Venture capital investment in China : Monitoring and value-added

Doctoral thesis English OPEN
Liu, Feng

This dissertation seeks to contribute to the body of literature covering the field of inter-organizational relationships of entrepreneurial firms in developing economies. More specifically, this study attempts to fill a significant gap in the research into relationships between entrepreneurial firms and their venture capital investors in China. Even though it has been recognized that social capital embedded in inter-organizational relationship may be more important in imperfect completion characterized by weak institutional support and distorted information, there is little rigorous, theory-based, empirical research that focuses on the factors influencing the monitoring and value-added that start-up companies receive from their venture capital investors in developing countries. This dissertation contributes to the literature by developing and empirically testing a model of the monitoring and the value-added mechanisms and of the factors influencing those mechanisms. Based on a review of the literature covering venture capital and related domains of research into inter-organizational relationships, this dissertation identifies formal and informal monitoring as the primary mechanism through which venture capital oversee their investees, and classifies resource and knowledge access as the major mechanisms through which venture capital investments add value to technology-based new firms beyond financing. Building on received theories, an integrated model of the monitoring and value-added mechanisms, and the factors influencing those mechanisms is developed. The model draws on the agency theory and the asymmetric information and resource-based view of the firm in order to understand the factors influencing both mechanisms. These theories are complemented by social capital theory in identifying the factors facilitating monitoring and sharing resource/knowledge across organizational boundaries. In order to test the model empirically, primary data were collected from fund managers of active Chinese venture capital using two sequential mail surveys. The primary data were complemented by archival data. The hypotheses were tested using multivariate statistical techniques, including multiple regression analysis and structural equation modelling. The model and the hypotheses received support from the empirical data. This dissertation makes important contributions to the literature in the area of venture capital and inter-organizational relationships of technology-based new firms in the Chinese business environment. The findings have important practical implications for venture capital either seeking investment opportunities in China or already managing an existing investor relationship with a Chinese investee. In addition to venture capitalists, the findings have important implications for entrepreneurs.
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