Abstract
This article identifies three distinct patterns of investment behavior by venture capital firms investing in technology sector start-ups in China. The first pattern is the service-oriented, technology-light investment behavior exhibited by the foreign venture capitalist firms not founded by ethnic Chinese. The second pattern is the technology creation investment pattern exhibited by foreign firms founded by ethnic Chinese and embedded in ethnic Chinese communities. The third pattern consists of local state-funded Chinese venture capital firms that choose either to invest in state-directed projects or opt out of investing in technology start-ups entirely. What explains the differences in behavior between the strictly foreign and the ethnic Chinese-embedded foreign firms are the different legal environments in which these firms honed their skills. The different learned experience gained from operating in different environments explains why the foreign firms avoid investing in technology-generating activities in China whereas the ethnic Chinese firms are willing to do so despite China’s notorious weak intellectual property rights regime. The political factors influencing the distribution of finance in China explain the behavior and essential failure of the local state-run venture capital firms. These findings demonstrate that several distinct, separate and non-clashing institutional arrangements are concurrently operating within China and shaping the behavior of venture capital firms there.
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Notes
For the rest of the article, VC firms and VCs will be used interchangeably. People engaged in the business of venture capital will be referred to as individual venture capitalists.
One could argue that there are in fact two separate market-based institutional systems if one incorporates the different learned experience of the ECF and foreign VC firms into the institutional systems, but for clarity’s sake, this article will refer to two systems (one government-dominated and the other market-based) with prior learned behavior differentiating how ECF and foreign VCs behave in the market-based system.
Among all the individual venture capitalists from ECF and foreign VCs interviewed, only one was not an ethnic Chinese returnee.
One of the VCs was a university VC and most of the others were nominally corporations, but were tightly linked to various municipal governments through ownership ties.
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Fuller, D.B. How law, politics and transnational networks affect technology entrepreneurship: Explaining divergent venture capital investing strategies in China. Asia Pac J Manag 27, 445–459 (2010). https://doi.org/10.1007/s10490-009-9149-0
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DOI: https://doi.org/10.1007/s10490-009-9149-0