effects of cultural distance.

Economic freedom and cross-border venture capital performance

Abstract We investigate the determinants of cross-border venture capital (VC) performance using a large sample of 10,205 cross-border VC investments by 1906 foreign VC firms (VCs) in 6535 domestic portfolio companies. We focus on the impact of a domestic country's economic freedom on the performance of both VC investments and portfolio companies using a probit model and the Cox hazard model. After controlling for other related factors of domestic countries, portfolio companies, VCs and the global VC market, as well as year and industry fixed effects, we find that a domestic country's economic freedom is crucial to cross-border VC performance. In particular, in a more economically free country, as measured by the raw values of, quartiles of or the ranking in the index of economic freedom (IEF), a foreign VC-backed portfolio company is more likely to pull off a successful exit through an IPO (initial public offering) or an M&A (merger and acquisition), and a foreign VC firm is likely to spend a shorter investment duration in the portfolio company. We also identify interesting evidence on the impact of many other level factors of domestic countries, portfolio companies, VCs and the global VC market on cross-border VC performance.

Is Venture Capital a Local Business? A Test of the Proximity and Network Hypotheses

Venture capital (VC) investment has long been conceptualized as a local business, in which the VC’s ability to source, syndicate, fund, monitor, and add value to portfolio firms critically depends on their access to knowledge obtained through their ties to the local (i.e., geographically proximate) social network. Curiously, emerging research on VC investment practice within the United States finds that cross-border investment has become increasingly common and that cross-border investment, as measured by “exits” (either initial public offering or merger & acquisition) out-performs local investment. These findings raise important questions about role of proximity in VC performance, and, more specifically, about the relationship between geographic and relational proximity in social networks. To more deeply probe these questions, we develop theory and test it by contrasting the deal and syndicate structure used to implement cross-border VC investment with those used for domestic VC investments. Evidence from 139,892 rounds of venture capital financing in the period 1980-2009 raises questions about the “local business” hypothesis and suggests that that the effects of geographic and relational proximity on VC firm performance differ. We conclude the evidence raises important questions about role of proximity in social networks, as well as the ability of VC firms to capture and lever the presumed benefits of local social network membership.

Cross-border venture capital investments in Asia: Selection and exit performance

We investigate the investment behavior and exit performance of VCs that have pursued expansion outside their home locations, specifically, in Asia. Our findings indicate that, in the Asian VC markets, foreign VCs have relative advantages over local VCs in terms of size and experience while they are at a disadvantage in information collection and monitoring due to both geographic and cultural distances. When investing alone, foreign VCs are more likely to invest in more information-transparent ventures. Partnership with local VCs helps alleviate information asymmetry and monitoring problem and has positive implication for the exit performance of local entrepreneurial firms. Specifically, we find that after controlling for the endogeneity of selection, firms with both foreign and local VC partnership are about 5% more likely to successfully exit.

The Impact of Economic Integration on Cross–Border Venture Capital Investments: Evidence from the European Union

Despite major policies surrounding economic integration among countries (e.g., the European Union [EU], North Atlantic Free Trade Area, and Mercosur), the theoretical and empirical research addressing the impact of such policies on various countries’ entrepreneurial activities has yet to fully emerge. To address this issue, this paper draws on institutional, economic, and entrepreneurship literatures to examine if two specific economic integration mechanisms, namely market and currency commonality, increase cross–border venture capital flows made by participating nations in the EU. Findings suggest that broad scale economic integration policies do influence the extent of foreign venture capital investments made into other member countries.

Attracting cross-border venture capital: the role of a local investor

Examining an increasingly prevalent but under-researched phenomenon, cross-border venture capital investments, it is observed that local venture capitalists typically invest first, followed by foreign venture capitalists in later rounds. A model is developed that explains the role of a domestic venture capital investor in attracting foreign investors and which also accounts for the impact of various circumstances on the importance of this role. In our model based on analysis of nine cross-border venture capital-backed companies, local venture capitalists have several important roles in increasing the venture's cross-border investment readiness including advice to operational management and contributing contacts and local market knowledge. The importance of these roles is mitigated if the entrepreneurial team is highly experienced or if the home market is not important for the venture. The prominence of the local investor has signalling value. Finally, the local investor's international social capital facilitates the formation of cross-border syndicates. Overall, the model developed in the paper contributes to a better understanding of cross-border venture capital and in particular to the division of labour between domestic and foreign venture capitalists in international venture capital syndicates. The paper also contributes to the emerging literature on international social capital.