Foreign Venture Capital Research Articles

Attracting Foreign Venture Capital Investment: The Institutions that Matter Most for Emerging Economies

This study explores the critical institutions and challenges influencing the attraction of international venture capital (VC) investment in emerging economies. By examining governance indicators such as "Voice and Accountability" and "The Rule of Law," the research highlights the importance of strong democratic institutions and robust legal frameworks in creating an attractive investment environment. It also identifies the complexities of regulatory frameworks, political stability, and corruption control in this context. The findings suggest that while effective governance fosters VC investment, over-reliance on government assistance can be counterproductive. The study emphasizes the need for collaboration among governments, regulatory bodies, and local organizations to create an investor-friendly climate, unlocking the potential for innovation and economic growth in emerging markets. Further research is recommended to understand the nuanced interactions between these factors and VC investments across diverse settings.

Venture capital internationalization in China and the Uppsala model

We study the investment behavior of new domestic Chinese venture capital (VC) firms compared to foreign VC firms newly entering the Chinese market. Given the institutional and cultural differences or psychic distance between China and the home country of foreign VC’s, the Uppsala Model would predict that foreign VC’s will be more cautious initially than domestic Chinese VC’s and that the degree of caution will increase with the psychic distance. Our data comes primarily from Zero2IPO, which has a nearly exhaustive list of VC investments in China from 1996 to 2006. We also use country-of-origin, membership in GLOBE cultural clusters, and a broad measure of psychic distance based on institutional and cultural differences from Berry, Guillén, & Zhou (2010) and the Freedom Index to test this prediction. We find support for the hypothesis that psychic distance affects initial investment behavior.

THE PROBLEMS OF ATTRACTING VENTURE CAPITAL IN RA

The investment environment formed in RA is still not favorable for attracting foreign venture capital. An effective state policy is needed, mainly aimed not at the creation of new venture funds, but at improving the depth of the Capital Market, the most vulnerable and at the same time the most important indicator group in the "Venture Capital and Private Equity Index". The article analyzes the risks of venture capital formation and based on it, recommendations are made in the direction of measures contributing to the improvement of the investment environment in RA.
 

Becoming global billionaires from mainland China: 2004–2018

This paper documents the increase in the number of global billionaires from mainland China between 2004 and 2018. One of the key findings is that under conditions of an open economy, grassroots billionaire entrepreneurs (e.g., Jack Ma) could mitigate political economy as well as financial frictions via capital injections from foreign venture capitalists. By building a unique database, I report that (i) the politically unconnected billionaire entrepreneurs financed by foreign venture capitalists are more likely to go public their companies outside mainland China (mainly in Hong Kong and the USA), use offshore financing vehicles, and enter the innovation sector and (ii) the politically connected global billionaire entrepreneurs, however, are closely associated with a record of state-owned enterprise (SOE) restructuring.Plain English SummaryThe increase in the number of billionaire entrepreneurs (e.g., Jack Ma) from mainland China between 2004 and 2018 is a new phenomenon, which necessitates a reassessment of the crony capitalism arguments, the types of entrepreneurs, and the sources of innovation. This paper has important implications for future research on entrepreneurship in a global economy and the design of relevant policies.

Research Topic: Evaluating the Venture Capital Growth, Impediments, and Prospects in Sub-Saharan Africa Nations

Purpose: Nowadays, is it internationally acknowledged that access to venture capital (VC) investment is central for market internationalisation, entrepreneurship development, job creation and economic growth. Although VC’s reputation is universally accepted among scholars and in academic literature, there is still a knowledge gap in Africa. The study intended mainly to explore why developing nations in Africa have not been fruitful at stimulating early-venture capital investment compared to the developed nations. We reflect a range of probable reasons that impede both foreign and domestic VC investment, including difficulties faced by the entrepreneurs in obtaining funding from VC firms.
 Design/methodology/approach: Using multiple regression analysis, we examined data from 61 VC companies’ resident in East and Southern Africa from 2015-2021, coupled with in-depth interviews with twelve VC investors.
 Findings: The study revealed that several early-stage firms lack the capacity to manage large tickets of above US$5 million. Second, the results affirm that the absorptive capacity and VCs’ geographical preference all combined significantly influence the growth of the VC industry, and this problem is heightened by government’s limited support to creating supportive policies that enhance SMEs’ growth.
 Practical implications: The study offers good insights by suggesting direct government intervention in the form of instituting tax incentives on capital gains to inspire more foreign investors.
 Paper type: Research paper

Incubator role of foreign venture capital: evidence from overseas listing of enterprises

This study uses the Granger-causality test and a sub-sample time-varying rolling window to explore the dynamic relationship between foreign venture capital (FVC) and overseas listing of Chinese enterprises (COLC), and takes into account the changes of legal environment and accounting standards. The results showed that from Q1 2012 to Q4 2014, the lower the FVC, the lower the COLC. From Q1 2008 to Q4 2008, the higher the FVC, the higher the COLC. Both positive and negative effects exist from COLC to FVC. Specifically, the more listed enterprises there are, the more foreign venture capitalists trust the potential of Chinese enterprises and the market. Thus, the corresponding FVC was high. Furthermore, the negative correlation between COLC and FVC was due to political factors and epidemics. Many enterprises improve their internationalization and profitability by attracting FVC to Chinese enterprises. Therefore, this study helps foreign investors achieve a greater return on investment in China and enables enterprises to improve their international reputations and realize overseas listings. In addition, the results can provide suggestions for the government to issue relevant measures conducive to maintaining the stability of the domestic market and the balanced development of domestic and foreign markets.

Does Venture Capital Reputation Contribute to Pre-IPO Performance of Entrepreneurial Firms in the Chinese Context?

This study investigates venture capital (VC) reputation impact on the pre-IPO performance of the entrepreneurial firms backed by three kinds of VCs. This study employs backward stepwise regression models following prior theoretical frameworks to examine the research question. Based on a database of the top 50 VC firms ranked during 2016 to 2020 and their portfolio firms. This study shows some contingent contribution to pre-IPO firm performance. Firstly, the reputation of the Chinese government-owned VCs is negatively associated with their portfolio firm performance. Still, there is a positive relationship between foreign and local private VCs. Secondly, entrepreneurial firm performance is significantly associated with industry policy and entrepreneur’s performance than VC reputation. This study has practical implications for entrepreneurs and limited partners regarding their corporation relationships with the Chinese VCs. JEL codes: G24, G34

The impact of internet penetration on venture capital investments: Evidence from a quasi-natural experiment

This study investigates the relationship between internet penetration and venture capital (VC) investment in China. Exploiting staggered inclusion in demonstration cities under the Broadband China strategy as a positive shock to internet penetration, our difference-in-differences analysis shows that this policy shock results in an increase in VC investments in demonstration cities relative to others. Moreover, the increase in VC investments is concentrated in early stage financing and young start-ups. In terms of VC fund sources, we find a stronger effect on foreign and independent VCs. Our mechanism analysis suggests that the effect of the broadband rollout is mainly driven by cities with higher ex-ante costs of information acquisition and that such costs are reduced by the improvement of internet-based network infrastructure. Finally, we provide additional evidence on the benefits to established companies by showing that broadband rollout improves the information environment of listed firms. Our study sheds new light on the economic consequences of infrastructure development that reduces information acquisition costs in China.

How does venture capital cross-border syndication spur corporate innovation? Evidence from China

In recent years, venture capital (VC) cross-border syndication has shown an obvious growth trend. Based on the existing studies, this paper explores the impact of VC cross-border syndication on corporate innovation. We also examine the mediating roles of cross-border quadratic relationship closure (CBQRC) formed by the strategic cooperation relationship between the respective portfolio companies of domestic and foreign VCs. This paper conducted an empirical analysis to test our hypotheses using a sample of first-round investments in domestic firms by domestic VC firms from 2014 to 2016. Results show that the more investment events of VC cross-border syndication or the more partners of VC cross-border syndication, the more likely it is to have a significant positive impact on the innovation of domestic portfolio companies. CBQRC plays a mediating role between VC cross-border syndication on corporate innovation. Results remain robust after removing endogeneity using the instrumental variables approach and removing sample selection bias using Heckman two-stage regression. Results deepen the understanding of the relationship between VC cross-border syndication and corporate innovation and provide essential guidance to domestic VC firms promoting corporate innovation in open partnerships.

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

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.

Influences of Foreign and Domestic Venture Capitalists on Internationalisation of Small Firms

This study investigates whether venture capitalists (VCs) influence the internationalization of small firms and whether such impact differs between foreign and domestic VCs. Our findings, based on in-depth interviews with top decision-makers from two VCs and four portfolio ventures, indicate contrasts between the perceptions of VCs and portfolio firms, so that the former claim to have a higher impact than what is perceived by the latter. Additionally, our evidence about the differential impacts of foreign versus domestic VCs runs counter to the literature and suggests that the purported stronger impact of foreign VCs may have been over-emphasized in the literature. Two contingencies are revealed that seem to affect the impact of the VC and of its nationality on the internationalization of investee firms: breadth of the industry (global versus local industries) and firm’s vocation (born global firm versus local leader).

The Impact of Venture Capital Background on CEO Replacement in Portfolio Companies: Empirical Evidence from China

Taking Chinese startups backed by venture capital (VC) in 1997–2017 as the sample, this study investigates the impact of VC background on chief executive officer (CEO) replacement in portfolio companies. The results show that (1) compared to foreign VC, domestic VC is more likely to replace the CEO of the portfolio companies. (2) Syndicate with domestic VC can overcome the disadvantage of foreign VC geographically distant from the portfolio companies, and domestic VC as coinvestors can effectively monitor portfolio companies, increasing the possibility of CEO replacement. Heterogeneity analysis shows that the positive effect of VC background on CEO replacement exists in the subgroup of VC geographically proximate to the portfolio companies, indicating that geographic proximity to the portfolio companies helps VC more easily grasp the development of the portfolio companies and more likely to replace CEO. This paper reveals the differences in the behavior of VC in replacing CEO during the postinvestment management process, highlights the critical role of geographical proximity, and provides important management insights for VC and entrepreneurs.

The Impact of Foreign Venture Capital Intervention on Venture Capital Innovation of Startup Entrepreneurs Using Propensity Score Matching Model.

The research expects to give full play to the role of venture capital in corporate innovation and enhance the development capability of enterprises. Based on Propensity Score Matching (PSM) model, the characteristics of venture capital and startup enterprises are analyzed, and the innovation of venture capital is discussed. Next, the PSM model is used to analyze the innovation of venture capital intervention in enterprises from risk probability intervention, probability evaluation, matching equilibrium validity test, matching results analysis, different venture capital, and different background risks. The results show that the difference of standardized mean is close to 0, which accords with the equilibrium test. The significant impact of venture capital intervention on the Number of Invention Patent Applications (NIPA) and Number of Utility Model Patent Applications (NUMPA) is 0.1 and 0.01, respectively. Venture capital intervention has a significantly positive impact on NIPA and NUMPA but has no significant positive impact on Number of Design Patent Applications (NDPA). The impact of joint venture capital intervention on the NIPA, NUMPA, and NDPA is 0.0874, 0.0635, and 0.1213, respectively. Hence, the intervention of joint venture capital can greatly promote the increase of Number of Patent Applications (NPA), especially, NIPA, and NUMPA. Compared with private venture capital, joint venture capital plays a greater role in promoting the growth of NPA and NIPA. Compared with private venture capital and foreign venture capital, national venture capital has a stronger innovation orientation and a longer investment cycle, which can greatly improve innovation performance, such as NIPA, while private venture capital and foreign venture capital have a less significant impact on enterprise innovation performance. The results demonstrate that the foreign capital sharing assessment based on the PSM model can be a good predictor of the performance of startups. It is hoped that the research results can provide a reference for the development of startups.

How does venture capital spur the innovation of environmentally friendly firms? Evidence from China

Previous literature has discussed the relationship between venture capital (VC) and green innovation; however, green innovation is seldom noted as having been created by both environmentally friendly and pollution-intensive firms, even though most VCs are actually invested only in environmentally friendly firms. Thus, this study focuses on the relationship between VC and the green innovation of environmentally friendly firms. The analysis combines traditional patent data with homogenous citation data to jointly examine the quantity and quality of VC-funded firms' green innovation. Results suggest that VC support not only improves firms' success rate of patent application but also increases the innovation “value” represented by increased citation. The Chinese government has asked government VC (GVC) to be a long-term strategic investment for environmentally friendly firms. However, we found that GVC negatively affects green innovation, which may be caused by the risk aversion and adverse selection of the GVC manager. By comparing the roles of experienced foreign VC and full-sample VC, we confirmed that the investment skills of developed countries could enhance the quantity and quality of green innovation in China.

Impact of Venture Capitalists' Experience on their Diversification Strategy in India

Our study contributes to the venture capitalists' industrial and regional diversification strategies at the selection stage, specifically in an emerging entrepreneurial context with high uncertainty. Venture capital diversification literature has focused primarily on mature environments, and their outcomes may not be suited for emerging environments. We study the effect of venture capitalists' experience on their diversification strategy and the moderating effects of investment-stage and syndication using data on 289 venture capitalists who had invested in Indian start-ups from 1999-2018. Drawing from the resource-based view, we expect that with increasing experience, venture capitalists would make informed decisions about prospective deals and decrease their diversification. Contrary to our expectations, we find that the venture capitalists diversify more with increasing experience. Early-stage investments and syndication negatively moderated the effect of experience on diversification. We suggest that learning under uncertainty is a slow process, or venture capitalists diversify more to undertake riskier investments seeking higher returns. Foreign venture capitalists investing in India are less regionally diversified than their domestic counterparts; however, the effect was not significant for industrial diversification. We discuss the possible explanations for findings in the discussion section.

Going Abroad, Friends on Board: Cross-Border Venture Capital and Syndication Strategy in China

Cross-border venture capitals (CBVCs) are increasingly prevailing in recent decades, inter alia in emerging markets like China. The venture capital (VC) firms investing outside their home countries are faced with foreignness which is broadly regarded as liability. The primary aim of this article is to contribute to our understanding how foreignness affects VC’s strategy when entering emerging markets, particularly with respect to the foreignness originated from cultural distance. The data consist of over 5,000 CBVC deals taking place in China mainland from 1988 to 2016. Our empirical study shows that, with foreignness growing, it turns from liability into advantage in the context of CBVCs. We find an inverse U-shape relationship between foreignness and syndication, with VC firm’s reputation as the moderator. Besides, foreign VC firms establish local subsidiary when faced with foreignness, which serves as alternative to syndication. The key contribution of this article is that foreignness turns from liability into advantage in emerging markets, which exerts a curvilinear impact on the entry strategy of VC firms. This study advances the knowledge of foreignness and VC strategy, and sheds new light on entrepreneurial activities in emerging markets.

Foreign Venture Capitalists and Access to Foreign Research: The Case of US Initial Public Offerings

AbstractWe investigate whether foreign venture capital (VC) firms create value above and beyond the value created by domestic VC firms in US initial public offering (IPO) firms. Contributing to an emerging literature on the role and effects of foreign VC firms, we study whether such VC firms enhance innovation by their investee firms. While high levels of innovation are a prerequisite for future value creation, as well as for maintaining the firm's competitive advantage, the extant literature nevertheless suggests that investors struggle with valuing innovation input when firms are about to go public. Ultimately, this results in greater rather than lower IPO underpricing. We argue that foreign VC firms, especially those from countries with high patent activity, increase the innovation levels of their investee firms. In turn, their presence in the VC syndicate signals the greater likelihood of the investee firm successfully turning innovation input (i.e. research and development (R&D) expenditures) into innovation output (i.e. patents), resulting in lower IPO underpricing. Studying a sample of 995 US IPOs conducted during 2000–2016, we find strong and consistent support for the above arguments.

СУЧАСНІ ТЕНДЕНЦІЇ ГЕНЕЗИСУ ВЕНЧУРНОГО ПІДПРИЄМНИЦТВА В УКРАЇНІ

The article is devoted to the analysis of quantitative and structural parameters of venture business development in Ukraine, so it seems appropriate to focus on its most generalizing features and characteristics, which have been clearly outlined in recent decades. First of all, it should be noted the extremely low level of capitalization of the domestic venture capital market. Also important for a comprehensive analysis of the current state and trends in domestic venture entrepreneurship is the number of venture capital investment institutions and a significant increase in the level of concentration of the domestic asset management market. Another conclusion that follows from the data concerns the dominance of venture mutual investment funds, ie closed-end funds, in the subjective structure of domestic venture entrepreneurship. Domestic venture funds are also characterized by an extremely insignificant share of the value of their assets in the gross domestic product of our state. Another well-established trend in the structural dynamics of domestic venture funds in the last decade is the growing share of foreign capital in the structure of their investment flows. In addition, in recent years there has been a clear eloquent trend, namely: the growing share of domestic individuals in the subjective structure of investors in venture mutual investment institutions. International corporate structures, business incubators and accelerators are actively opening their innovative divisions and representative offices in our country. It is worth noting that the number and volume of funding for Ukrainian startups is increasing from year to year. In recent years, the processes of attracting funding through crowdfunding platforms and grant sources have been developing dynamically. Evidence of the growing interest of foreign venture capitalists in Ukrainian startups is the intensification of mergers and acquisitions in this area. Unfortunately, maintaining the extremely low economic motivation of venture capitalists to invest money in the early stages of research and self-search by inventors in most cases leads to dependence on investors and unequal exchange of property rights for scientific ideas for financial resources.

VC in Emerging Markets: The Value of Patience

Due to multiple agency relationships, venture capitalists (VCs) may rush to exit their investments in entrepreneurial firms and pass returns on to the limited partners (LPs) who supply their capital. In emerging markets characterized by institutional voids and delays, there is a tension between this tendency and local entrepreneurs’ desire for more ‘patient’ (longer-term) capital. Premature exit can harm investee entrepreneurs, if it bluntly forces too great a focus on short term gains over long-term, sustainable performance. We investigate determinants of the VC investment holding period in 10 emerging economies using data from the Private Capital Research Institute (PCRI). We find that younger VCs, industry specialized VCs, and foreign VCs, particularly those investing in institutionally weaker host markets, exit deals faster. VCs in syndicated deals or with greater industry specialization also exit faster. Entrepreneurs, VCs, and LPs should all be aware of the potential downsides of these tendencies.

Irrigation Canals: Foreign Venture Capital Investment and Cross-Border Knowledge Spillovers

Prior studies have documented that VC investments provide channels facilitating knowledge flows through investment relationship networks. Such knowledge diffusion, although it may help entrepreneurial companies overcome initial resource constraints, can undercut their competitive advantages by leaking their intellectual properties to competitors in domestic and international markets. The potential for unwanted spillovers may even adversely affect a nation’s competitive advantage. This study examines whether and how foreign VC investments in a host country’s industries are associated with knowledge spillovers in their home countries. Using a dataset of foreign VC investments in 27 U.S. critical industries and related patenting activity between 2007-2017, we find counterintuitive evidence that increased foreign VC investment in U.S. critical industries is actually associated with knowledge spillovers in an inverted U-shaped relationship. Such a relationship is also moderated by home country intellectual property regimes and technology gaps between the home and host countries.