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The Internationalization of Venture Capital and Private Equity

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  • Aizenman, Joshua
  • Kendall, Jake

Abstract

This paper investigates the internationalization of venture capital (VC) and private equity (PE) investments. We derive flows between countries of VC and PE investments worldwide, relying on comprehensive firm-level data sources, covering three decades and about 100 countries. A gravity analysis indicates that distance, common language, and colonial ties are significant factors in directing these flows. Additionally, the presence of high-end human capital, a better business environment, high levels of military expenditure, and deeper financial markets are important local factors that attract international venture capital. There is also evidence of path dependency and persistence in VC and PE flows, indicating network effects and fixed costs of entry may be at work. Further analysis suggests the internalization of VC and PE is an ongoing story. Prior to the 1990s, VC was primarily a US-only phenomenon. The globalization of IT activities induced the US venture capital industry to mature, and to start exporting its unique skills as VC managers. The US is now a dominant net exporter of deals, though most cross- border deals are still either to or from the US. China has emerged as the dominant net importer, followed by Sweden, Canada, the UK, India and France. For deals outside the US, cross-border participation has been the norm, while US-located deals have been almost exclusively domestic, involving a higher percent of international participation only after 2001. In the past few years, domestic VC and PE capacity has begun to emerge in many countries where it did not exist previously.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt3vh3n83p.

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Date of creation: 01 Sep 2008
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Handle: RePEc:cdl:ucscec:qt3vh3n83p

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Keywords: Venture capital; Gravity equation; path dependence; cross border flows;

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References

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  1. Marco Da Rin & Giovanna Nicodano & Alessandro Sembenelli, 2004. "Public Policy and the Creation of Active Venture Capital Markets," Working Papers 270, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  2. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," NBER Working Papers 10480, National Bureau of Economic Research, Inc.
  3. Richard Portes & Hélène Rey, 2001. "The Determinants of Cross-Border Equity Flows," DELTA Working Papers 2001-08, DELTA (Ecole normale supérieure).
  4. Ross Levine & Sara Zervos, . "Stock markets, banks and economic growth ," CERF Discussion Paper Series 95-11, Economics and Finance Section, School of Social Sciences, Brunel University.
  5. Joshua Aizenman & Nancy Marion, 2001. "The Merits of Horizontal versus Vertical FDI in the Presence of Uncertainty," NBER Working Papers 8631, National Bureau of Economic Research, Inc.
  6. Black, Bernard S. & Gilson, Ronald J., 1998. "Venture capital and the structure of capital markets: banks versus stock markets," Journal of Financial Economics, Elsevier, vol. 47(3), pages 243-277, March.
  7. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
  8. J. M. C. Santos Silva & Silvana Tenreyro, 2006. "The Log of Gravity," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 641-658, November.
  9. Paul Gompers & Josh Lerner, 2001. "The Venture Capital Revolution," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 145-168, Spring.
  10. Bruce Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," Atlantic Economic Journal, International Atlantic Economic Society, vol. 33(4), pages 383-403, December.
  11. Astrid Romain & Bruno Van Pottelsberghe, 2004. "The determinants of venture capital: a panel data analysis of 16 OECD countries," Working Papers CEB 04-015.RS, ULB -- Universite Libre de Bruxelles.
  12. Andrew K. Rose & Mark M. Spiegel, 2002. "A Gravity Model of Sovereign Lending: Trade, Default and Credit," NBER Working Papers 9285, National Bureau of Economic Research, Inc.
  13. Samuel Kortum & Josh Lerner, 2000. "Assessing the Contribution of Venture Capital to Innovation," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 674-692, Winter.
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Citations

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Cited by:
  1. Tykvová, Tereza & Schertler, Andrea, 2011. "Cross-border venture capital flows and local ties: Evidence from developed countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(1), pages 36-48, February.
  2. Schertler, Andrea & Tykvová, Tereza, 2009. "Venture capital and internationalization," ZEW Discussion Papers 09-055, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  3. Marco Da Rin & Thomas F. Hellmann & Manju Puri, 2011. "A survey of venture capital research," NBER Working Papers 17523, National Bureau of Economic Research, Inc.
  4. Lerner, Josh & Tåg, Joacim, 2012. "Institutions and Venture Capital," Working Paper Series 897, Research Institute of Industrial Economics.
  5. Schertler, Andrea & Tykvová, Tereza, 2012. "What lures cross-border venture capital inflows?," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1777-1799.
  6. Roman Kraussl & Stefan Krause, 2013. "Has Europe Been Catching Up? An Industry Level Analysis of Venture Capital Success over 1985-2009," LSF Research Working Paper Series 13-6, Luxembourg School of Finance, University of Luxembourg.
  7. Wang, Lanfang & Wang, Susheng, 2011. "Cross-border venture capital performance: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 19(1), pages 71-97, January.
  8. Roman Kraussl & Stefan Krause, 2013. "Has Europe Been Catching Up? An Industry Level Analysis of Venture Capital Success over 1985-2009," CREA Discussion Paper Series 13-6, Center for Research in Economic Analysis, University of Luxembourg.

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