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Understanding global flows of venture capital: Human networks as the “carrier wave” of globalization

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Abstract

Industry participants and observers view venture capital as fundamentally a local business. However, recent data show an increasing share of US venture capital investments flowing overseas. We suggest that cross-border venture capital flows are associated with the formation of “transnational technical communities” (TTCs), groups of immigrants active in both home- and host-country technical networks. Our results highlight the role of human networks as a mechanism of industry globalization, and support the view that TTCs are emerging economic actors in their own right.

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Notes

  1. Scholars have also begun to describe and analyze the emergence of domestic venture capital industries in other parts of the world – for example, see Kenney, Han, and Tanaka (2004) on the Taiwanese and Japanese cases.

  2. As with all metaphors, our “carrier wave” metaphor has its limitations, and should not be taken literally. While the carrier wave in electronics is an unmodulated wave, the human network is highly modulated. Our intent is only to suggest that the human network is the mechanism that carries the venture capital flow.

  3. We focus on FDI, which is assumed to be driven by the productive capacity of the local economy, rather than on portfolio investments, which may be speculative in nature.

  4. We thank anonymous reviewers and the editor for suggesting this point.

  5. Diaspora networks are defined as ethnic networks of immigrant venture capital industry participants (VCs, entrepreneurs, and “angels”) that connect them with their overseas counterparts.

  6. The embeddedness perspective refers to the contextualization of economic activity, arguing that research should pay attention to the social and other contexts within which economic exchange takes place (Granovetter, 1985).

  7. Since our goal is to understand cross-border flows of venture capital, we focus only on the VC's investment activities, setting aside the complementary activity of fund-raising, which appears to remain largely focused on the VC's domestic sphere.

  8. Since data for Taiwan were not available from the World Bank database, we obtained that data from the Taiwan Statistical Data Book compiled by the Council of Economic Planning and Development of Taiwan.

  9. We used the 2003 data to interpolate the missing data for year 2002.

  10. For a few nations, immigration data were not available for early sample periods (e.g., the 1960s). Since “not available” data implies that the number of immigrants was negligibly small, we regarded such data as zero, and cumulated immigrant data only for available data points.

  11. Data for Taiwan and Mainland China were available only from 1979 because their data were not reported separately from each other up to then. We accumulated immigrant data from 1979 for each and neglected the data before 1979. Since this variable construction clearly underestimates the extent of cumulative immigration, we tested for sensitivity by specifying alternative regression models that omitted these nations from the sample. The omission did not appear to affect our main results.

  12. We believe that interpolation was the best method to address the missing data, as the over-time tendency of immigration from each nation to the US is mostly stable. We attempted several alternative methods, however, for sensitivity analysis. For example, we examined cumulative immigration data without data for these missing years. We also examined the regression after omitting observations for these 5 years. We obtained results closely consistent with those reported.

  13. In addition, we set this duration from the viewpoint of operational appropriateness. When we take TTC with 15 years’ lag for t=1982, the earliest year in our sample, for example, the TTC t −15 is constructed from the 6 years’ data from 1959 through 1965. Had we taken more years’ lag, say 20 years, such data must be constructed only from the data in 1959 through 1962. We concluded that such short duration could not capture “cumulative” impact of immigration on venture capital flow, and therefore avoided lags beyond 15 years.

  14. In addition to year heterogeneity, we considered the possibility that global venture capital flows were larger in certain industries than in others. Since we utilized aggregated venture capital flow data, we could not control for this by using dummy variables. Instead, we calculated industry shares of global venture capital flow and the US domestic venture capital flow for 18 key industries and compared them. Spearman's rank correlations for industry share between global venture capital and domestic venture capital were greater than 0.7 and significant at the 1% level for every observation year. Thus we concluded that the structures of industry shares were mostly consistent between global venture capital flow and domestic venture capital flow.

  15. As a further check, we did also conduct the fixed model estimation by dropping the DIS variable, and obtained results consistent with those found with the use of the random-effect model.

  16. We thank an anonymous reviewer for this point.

  17. We thank an anonymous reviewer for suggesting this analysis.

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Acknowledgements

We are grateful to the International Business Center at the University of Pittsburgh, the Illinois CIBER, and the University of Illinois Campus Research Board for financial support. We thank Franky Supriyadi for his assistance with supplemental data collection. Joseph Cheng, Nosh Contractor, Kevin Kim, Yong Li, Steve Michael, Joseph Mahoney, Ajay Mehra, and seminar participants at the University of Pittsburgh, University of Kentucky and the State University of New York, Buffalo, provided helpful comments at various stages of the study. We also thank three anonymous JIBS reviewers and Departmental Editor Tom Murtha for helping us to refine the paper.

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  1. Katz Graduate School of Business, University of Pittsburgh, Pittsburgh, USA

    Ravi Madhavan

  2. School of Management, State University of New York at Buffalo, Buffalo, USA

    Akie Iriyama

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  1. Ravi Madhavan
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Correspondence to Ravi Madhavan.

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Accepted by Thomas Murtha, Departmental Editor, 21 August 08. This paper has been with the authors for two revisions.

APPENDIX

APPENDIX

See Table A1.

Table a1 List of recipient nations and cumulative amount of venture capital flow from US (1982–2002)
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Madhavan, R., Iriyama, A. Understanding global flows of venture capital: Human networks as the “carrier wave” of globalization. J Int Bus Stud 40, 1241–1259 (2009). https://doi.org/10.1057/jibs.2009.6

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