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

Abstract

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. and Canada, policymakers have actively encouraged foreign investments, while others, including many European countries, implicitly discourage cross-border financing, or simply lack a clear set of policy guidelines. In this paper, we propose a coherent perspective to assess the advantages and disadvantages of cross-border VC investments. We outline the challenges faced by companies, investors, and policymakers, and present a framework for drafting appropriate policy responses.This study builds on a review of the academic literature (see Devigne et al. 2018), as well as a summary of publicly available data, to develop a new framework analysing policy options for cross-border venture investing. Section 2 looks at the quantitative and qualitative data about the rise of cross-border investing. Section 3 develops a conceptual understanding of the economic challenges of cross-border investing. Section 4 develops the main policy analysis. It is followed by a brief conclusion. Trends in Cross-Border Venture Capital InvestmentsThis section outlines what we currently know about cross-border investments. Cross-border VC investment is defined as investments from investors located in a different country from the country where the portfolio company was founded. In our discussion, we mainly talk about VC, but one can use a broad definition of this term. Although not our focus and thus excluded from our data, much of our analysis also pertains to other forms of early-stage financing, such as angel investing, corporate venturing, or crowdfunding. In general, cross-border VC investments make up a non-tr...

Internationalisation and localisation: Foreign venture capital investments in the United Kingdom

“…A number of studies have noted the relative importance of FVC and its potential role in adding value to private enterprises and contributing to the local development of the entrepreneurial finance market in the receiving countries (see reviews by Bradley et al., 2019; Devigne et al., 2018). While the scale of international VC fundraising and investment activity has been increasing, this is not a new phenomenon.…”

“…First, running alongside this intra-national concentration of VC has been a counter-trend in the spatiality of the industry, the internationalisation of VC (Devigne et al., 2018), as foreign investors are attracted by new opportunities and markets to invest outside their home country (Alhorr et al., 2008; Bradley et al., 2019). Defined as VC investment from investors located in a country other than that where the portfolio company is located, cross-border VC has grown over the years to form a non-trivial part of the market (Tykvová, 2018).…”

“…Defined as VC investment from investors located in a country other than that where the portfolio company is located, cross-border VC has grown over the years to form a non-trivial part of the market (Tykvová, 2018). International VC is a distinctive part of the market: relative to domestic VC, cross-border VC investments are larger, perform better, are associated with later stages and realize faster and larger exits (often on foreign exchanges) (Bradley et al., 2019; Devigne et al., 2018; Tykvová, 2018).…”

“…investments made without a domestic co-investor). These are concentrated in those non-core regions which have weak domestic private sector VC activity, and suggest that FVC can potentially play a catalysing market development role over time in creating more active domestic VC markets (Bradley et al., 2019). Subject to a detailed appraisal of the performance of such FVC (Devigne et al., 2018), this raises the possibility that at least in part some modes of FVC have the potential to mitigate the uneven development effects of the increasingly concentrated domestic VC industry (Kovner and Lerner, 2015).…”

“…This has significant and negative implications to the host region, as it results in brain drain and loss of employment. However, how much relocation of portfolio companies to their investors’ country of origin actually happens, is largely a function of how strong the domestic ecosystem is, and these negative consequences are more likely to be observed where the domestic VC ecosystem is weak and FVC investments are made without local syndicate partners (Bradley et al., 2019).…”