Formal Institutions, Culture, and Venture Capital Activity: A Cross-Country Analysis

Why does the level of venture capital activity vary across countries? This study suggests that the variation can be attributed to the different levels of formal institutional development. Further, this study proposes that venture capitalists respond differently to the incentives provided by formal institutions depending on different cultural settings. Analysis of VC activity for 68 countries during the 1996–2006 period shows that formal institutions have a positive effect on the level of venture capital activity, but this effect is weaker in more uncertainty-avoiding societies and in more collectivist societies. This study has useful theory and policy implications for venture capital and entrepreneurship development.

[1]  D. Cumming,et al.  The Legislative Road to Silicon Valley , 2006 .

[2]  Jeffery S. McMullen,et al.  Entrepreneurial Action And The Role Of Uncertainty In The Theory Of The Entrepreneur , 2006 .

[3]  Douglas J. Cumming,et al.  Crowding Out Private Equity: Canadian Evidence , 2002 .

[4]  Manju Puri,et al.  The Interaction between Product Market and Financing Strategy: The Role of Venture Capital , 1999 .

[5]  Roger V. Gould.  Collective Action and Network Structure , 1993 .

[6]  O. Shenkar,et al.  Cultural distance revisited: Towards a more rigorous conceptualization and measurement of cultural differences , 2001 .

[7]  F. Fukuyama.  Trust: The Social Virtues and the Creation of Prosperity Penguin London , 1995 .

[8]  Darwin V. Neher.  Staged Financing: An Agency Perspective , 1999 .

[9]  Garry D. Bruton,et al.  An institutional view of China's venture capital industry Explaining the differences between China and the West , 2003 .

[10]  Scott Shane,et al.  Cultural influences on national rates of innovation , 1993 .

[11]  John C. Ruhnka,et al.  Some hypotheses about risk in venture capital investing , 1991 .

[12]  Cristina B. Gibson,et al.  Taking Stock in Our Progress on Individualism-Collectivism: 100 Years of Solidarity and Community , 1998 .

[13]  Aart Kraay,et al.  Governance Matters VIII: Aggregate and Individual Governance Indicators, 1996-2008 , 2006 .

[14]  Mike Wright,et al.  International Venture Capital Research: From Cross-Country Comparisons to Crossing Borders , 2005 .

[15]  Harry C. Triandis,et al.  The measurement of the etic aspects of individualism and collectivism across cultures , 1986 .

[16]  Witold J. Henisz.  The Institutional Environment for Multinational Investment , 2000 .

[17]  Javier Suarez,et al.  Venture Capital Finance: A Security Design Approach , 1999 .

[18]  Rafael Repullo,et al.  Monitoring, Liquidation, and Security Design , 1998 .

[19]  Tarun Khanna,et al.  Billions of Entrepreneurs: How China and India Are Reshaping Their Futures--and Yours , 2008 .

[20]  A. Stinchcombe.  Social Structure and Organizations , 2000, Political Organizations.

[21]  Z. Ács,et al.  The Determinants of Regional Variation in New Firm Formation , 2002 .

[22]  David A. Griffith,et al.  The effect of cultural distance on entry mode choice, international diversification, and MNE performance: a meta-analysis , 2005 .

[23]  Ian C. MacMillan,et al.  Elitists, risk-takers, and rugged individualists? An exploratory analysis of cultural differences between entrepreneurs and non-entrepreneurs , 1992 .

[24]  Garry D. Bruton,et al.  Institutional Theory and Entrepreneurship: Where Are We Now and Where Do We Need to Move in the Future? , 2010 .

[25]  G. Hofstede,et al.  Culture′s Consequences: International Differences in Work-Related Values , 1980 .

[26]  Dieter Bös,et al.  Property rights and the nature of the firm journal of political economy: Oliver Hart and John Moore, Journal of political economy (1990), no. 6, 1119-1158 , 1991 .

[27]  Christian Keuschnigg,et al.  Tax Policy, Venture Capital, and Entrepreneurship , 2000 .

[28]  Michael J. Cooper,et al.  A Rose.Com by Any Other Name , 2000 .

[29]  Leslie A. Jeng,et al.  The Determinants of Venture Capital Funding: Evidence Across Countries , 1998 .

[30]  G. Hofstede.  Culture′s Consequences: Comparing Values, Behaviors, Institutions and Organizations Across Nations , 2001 .

[31]  Paul A. Gompers.  Optimal Investment, Monitoring, and the Staging of Venture Capital , 1995 .

[32]  Mike W. Peng.  Institutional Transitions and Strategic Choices , 2003 .

[33]  Jeffrey M. Wooldridge,et al.  Solutions Manual and Supplementary Materials for Econometric Analysis of Cross Section and Panel Data , 2003 .

[34]  Anne S. Tsui,et al.  Journal of Management on Behalf Of: Southern Management Association Journal and Article Identification Content Review Cultural Values Used Topics Studied Type I Studies—culture as Independent Variable Figure 1 Two Types of Cross-national, Cross-cultural Studies on Individuals and Teams in Organizati , 2022 .

[35]  J. Cochrane.  The Risk and Return of Venture Capital , 2001 .

[36]  J. Niosi.  National systems of innovations are “x-efficient” (and x-effective): Why some are slow learners , 2002 .

[37]  P. Earley.  Social Loafing and Collectivism: A Comparison of the United States and the People's Republic of China. , 1989 .

[38]  James H. Tiessen.  Individualism, collectivism, and entrepreneurship: A framework for international comparative research , 1997 .

[39]  David B. Audretsch,et al.  The rate of hazard confronting new firms and plants in U.S. manufacturing , 1994 .

[40]  Scott Shane,et al.  Why do some societies invent more than others , 1992 .

[41]  Kumiko Miyazaki,et al.  An integrated network approach to systems of innovation--the case of robotics in Japan , 1999 .

[42]  Mike W. Peng,et al.  Managerial Ties and Firm Performance in a Transition Economy: The Nature of a Micro-Macro Link , 2000 .

[43]  S. Prowse,et al.  The Private Equity Market: An Overveiw , 1997 .

[44]  Mike Wright,et al.  Venture Capital and Private Equity: A Review and Synthesis , 1998 .

[45]  Shaker A. Zahra,et al.  National Culture and Entrepreneurship : A Review of Behavioral Research , 2002 .

[46]  Raphael Amit,et al.  Venture‐Capital Syndication: Improved Venture Selection vs. The Value‐Added Hypothesis , 2002 .

[47]  Amitai Etzioni.  The active society , 1968 .

[48]  Leora F. Klapper,et al.  Entrepreneurship : New Data on Business Creation and How to Promote It , 2007 .

[49]  Witold J. Henisz,et al.  Political Institutions and Electric Utility Investment: A Cross-Nation Analysis , 1998 .

[50]  J. M. Buchanan,et al.  An Economic Theory of Clubs , 1965 .

[51]  E. O. Wright,et al.  The Fall and Rise of the Petty Bourgeoisie: Changing Patterns of Self-Employment in the Postwar United States , 1989, American Journal of Sociology.

[52]  Douglas J. Cumming,et al.  Government Policy Towards Entrepreneurial Finance: Innovation Investment Funds , 2007 .

[53]  Alessandro Sembenelli,et al.  Public Policy and the Creation of Active Venture Capital Markets , 2005 .

[54]  R. Gilson,et al.  Venture Capital and the Structure of Capital Markets: Banks Versus Stock Markets , 1997 .

[55]  Leslie E. Palich,et al.  Economic Freedom and the Motivation to Engage in Entrepreneurial Action , 2008 .

[56]  Klaus M. Schmidt,et al.  Convertible Securities and Venture Capital Finance , 2001, SSRN Electronic Journal.

[57]  W. Sine,et al.  Revisiting Burns And Stalker: Formal Structure And New Venture Performance In Emerging Economic Sectors , 2006 .

[58]  J. March,et al.  Handbook of organizations , 1966 .

[59]  Raphael Amit,et al.  WHY DO VENTURE CAPITAL FIRMS EXIST? THEORY AND CANADIAN EVIDENCE , 1998 .

[60]  H. Triandis.  Collectivism and Individualism as Cultural Syndromes , 1993 .

[61]  Stephen L. Mueller,et al.  Culture and entrepreneurial potential: A nine country study of locus of control and innovativeness , 2001 .

[62]  Per Strömberg,et al.  Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts , 2000 .

[63]  Michael Freudenberg,et al.  The Internationalisation of Venture Capital Activity in OECD Countries: Implications for Measurement and Policy , 2000 .

[64]  Anjan V. Thakor,et al.  Learning, Corporate Control and Performance Requirements in Venture Capital Contracts , 1990 .

[65]  Scott Shane,et al.  Uncertainty Avoidance and the Preference for Innovation Championing Roles , 1995 .

[66]  Garry D. Bruton,et al.  Institutional Influences on the Worldwide Expansion of Venture Capital , 2005 .

[67]  Samuel P. Huntington,et al.  Culture Matters: How Values Shape Human Progress , 2001 .

[68]  Leora F. Klapper,et al.  What does “entrepreneurship” data really show? , 2008 .

[69]  S. Shane.  THE EFFECT OF NATIONAL CULTURE ON THE CHOICE BETWEEN LICENSING AND DIRECT FOREIGN INVESTMENT , 1994 .

[70]  O. Hart,et al.  Property Rights and the Nature of the Firm , 1988, Journal of Political Economy.

[71]  Ronald K. Mitchell,et al.  Institutional Environment and Entrepreneurial Cognitions: A Comparative Business Systems Perspective , 2010 .

[72]  Jeffery S. McMullen,et al.  Venture capitalists' decision policies across three countries: an institutional theory perspective , 2007 .

[73]  P. T. Spiller,et al.  The Institutional Foundations of Regulatory Commitment: A Comparative Analysis of Telecommunications Regulation , 1994 .

[74]  S. Chatterjee,et al.  Regression Analysis by Example , 1979 .

[75]  Toby E. Stuart,et al.  Syndication Networks and the Spatial Distribution of Venture Capital Investments1 , 1999, American Journal of Sociology.

[76]  Sea-Jin Chang,et al.  Economic Performance of Group-Affiliated Companies in Korea: Intragroup Resource Sharing and Internal Business Transactions , 2000 .

[77]  G. Hofstede,et al.  Cultures and Organizations: Software of the Mind , 1991 .

[78]  Pat H. Dickson,et al.  The Influence of National Culture on the Formation of Technology Alliances by Entrepreneurial Firms , 2000 .

[79]  Josh Lerner,et al.  Does Legal Enforcement Affect Financial Transactions? The Contractual Channel in Private Equity , 2005 .

[80]  Peter Johnson.  Differences in Regional Firm Formation Rates: A Decomposition Analysis , 2004 .

[81]  P. Dorfman,et al.  Leadership and Organizations: The GLOBE Study of 62 Societies , 2004 .

[82]  W. A. Sahlman,et al.  What do venture capitalists do , 1989 .

[83]  W. A. Sahlman,et al.  The structure and governance of venture-capital organizations , 1990 .

[84]  D. North.  Institutions, Institutional Change and Economic Performance: Economic performance , 1990 .

[85]  Samuel Kortum,et al.  Assessing the Contribution of Venture Capital to Innovation , 2000 .

[86]  J. Clapp,et al.  Development as freedom , 1999 .

[87]  Dovev Lavie,et al.  Alliance Portfolio Internationalization and Firm Performance , 2008, Organ. Sci..