The Performance of Foreign Venture Capital Firms in Emerging Economies: A Study of U.S. Firms in China

Abstract

Extant research on the international venture capital (VC) firms largely focuses on cross-country comparison; only a limited number of studies have examined the internationalization of VC firms and their strategies in host countries. This study approaches the research topic mainly from an institutional perspective, and intends to understand the performance of foreign VC firms in emerging economies, a topic that has rarely been examined in previous research. Using a sample of U.S. VC firms investing in China, this study finds that U.S. VC firms with more investment experience at home have weaker investment performance in China. The empirical results also show that U.S. VC firms investing in ventures with larger top management team, staging their investments, and syndicating with other U.S. VC firms are likely to achieve better performance in China. Contrary to what was hypothesized, syndicating with Chinese VC firms decreases U.S. VC firms' investment performance in China.Keywords: emerging economies, institutional perspective, liability of foreignness, venture capital IntroductionResearch examining the growth and development of the venture capital (VC) industry and VC firms in different countries have captured a great deal of attention (e.g. Batjargal, 2007;Black & Gilson, 1998;Bruton, Ahlstrom, & Puky, 2009;Zacharakis, McMullen, & Shepherd, 2007). However, extant research on the international VC industry mainly focuses on cross-country comparison (Wright, Pruthi, & Lockett, 2005). Researchers have not paid adequate attention to the internationalization of VC firms and their strategies in host countries, with the studies by Patzelt and colleagues (2009) and Li and colleagues (2014) as two recent exceptions. Given the significant amount of cross-border VC flows and the geographic diversity of VC investments (Wright et al., 2005), a better understanding of VC firms' strategies in host countries becomes increasingly important. Among the target markets for VC firms to expand internationally, emerging economies are particularly intriguing because they simultaneously offer the biggest attractions and challenges to VC firms. The rapid changes in those economies create abundant new business opportunities, which spur the need for VC (Karsai, Wright, & Filatotchev, 1997). Furthermore, in the process of transforming their environments and strengthening their competitiveness, the managerial expertise accompanied with foreign VC firms is highly valued. Accordingly, this study intends to fill this gap in the literature by examining U.S. VC firms' strategies in China, the largest emerging economy.This study mainly approaches the research topic from an institutional perspective (e.g., North, 1990), and intends to contribute to the understanding of VC firms' strategies and actions in emerging economies, a topic which has rarely been examined in previous research while foreign VC investment in emerging economies has become an increasingly important business phenomenon. Using an institutional approach, extant studies have n...