This study attempts to enhance the understanding of the liability of foreignness in the context of venture capitalists, hereafter VC, investing in emerging markets, hereafter EM, by drawing on case evidence from five cases. The outcomes of the study aim to provide VCs with a deep understanding of the investment environment within EM to lower the perceived risks and facilitate investments.
The literature review revealed a lack of evidence for the main institutional pressures, their impact on VCs as well as the strategies used to mitigate the impact of the liability of foreignness.
The main finding of the study is that a liability of foreignness exists for VCs due to political, legal and cultural pressures as well as a home bias. This leads to an increase in transaction costs. Furthermore, differences in the governance codes and business practices made it difficult for VCs to gain legitimacy within the EM while complying with all the rules and regulations of their home country.
Furthermore, local adaptation through the establishment of local offices to gain access to local networks and resources was the favoured mitigation strategy of VCs. Superior firm resources were used to facilitate learning about the EM by attracting local entrepreneurs and leveraging the added value of such resources during negotiations. The relocation of the headquarters from a portfolio company operating in an emerging market to a developed country in order to access financial as well as human resources was identified as a new mitigation strategy.
1 Table of Contents
2 Introduction
2.1 Research motivation
2.2 Scope of the project
2.3 Study procedure
3 Literature Review
3.1 Internationalisation
3.2 Institutional theory
3.3 Liability of foreignness
3.4 Benefits of foreignness
3.5 Difficulties in internationalisation
3.6 Home Bias
3.7 Strategies to overcome LOF
4 Research Objective and Research Questions
5 Methodology
5.1 Case Study Method
5.2 Single or multiple case study approach
5.3 Sample Size and Selection Criteria
5.4 Data Collection
5.5 Data Analysis
6 Case studies
7 Cross-Case analysis
7.1 Drivers Africa
7.1.1 Institutional pressures
7.1.2 Home bias Africa
7.2 Drivers China
7.2.1 Institutional pressures China
7.2.2 Home bias China
7.3 Drivers India
7.3.1 Institutional pressures
7.3.2 Home bias India
7.4 Strategies Africa
7.4.1 Local adaptation
7.4.2 Exploitation of firm resources
7.5 Strategies China
7.5.1 Local adaptation
7.5.2 Exploitation of firm resources
7.6 Strategies India
7.6.1 Local adaptation
7.6.2 Exploitation of firm resources
7.7 Similarities and differences
7.7.1 Drivers
7.7.2 Strategies
8 Discussion and conclusion
8.1 Drivers
8.2 Home bias
8.3 Strategies
8.4 Implications
8.4.1 Implications for VCs
8.4.2 Implications for policy makers
8.4.3 Contributions to academic literature
9 Limitations
Appendix A Research Proposal
References
Appendix B Example Coding of an Interview
Appendix C Profile Participants
Appendix D FDI reforms India
Appendix E Law firms energy sector
Appendix F Interview guide
Appendix G Interview guide text candidates
References
ABSTRACT
DOES A LIABILITY OF FOREIGNNESS EXIST FOR VENTURE CAPITAL FIRMS IN EMERGING MARKETS? – A CASE STUDY APPROACH
Keywords: Venture capital, business angel, legitimacy, liability of foreignness, isomorphism, home bias, internationalisation, institution, costs of doing business abroad
This study attempts to enhance the understanding of the liability of foreignness in the context of venture capitalists, hereafter VC, investing in emerging markets, hereafter EM, by drawing on case evidence from five cases. The outcomes of the study aim to provide VCs with a deep understanding of the investment environment within EM to lower the perceived risks and facilitate investments.
The literature review revealed a lack of evidence for the main institutional pressures, their impact on VCs as well as the strategies used to mitigate the impact of the liability of foreignness.
The main finding of the study is that a liability of foreignness exists for VCs due to political, legal and cultural pressures as well as a home bias. This leads to an increase in transaction costs. Furthermore, differences in the governance codes and business practices made it difficult for VCs to gain legitimacy within the EM while complying with all the rules and regulations of their home country.
Furthermore, local adaptation through the establishment of local offices to gain access to local networks and resources was the favoured mitigation strategy of VCs. Superior firm resources were used to facilitate learning about the EM by attracting local entrepreneurs and leveraging the added value of such resources during negotiations. The relocation of the headquarters from a portfolio company operating in an emerging market to a developed country in order to access financial as well as human resources was identified as a new mitigation strategy.
2 Introduction
Once thought of as risky and volatile environments, emerging markets, hereafter EM, are transforming. Governments constantly seek to improve the business environment in EM (Cavusgil et al., 2012). By lowering trade barriers, EM such as India are growing rapidly. Within the next 20 years China will overtake the US as the biggest economy in the world (EM 2014). Venture Capital firms, hereafter VCs, play a major role in this transformation process. By connecting knowledge and financial resources a stable ground for growth is built. However, VCs hesitate to invest in emerging markets by investing only ten per cent of their funds in the developing economies (EY 2014a). Major reasons are institutional voids such as lack of infrastructure, information or intellectual property laws, which lead to a liability of foreignness, hereafter LOF. The LOF is a widely applied concept in academic literature (Di Maggio and Powell, 1983; Hymer, 1960; Luo et al., 2002; Miller and Pahrke, 2002; Zaheer, 1995). However, there is only one study that provides evidence for the existence of the LOF in the VC industry (Lu and Hwang, 2008). There are several indicators for the existence of a LOF in the VC context. For example, VCs suffer from a home bias, information asymmetries as well as a lack of local knowledge and networks when investing abroad (Bruton et al., 2004; Lernern, 1995). Furthermore, the strategies of VCs to mitigate the impact of the LOF remain unclear while there is evidence that multinational enterprises either adapt to the local environment or use their home grown advantages (Luo, 2002; Zaheer, 1995)
2.1 Research motivation
Given that just ten per cent of venture capital funds are spent in EM this reveals the major concerns of VCs about the proportion of risk to returns in EM. However, little is known about the investment behaviour and LOF of VCs investing in EM (Nahata et al., 2014). A deep understanding of the institutional pressures influencing the investment decisions of VCs as well as the development of suitable strategies to mitigate the impact of such pressures is key to accelerating foreign direct investment, hereafter FDI, in EMs. Moreover, it although helps policy makers such as local governments to address voids in the institutional environment facilitating innovation and growth within the economy. This dissertation seeks to develop an understanding of the phenomenon of LOF in the context of VCs investing in EM by applying institutional as well as internationalisation theory. Furthermore, the existence of the LOF as well as coping strategies for VCs will be investigated. Therefore, a multiple case study approach with is adopted.
2.2 Scope of the project
The research is targeted at VCs and Business Angels, hereafter BA, investing in EM. Cases from VCs and BAs investing in China, India and Africa were chosen due to the potential and importance of such economies in the world. All three economies belonged to the fastest growing economies in 2014 (EMB 2014)1. Accelerating growth and FDI in such economies by providing a better understanding of the LOF in the VC context helps policy makers as well as VCs to develop coping-strategies. This ultimately leads to higher growth and innovation levels in the world economy.
2.3 Study procedure
First, studies in the international business literature are reviewed to identify research gaps in order to establish the research questions worth investigating.
Second, based on the origin of the research objective as well as questions a suitable setting for analysis is chosen and justified.
Third, a multiple case study approach is adopted to study the experiences of VCs and BAs while investing in EM. Primary data from in-depth interviews with industry experts build the basis of the cases. Secondary data from newspapers and financial databases is used to establish a reliable and valid chain of evidence for each case through triangulation.
Fourth, a cross-case analysis is conducted to identify common experiences and underlying patterns within the cases. The main institutional pressures and their impact on the investment decisions of VCs as well as coping strategies are discussed.
Fifth, the findings of the cross-case analysis are discussed by comparing them with recent academic studies to identify the addressed research gaps and major contributions and implications for researchers, policy makers and VCs.
Sixth, the limitations of the study are acknowledged to identify new avenues for future research.
3 Literature Review
In this section, related literature from institutional and VC theory is reviewed. The EBSCOhost Research Databases were used to perform search requests as illustrated in Table 2.1. Both empirical and theoretical studies were included.
Table 2.1: Keywords
Abbildung in dieser Leseprobe nicht enthalten
3.1 Internationalisation
The internationalisation of firms has been analysed by a wide range of academic studies from various disciplines (Buckley, 2002; Buckley and Casson, 2002; Bartlett and Ghosal, 1991, 2002; Dunning, 1988, 2000; Hollensen, 2010; Johanson and Mattson, 1987; Johanson and Vahlne, 1977, 1990, 2009; Vernon, 1966). In general, four main perspectives on internationalisation have been identified: institutional-economic, learning, strategic competition, inter-organisational (Rask et al., 2008).
The institutional-economic perspective combines transaction cost (Coase, 1937; Williamson, 1985) and internalisation theory (Hymer, 1976). It is argued that the conditions within the company, e.g. available resources, determine the decision of a company to internationalise. Further, all the decisions made by the company are the result of a plan which is based on an analysis of transaction costs by the senior management (Williamson, 1975). The human resources and size of the company are the key internal factors for VCs to facilitate internationalisation (Hall and Tu, 2003; Manigart et al., 2006).
In a similar manner the learning perspective analyses conditions within the company. It predicts that a company gradually expands internationally according to its level of experience (Johanson and Vahlne, 1977). Commitment and geographical distance of the entry mode increase if the knowledge of the company increases. Several scholars have observed different stages within the internationalisation process. First, companies use low commitment entry modes such as exports and gradually move to more risky entry modes, e.g. joint ventures or green field investments (Bilkey and Tesar, 1977; Cavusgil, 1980). This stage perspective is in line with recent VC literature, which found that VCs with experience in foreign investments tend to invest in foreign countries more often (Guler and Guillén, 2010a, 2010b; Prijcker et al., 2009).
In contrast, the strategic competition perspective stresses the importance of external drivers such as competitor movements in order to formulate internationalisation strategies (Bartlett and Ghosal, 1986, 1991, 2002; Kogut, 1985a, 1985b). The internationalisation decision is a result of an assessment of the internal and external environment of the company (Discoll and Paliwoda, 1997). It determines if resources should be sourced internationally to realise cost reductions or locally to protect the competitive advantage of the firm. Further, the fit of each resource to the value chain of the company is key to building a sustainable competitive advantage (Porter, 1988). VCs may face difficulties in optimising the location of each resource since they are investing in firms, which represent a “bundle of resources” (Pernrose, 1959). In order to keep their portfolio manageable VCs tend to invest in companies close to their premises. They capitalise on their local knowledge and the low geographical distance facilitates control (Sorensen and Stuart, 2001).
The inter-organisational perspective emphasises the importance of relationships and networks as main drivers for the internationalisation of firms (Johanson and Vahlne, 2009). First, networks are created to facilitate learning about the local environment and enter a new market at lower risk (Coviello, 2006). A broad range of research has analysed networks effects in the context of firms from EM (Elango and Pattnaik, 2007), first move before internationalising (Ellis, 2000) and main driver for foreign direct investment (Chen and Chen, 1998). VCs are especially reliant on their networks and relationships to overcome information asymmetries as well as to identify new investment opportunities (Atanasov et al., 2006; Hsu, 2004).
Overall, the various perspectives on the internationalisation of firms offer valuable information about the reasons why VCs go abroad. However, there is no perspective that covers the whole picture. Various scholars have attempted to develop an overall framework (Andersen, 1993; Andersen and Busik, 2002; Dunning, 1988, 2000; Rask et al., 2008), but without success. Therefore, each perspective on internationalisation has to be taken into account in order to identify why VCs invest in EM. Furthermore, the perspectives on internationalisation in the context of VCs have not received enough attention from academic studies. Only a handful of studies have addressed this issue (Aizenman and Kendall, 2012; De Prijcker et al., 2012; Guler and Guillén, 2010a, 2010b; Manigart et al., 2006; Patricof, 1989).
3.2 Institutional theory
“Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction” (North, 1990, p. 3). In detail, institutions refer to the ex ante arrangements (Bonchek and Shepsel, 1996), formal set of rules (North, 1990), taken for granted expectations (Meyer and Rowan, 1991) or shared behaviour (Japperson, 1991) that have to be followed by firms and individuals (Bruton et al., 2010). Institutions create expectations that define appropriate and unacceptable behaviour for organisations (DiMaggio and Powell, 1991; Meyer and Rowman, 1991). The main institutional forces are analysed within various academic fields such as organisational theory (Meyer and Rowman, 1991), economics (North, 1990), sociology (DiMaggio and Powell, 1983, 1991) and political science (Boncheck and Shepsle, 1996). Academic studies from sociology emphasise the role shaping and legitimacy building efforts of institutions (DiMaggio and Powell, 1983; Suchman, 1995). The common experiences and beliefs which form how people behave and think are built through similar political or cultural systems (Scott, 1992; Zucker, 1987). In contrast, economists argue that institutions develop formal rules and laws to control all activities within the economy (North, 1990). Such rules can be political, legal or social in nature and provide the basement for the distribution, exchange or production within an economy. Therefore, institutions constrain the available set of choices for firms and individuals (Roy, 1997). There is evidence that institutional pressures influence the processes and goals of VCs in the west (Bruno and Tyebjee, 1986; Suchman, 1995; Wright et al., 1992). Scott (1995) proposes three categories of institutional forces: the regulative, normative and cognitive pillars.
The regulative pillar describes the formal constraints and regulations of institutions. This includes sanctioning activities, monitoring and rule setting. First, rules need to be established in order to be able to monitor the conformity to them and penalise individuals or firms if they break the rules (Scott, 1995). Economists view institutions as the main driver for regulative processes. As North (1999) states, institutions “consist of formal written rules as well as typically unwritten codes of conduct that underlie and supplement formal rules” (p. 4.). The main control mechanism of an institution is coercion in combination with formal rules and laws (DiMaggio and Powell, 1983). However, such rules have to be acknowledged by all members of the society in order to achieve legitimacy (Weber, 1978). Rules may increase the transaction cost for VCs since the legitimacy of every deal is desirable (Becker-Blease and Sohl, 2012). However, a strong legal system is desirable since the absence of such rules creates uncertainty and increase transaction costs for VCs (Perry, 2000; Posner, 1998).
The normative pillar consists of less formal and codified rules. Norms and beliefs define ground rules, which determine the expected or appropriate behaviour depending on the situation (Scott, 2007). Values are conceptions of desirable or appropriate actions. However, standards are needed in order to be able to compare and review different behaviours. Norms define how business is done. In general, normative institutions define desirable targets, e.g. making a profit, and the legitimate measures, e.g. fair business practices to reach such targets (Scott, 1995). Therefore, the norms and values of a society - for example, the high status of entrepreneurs - can facilitate VC investment (Baumol et al., 2009).
The cognitive pillar focuses on the behaviour of individuals (Caroll, 1964; Scott, 1987). “Every human institution is, as it were, a sedimentation of meanings” (Berger and Kellner, 1981, p. 31). Furthermore, a meaning is not clearly defined and may change. The changing cultural systems, symbols as well as daily activities force individuals to renegotiate how they construct and perceive social reality on a daily basis (Swidler, 1986; Zucker, 1977). Overall, the cognitive pillar is important for VCs since it is able to create a culture that accepts and promotes activities such as entrepreneurship that create investment opportunities (Bosma et al., 2009; Harrison, 2008; Li, 2009).
All in all, institutional theory is a valuable concept, which helps to understand the institutional environment and pressures that influence the investment decisions and transaction costs of VCs (Guler and Guillén, 2010b).
3.3 Liability of foreignness
The LOF has received a lot of attention in international business literature (Calhoun, 2002; Di Maggio and Powell, 1983; Hymer, 1960; Luo et al., 2002; Mezias, 2002; Miller and Parkhe, 2002; Nachum, 2003; Rugman and Verbeke, 1992; 2006; Zaheer, 1995; 2002; Zaheer and Mosakowski, 1997). International scholars analysed the LOF through various lenses: socioeconomic (Luo et al., 2002), organisational learning (Petersen and Pedersen, 2002), the resource based-view (Sethi and Guisinger, 2002) and evolutionary dynamics (Hennart et al., 2002). However, the academic literature is not able to fully describe the phenomenon of LOF. More clarity and a deeper understanding are needed (Zaheer, 2002).
It is defined as the additional costs accruing for a foreign firm operating in a new market, which do not accrue for local firms (Zaheer, 1995). Additional costs arise from a certain geographical distance, e.g. transport costs, unfamiliarity with host country environment (e.g. laws), lack of legitimacy in the host country environment (e.g. no governmental support) and costs from the home country environment (e.g. sales restrictions) (Nachum, 2003; Zaheer, 1995; Zaheer and Moskowski, 1997). The majority of international firms have a knowledge disadvantage in combination with a weak institutional network within the foreign country (Eriksson et al., 1997; Johanson and Vahlne, 1977). The existence of the LOF has been demonstrated in various contexts, e.g. global banking, foreign firms in the US or within the internationalisation process of small and medium sized companies in Japan (Mezias, 2002; Lu and Beamish, 2001; Miller and Parkhe, 2002; Zaheer, 1995; Zaheer and Moskowski, 1997). The non-existence of the LOF has only been reported among financial services firms in London (Nachum, 2003).
However, the LOF concept is focused on the additional costs for a subsidiary within a foreign country. It does not take into account the various costs arising from the interdependence between the subsidiaries or increased size of operations (Kobrin, 1997). Therefore, not only do the costs within a foreign country subsidiary need to be considered; the costs from the external context (e.g. various countries) need to be acknowledged as well (Cuervo-Cazurra et al., 2007).
3.4 Benefits of foreignness
Despite the focus in academic studies on the additional costs for businesses operating in a new environment, the LOF can be an advantage as well. For example there is evidence that consumers give better ratings to Western products from culturally distant countries in comparison with products from their home market (Chao, 1993; Insch and Miller, 2005). Therefore, it can be argued that a benefit of foreignness, hereafter BOF, exists. Western companies in particular seem to enjoy a BOF in EM due to an increasingly positive attitude with more cultural distance (Ghauri and Cateora, 2006).
However, the BOF does not apply to all entry modes in foreign markets. For example, exports to a country with a high cultural distance, which are sold by a local partner in the foreign country, are likely to have lower BOF (Slangen et al., 2011). Further, Western products that are produced locally in a foreign country may be perceived as of less value than their imported counterparts (Johansen and Nebenahl, 1986). Therefore, it can be concluded that the LOF not only increases transaction costs, but also acts as a source of a firm’s specific advantage in some cases.
3.5 Difficulties in internationalisation
Recent research has developed a new concept, called difficulties in internationalisation, to analyse the various challenges firms face during their internationalisation (Cuervo-Cazurra and Un, 2004; Cuervo-Cazurra et al., 2007). The difficulties are clustered in three categories: loss of advantage, creation of a disadvantage and lack of complementary resources. It acknowledges the LOF as a difficulty, but adopts a more holistic view by acknowledging a liability of expansion, newness and infrastructure.
A liability of expansions occurs if firms are not able to acquire the complementary resources in order to expand their operations. During the expansion additional communication or transportation may increase transaction costs (Hitt et al., 1997; Tallman and Li, 1996). In order to keep the expansion manageable companies need to create new resources, otherwise they have to rely on their existing resources, which causes inefficiencies (Penrose, 1959). However, this liability does not only occur for firms expanding internationally. Domestic firms may face identical problems when increasing their market power or when trying to diversify (Cuervo-Cazurra et al., 2007).
In a similar manner, the liability of newness describes the lack of competitive advantage in a new competitive environment due to resource shortages. Therefore, firms need to develop new strategies or resources in order to stay competitive within an industry (Porter, 1998). If a firm internationalises it faces new competitive environments forcing it to acquire additional resources that are either not owned by the firm or not transferable across countries (Anand and Delios, 1997). As a consequence the firm may face lower revenues and higher costs (Hastings, 1999).
In contrast, the liability of infrastructure moves away from firm-specific to market liabilities. It affects the efforts of foreign as well as domestic firms equally when trying to market or sell a product/service to their customers. The needed infrastructure may be intangible - for example, a lack of knowledge - or tangible - e.g. poor roads - which may be exacerbated by “institutional voids” (Khanna et al., 2005).
Overall, the concept of “difficulties of internationalisation” provides valuable insights into the challenges for firms during their internationalisation. However, it has not been fully applied in the context of VCs. Only a select number of theories within the concept have been analysed by academic studies from the VC literature (Lu and Hwang, 2010 ; Nahata et al., 2014). Therefore, its validity in this sector is questionable.
A summary of all concepts regarding the costs and benefits of doing business abroad can be found in Table 2.1
Table 2.2: Costs/ benefits of doing business abroad
Abbildung in dieser Leseprobe nicht enthalten
Adapted from Sethi and Hudge (2009)
3.6 Home Bias
The phenomenon of home bias as developed by VC literature follows a similar approach to the LOF. It describes the preference of investors for local investments and is well documented for foreign investors in Korea and international fund managers and traders outside Germany (Bottazzi et al., 2011; Choe et al., 2005; Coval and Moskowitz, 1999; 2001; Grinblatt and Keloharju, 2001; Hau, 2001). Academic studies have identified two main drivers for home bias.
First, Coval and Moskowitz (1999) found that it is easier for investors to obtain data from companies located close to their premises. They have the possibility of talking to managers, employees or suppliers of the company. This helps them to gain a better understanding of the company and may lead to an information advantage. Coval and Moskowitz (2001) found that fund managers who are investing close to their premises earn abnormal returns. Further evidence is provided by Parwada (2008) who has shown that new fund managers have problems overcoming a lack of information and therefore tend to invest in familiar environments.
Second, the home bias phenomenon is analysed from a psychological viewpoint. Fund managers feel more confident about investing in firms that are visible and familiar to them (Franke et al., 2006, Huberman, 2002, Zacharakis et al., 2003). This effect is even stronger for VCs since crucial information about promising investment opportunities is not public. Therefore, VCs rely heavily on their network and relationships to gain an information advantage. Sociological research has shown that it is easier to form social relationships in less distant social and physical spaces, which promotes local investments (Blau, 1977; Blaun and Schwarz, 1997). Moreover, it is harder for VCs to monitor investments far away from their premises (Lerner, 1995). However, well known VCs can use their extensive networks and brand value to mitigate the lack of information, making them less dependent on local investments (Atanasov et al., 2006; Hsu, 2004).
Overall, the home bias literature fails to address the real causes of LOF for VCs. Therefore, little is known about the LOF in the context of VCs (Lu and Hwang, 2010 ; Nahata et al., 2014). There are various indicators - such as lack in local knowledge, networks and information asymmetries - which support the existence of a LOF (Hall and Tu, 2003; Lerner, 1995; Mäkelä and Maula, 2005; Bruton et al., 2004). Furthermore, research into VCs focuses on North America and US-based companies (Gompers and Lerner, 2000; Gompers et al., 2008, 2010; Hochberg et al., 2007; Sorensen, 2007, 2008; Nahata, 2008; Zarutskie, 2010).
3.7 Strategies to overcome LOF
Mitigating the impact of the LOF is key for foreign companies in order to defend their competitive advantage against local and international competitors (Asmussen et al., 2011). In general, there are two strategies to overcome the LOF: either a firm adapts to the local market or it exploits its home-grown advantages (Asmussen et al., 2011; Glaister and Buckley, 1996; Luo, 2002; Nachum, 2003; Zaheer, 1995).
Legitimacy building plays a key role when adapting to the host country’s environment. It enables the company to access local resources and reduce transaction costs (Miller et al., 2002; Noharia, 1994; Oliver, 1990; Owens et al., 2001; Suchman, 1995). Strategies to gain legitimacy fall into two categories: Legitimacy with the external environment, e.g. with governments and legitimacy with the internal environment, e.g. support from the board of directors of a company (Ahlstrom, 2008; Dacin et al., 2007; DiMaggio and Powell, 1983; Hirsch, 1975; Kostava and Zaheer, 1999; Lu and Xu, 2006; Meyer and Scott, 1983 ; Meyer and Rowan, 1977; Suchman, 1995; Tolbert and Zucker, 1983; Zimmermann, 2002;). Information asymmetry is a major problem in terms of deal screening as well as the control of portfolio companies for VCs investing in EM (Amit et al., 1990). Local subsidiaries of big VCs enjoy huge autonomy in the market screening, deal searching and investment decision-making processes. This is due to the fact that VCs mainly compete on a local-to-local basis (Locket and Wright, 2002).
However, the VC literature fails to provide sufficient evidence for the existence of legitimacy efforts. Using relationships, networks, local investors and subsidiaries are the only known measures by which VCs gain legitimacy (Nahata, 2014).
The exploitation of firm resources - e.g. output standardisation - reduces the dependence on the host country’s resources and markets (Barney, 1991; Dunning et al., 2008; Hu, 1992; Nachum, 1999; Wernerfelt, 1984). VCs have strong firm resources, such as superior human resources or business networks, and preferably use such resources to overcome the LOF (Mäkäla, 2005; Johansen and Vahlne, 1990). The majority of VCs in Asia (Bruton et al., 2005) and Europe (Sapienza et al., 1996) copy best practices - for example, minority shareholding or board sitting - from US VCs. In general, VCs tend to internationalise after they have made successful investments in their domestic market, gained industry knowledge, investment experience and an understanding of recent trends as well as management expertise (Hall and Tu, 2003). Through several years of business activities, VCs enjoy strong international institutional networks, which may help to increase their performance in a foreign country (Zhang and Li, 2008). Furthermore, VCs with high brand value and strong deal histories can easily raise money for new funds in EM or attract local start ups to request funding, generating a steady inflow of deal prospects (Lu and Hwang, 2008). This is due to the various benefits VCs create for entrepreneurs. Helman and Puri (2000, 2002) found that VCs help to shorten the time to market of products and improve the management skills within the firm, lower failure rates (Puri and Zarutskie, 2008), facilitate growth and increase productivity (Chemmanur et al., 2008). However, the recent literature fails to address the question of whether the exploitation of home-grown advantages leads to a significant reduction in the costs arising from the LOF for VCs.
Overall, there is a significant lack of empirical evidence for the validity of the strategies proposed by Luo (2002) to overcome the LOF in the VC context (Lu and Hwang, 2008). This would provide value for VCs but also for emerging market governments since FDI is a main driver for innovation and economic growth (Chen and Mohnen, 2009; Fu, 2008; Wignaraja, 2008).
4 Research Objective and Research Questions
The research objective of this dissertation is to examine the phenomenon of LOF in the context of VCs investing in EM. The experiences of VCs are analysed to develop an understanding of the phenomenon of LOF by identifying common experiences and underlying patterns.
Research Question 1: Why do venture capital firms face a liability of foreignness in emerging markets?
Research Question 2: How does the liability of foreignness impact venture capital firms?
Research Question 3: How do venture capital firms overcome the liability of foreignness in emerging markets?
5 Methodology
The following chapter discusses the research approach by looking at the available resources in order to identify a feasible research setting.
5.1 Case Study Method
In order to examine the phenomenon of LOF in the context of VCs and BAs investing in EM, five qualitative case studies of investment experiences within three EM (China, India and Africa) are constructed. The case studies reflect the experiences of leading VCs and BAs when investing in such markets, supplemented with data from newspapers and financial databases. The VC industry is rich in institutional pressures and differences causing LOF and therefore forms a suitable context for studying how the LOF influences investment decisions of VCs. A detailed justification of the case study approach can be found below.
According to Lomas (2011), the suggested research objective is a problem of observation. During an observation mainly qualitative data is gathered. The details of experiences concerning LOF of various VCs and BAs investing in EMs are collected within each case study. This approach can be classified as a phenomenological study (Creswell, 2012). Overall, common experiences and underlying patterns were identified to gain an understanding of the phenomenon of LOF. A qualitative case study approach was adopted, because “the naturalistic style of a case study research makes it particular appropriate to study human phenomenon” such as the LOF (Gilham, 2000, p. 2). Furthermore, “why” and “how” research questions favour explanatory research since it allows researchers to analyse the environment of the case (Yin, 2009). This is vital if we are to answer the research questions since the main causes of an LOF are differences in the institutional environment between the home country and the target market of the VC or BA (Zaheer, 1995).
The researcher may have the ability to control the actual behavioural events to some extent by manipulating the final result (Yin, 2009). As explained in the previous paragraph, a problem of observation is investigated. Therefore, the cases were constructed from the outside and cannot influence the factors causing a LOF, their impact on VCs as well as the strategies used by VCs in EM.
Furthermore, the study focused on contemporary events (Ying, 2009). As highlighted in the introduction, nowadays EMs need FDI to grow and VCs still hesitate to invest. Furthermore, empirical evidence for this phenomenon in the VC context is missing. However, an empirical study requires a large sample size and access to internal data, such as deal lists or briefing documents from various VCs and BAs. Due to the limited time and financial resources of this study an empirical study was not achievable. Instead, in-depth interviews with VCs and BAs, newspaper articles and financial databases were used to construct five case studies in order to provide evidence that the LOF exists for VCs investing in EM. The perspectives of BAs and VCs differ, because BAs tend to invest at an earlier stage than VCs (Osnabrugge, 2000). Therefore, different perspectives were used to gain a better understanding of the phenomenon of LOF.
Secondary data was used to validate the findings from the in-depth interviews through triangulation since a single data source cannot explain rival causal factors (Denzin, 1978; De Vos, 1998; Patton, 1990). The extensive amount of secondary data about the economic and cultural environments in EM - for example, databases from the World Bank or newspapers - offered reliable data, which was easy to access and obtain. This data helped to understand the context of the experiences from each VC and BA. However, some factors causing an LOF were difficult to measure, e.g. additional investment cost or required access to data exceeding the available resources. Due to the short time frame and limited resources, factors that could not be obtained easily had to be excluded. Overall, the wide range of primary and secondary data favoured a case study approach.
In conclusion, it was found that a case study approach was suitable to answer the research questions of this study due to the nature of the research questions, missing control of behavioural events and focus on a contemporary event, as illustrated in Table 4.1.
Table 4.1: Research methods
Abbildung in dieser Leseprobe nicht enthalten
Source: (Yin, 2009, p. 8)
5.2 Single or multiple case study approach
Within the case study approach, a single or multiple case study can be conducted. Multiple case studies provide a wider range of evidence by using more data, which makes them stronger against critique (Baxter and Jack, 2008). Important factors and common variables influencing the analysed phenomenon were identified through the combination of multiple cases following a logic of replication (Gering, 2006; Yin, 2009). Furthermore, multiple case studies were frequently used to study institutional pressures and environments (Scott, 1995).
5.3 Sample Size and Selection Criteria
Given the available resources, five firm-specific cases were constructed. Purposive sampling in detail expert sampling was used for this study due to the missing empirical evidence in the area (Bryman, 2012). Experts were chosen, because the qualitative nature of the study aimed to explain an experience. Only people with a strong track record as a VC or BA in the EM had the experience as well as specific expertise to provide valuable insights into the LOF within this industry and geographical area. BAs and VCs were chosen due to their different perspectives and criteria on investments in EM (Osnabrugge, 2000).
The following selection criteria were used:
- VC/ BA which made at least two investments in China, India or Africa within a period of 5 years
- VC/ BA which managed deals with a value of over 1 million USD within a period of 5 years
- VC/ BA with over 5 years experience in the VC/ BA industry
Previous students contacted 50 VCs internationally to arrange five interviews (Prantl, 2014). Therefore, a convenience sampling method was adopted, because it could be concluded that VCs are extremely hard to recruit due to their high workloads and tight schedules. The strong personal network of the researcher within the VC industry enabled him to contact five VCs directly. Moreover, specialised EM/ VC fairs were used to approach potential participants. In particular, the EM forum from the LSE and the Africa conference at Oxford University were used to recruit participants. Furthermore, resources from the career service at the Bradford School of Management as well as other databases such as Bloomberg were accessed to identify potential participants and suitable companies. In total, 24 VCs were contacted, five from the personal network of the researcher and 19 from external sources. Overall, two VCs from the personal network of the researcher and three from external sources agreed to participate. Table 4.2 illustrates the overall sample and Table 4.3 the interview details.
Table 4.2: Sample interview
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Table 4.3: Interview Details
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5.4 Data Collection
Due to the wide range of available data for the coding of the case studies a mixed case study approach was conducted. The combination of primary and secondary data within each case strengthened the validity of the argumentation and the conclusions drawn (Yin, 2009). As explained in the methodology section, data was collected from in-depth interviews, newspapers and financial databases.
In detail, academic literature was reviewed to develop an interview guide which was further validated by applying the personal knowledge of the researcher as well as several field tests with VCs managing over $12 bn in total before the interviews were conducted. A description of the test candidates can be found in Appendix L.
The majority of data has been collected through in-depth interviews with experts from the VC and BA industry. In-depth interviews were chosen, because the broad experience and knowledge of the selected participants in combination with secondary data from databases such as World Bank or Financial Times allowed the researcher to construct information-rich cases to answer the research questions raised and identify new, fruitful avenues for future research (Woodside, 2010).
The participants were asked broad questions regarding the LOF according to the interview guide (Appendix K). Further, not every participant was familiar with the term and concept of the LOF. A short explanation and introduction to the terminology and concept was given before the interview to prevent misunderstandings.
The extensive amount of secondary data about the economic and cultural environments in EM - for example, databases from the World Bank or leading national newspapers - offered reliable data, which was easy to access and obtain. All databases were accessed through the resources of Bradford University, e.g. LexiNexis services and Business Monitor. For instance, a participant highlighted the role of the government when investing in India during the in-depth interview, which was discussed in detail in an article from a newspaper drawing on data from a financial database. Therefore, the combination of different data sources helped to understand the whole context of the experiences of each expert, thus increasing the validity of the findings.
Overall, the in-depth interviews built the core data source for each case in combination with leading national newspapers and financial databases to establish a reliable and valid chain of evidence for each case. The principle of triangulation was used, because it is a “powerful technique that facilitates validation of data through cross-verifications from two or more sources” (Bogdan and Biklen, 2006, p. 254).
5.5 Data Analysis
The in-depth interviews built the main data source for each case study. Each interview was recorded and transcribed (Appendices B to F). The interviews were coded manually (Appendix G). The analysis was based on the methods of Moustakas (1994) and Polkinghorne (1989). First, quotes or statements that provided an understanding of the experiences of each participant regarding the LOF were highlighted to develop a textual description. Second, significant statements were clustered to develop themes, as shown in Appendix G.
In general, the data analysis was split into three stages (Miles and Huberman, 1994). In the first step, the data gathered from the in-depth interviews, newspapers and financial databases was selected and coded manually. An overall structure was developed to allocate the gathered statements and themes to one of three core areas: (1) The drivers that cause an LOF, (2) The impact of the drivers of the LOF, (3) Strategies to overcome LOF. The themes were based on the tested interview guide. However, as Gilham (2000) notes, the selection process is highly subjective and in some cases superficial. Therefore, all data sources were merged into an Excel table reflecting the three research questions in order to improve the internal organisation of the researcher.
In the second step, case summaries which combined data from all sources were constructed in order to familiarise the researcher with each case and promote cross case comparison (Eisenhardt, 1989). The themes were used to write a textural description about the experience of the LOF from each participant. Furthermore, a structural description was written about the setting and context that had an influence on the experience of the LOF.
Within the third step, a cross-case comparative analysis was conducted. The textural and structural descriptions built the foundation for the composite description that captured the essence of the various experiences. Common experiences were grouped to identify patterns within the themes. Each pattern was analysed and explained in detail to provide a clear understanding of the LOF in the context of VCs investing in EM, as illustrated in Figure 4.1 (Moustakas, 1994; Polkinghorne, 1989).
Figure 4.1: Data analysis approach
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Adapted from Yin (2009, p. 57)
In conclusion, the three stages within the data analysis process were: data selection and coding, then construction of case summaries as well as a cross-case analysis to prevent a research bias and ensure that only valuable data was analysed (Yin, 2009). Therefore, reliable conclusions can be drawn about the LOF in the context of VCs investing in EM (Moustakas, 1994; Polkinghorne, 1989).
6 Case studies
The selected cases for the case analysis can be found in Tables 5.1 and 5.2.
Table 5.1: Selected Cases 1-3
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Table 5.2: Selected cases 4-5
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[...]
1 The author acknowledges that Africa is not a country. Nigeria as the second fastest growing economy within the EM and the fastest growing economy in Africa was used as a reference.
- Citation du texte
- Tim Schreier (Auteur), 2015, A liability of foreignness for venture capital firms investing in emerging markets. A case study approach, Munich, GRIN Verlag, https://www.grin.com/document/999705
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