Venture capital internationalization in China and the Uppsala model

Abstract

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.