Handbook of Research on Venture Capital: Volume 2

Handbook of Research on Venture Capital: Volume 2

A Globalizing Industry

Handbooks in Venture Capital series

Edited by Hans Landström and Colin Mason

This Handbook charts the development of venture capital research in light of the global financial crisis, starting with an analysis of the current venture capital market and the changing nature of the business angel market. Looking at governance structures; the performance of venture capitalists in terms of investments, economic impact and human capital; geographical organization of business angels and venture capital global ‘hotspots’; this book also analyses the current state of venture capital research and offers a roadmap for the future.

Chapter 10: Global venture capital ‘hotspots’: China

Haitian Lu and Yi Tan

Subjects: business and management, entrepreneurship, economics and finance, corporate governance, economics of innovation, financial economics and regulation, innovation and technology, economics of innovation


The fact that China has become an international hotspot for venture capital (VC) is of recent origin. Though the Chinese domestic VC industry can be traced back to the mid-1980s, its substantive development did not take place until the late 1990s. Whereas foreign direct investment in China in the 1980s and 1990s mostly took the form of greenfield investment, entering into the new millennium the primary form has become mergers and acquisitions, of which foreign private equity (including VC) plays an important role. A 2006 survey by Deloitte Touche Tohmatsu (2006) reports that US VC firms named China as their top destination for international investments. This change is consonant with two global trends in the VC industry in the last three decades. One has been VC internationalization. Once exclusively among OECD countries, since the 1990s highgrowth opportunities in developing countries like China and India have increasingly attracted Western (mostly US) venture capitalists (Patricof, 1989; Bruton et al., 2005). The other global trend has been the booming domestic VC markets outside the US and Europe. Armour (2004) and Gilson (2003) suggest that the VC markets in developing and transitional economies are primarily driven by their governments with an objective to replicate US success in fostering innovation and entrepreneurship. This has facilitated the development of domestic VC in these countries together with the necessary institutional settings for such activities. Despite this, there are marked differences between Chinese and Western society, and a general consensus among academics and practitioners on VC is that these differences have profound impacts on the organizations and behavior of VC activities (Bruton and Ahlstrom, 2003). For example, researchers have yet to determine to what extent the institutional (formal and informal) environment of China differs from that in developed markets. To what extent can the established US model of VC investment be applied to China? At what stage is China’s VC market and academic research today? Which mainstream economics, management or finance theories exhibit more potential to explain the organizational and behavioral divides between East and West? These are all legitimate questions for subsequent researchers who wish to accumulate knowledge in exploring the Chinese VC industry. To provide a conceptual and analytical framework on these important questions is therefore the principal objective of this chapter.This chapter is organized into four parts.

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