Research On The Development Of Cross-border Venture Capital In China

Over the past two decades, venture capital is considered to be one of the world's fastest growing industries. The United States and some other countries, like United Kingdom, Israel, have shown that venture capital can promote the technological innovation and have the potential to support a number of small and medium enterprises. With the acceleration of global integration, venture capital activity has shown a growing trend of internationalization. In this article, cross-border venture capital is considered to be a special form of foreign direct investment, at the same time, it has shown some of the characteristics of indirect investment. In particular, cross-border venture capital refers to a global asset allocation of venture capitalists, mainly in the form of equity investment in the host country's emerging small and medium enterprises, aiming to get relatively high returns by selling the equities to other investors.First of all, we try to analyze the origin and development of cross-border venture capital from a global perspective. As we know, the scale of global venture capital industry changes cyclically. And the fluctuation range is higher than the real economy. Moreover, venture capital industry mainly concentrated in North America and Europe. As for the phase, the proportion of investment to expansion and start-up stage is more than that of early stages. And the exit is closely related to long-term rate of return higher than the short-term. From the country's point of view, we find that the source of venture capital in different in different countries; investments are mostly concentrated in the software industry. The exit channels of venture capital in United States and Britain are always initial public offering (IPO) and mergers and acquisitions (M & A).Meanwhile, with the tide of economic globalization and the deepening of integration, venture capital started flow from one country to another,which is called cross-border capital and soon has become an increasingly trends. In this part, we analyze the intrinsic factors which make cross-border venture capital industry to gradually rise. The main characteristics includes:(1) cross-border venture capital has gradually reduced barriers to international venture capital flow; (2) cross-border venture capital has experienced the transformation from an endogenous factor of an economy to an important component of the system; (3) the development of cross-border venture capital is always a copy of United States, but there was a clear distinction between the outcome of the developmental routes; (4) cross-border venture capital often flows from developed countries to developing countries; (5) cross-border venture capital has played a pivotal role in cultivating entrepreneurial culture.In the second part of this paper, we discuss the motives and characteristics of cross-border investment from a theoretical perspective. First, we use Compromise Theory in FDI to analyze why cross-border venture capital occurs. In my opinion, localization advantages and internalization advantages can be used to explain their motives to invest in other countries, and options theory can be explained why some qualitative venture capitalists invest globally to some extent. Secondly, we explain the behavior of cross-border venture capital, especially decision-making and investment strategies by using expected utility and risk preference theory. We find that, like the usual behavior in domestic investments, cross-border venture capital also tends to diversify the investments, prefer to converted bonds or convertible shares, use phase investment in order to control risk.At the basis of theoretical analysis, this article chooses cross-border venture capital in China to study the investment characteristics and investment behavior of the cross-border venture capital, and then elaborates both internal and external factors affecting the empirical analysis. In this part, we focus on the foreign venture capital institutions (which refer to the offshore funds in foreign currency (mainly U.S. dollar), investing mainly in Chinese mainland and always listing overseas. The author participates in a large-scale field research in the 12 well-known domestic and foreign capital investment agencies in the second half of 2008, and through the famous venture capital data provider-Qingke Groups, collected data from 2002 to 2008. We find that:(1) foreign venture capital investment scale is much higher than domestic-funded venture capital, and individual investment and the total amounts are also much higher in foreign venture capital funds; (2) foreign venture capital investments focus on broad IT industry, but have shown an increasingly interests in agriculture and other traditional industries; (3) foreign investors emphasize on start-up phase of the invested company, while domestic-funded enterprises preferences expansion stage; (4) foreign venture capital is geographically concentrated, especially in Beijing and Shanghai, but under more and more competition, the regions of foreign venture capital investment in expanding gradually; (5) the intensity of foreign investment significantly increases with the rounds, which fully reflects its ability to control risk; (6) the exits of foreign capital are more flexible, which include selling to the third party, IPO, buy-out, M&A, writing-off; (7) foreign venture capital investments prefer to choosing overseas markets to exit, such as NASDAQ, AIM and Hongkong GEM, while domestic venture capital investments tend to exit in small and medium-sized main board.In the fourth part, we analyze some internal characteristics which lead to a discrepancy between foreign venture capital and their domestic counterparts. We find that:(1) as for the governance structure, domestic venture capital funds are more complex and confusing; (2) in the investment decision-making, both parties will consider the management team and market demand, but the foreign venture capital funds pay more attention to the innovation profitability, while domestic funds take technological innovation into the fist place; (3) both parties have set up perfect risk control systems, but foreign venture capitalists pay more attention to the vote of the legal risks, tend to use preference shares and to use the portfolio approach to minimize risks; (4) as for the value-added services, foreign venture capitalists are more skillful and systematic than the domestic counterparts.After that, we discuss the macroeconomic policies and regulations, industry self-regulation and behavior guidelines, funding sources and other external factors which lead to the differences between foreign venture capital funds and domestic ones. These external differences mainly reflected in:(1) regulations and policies on foreign venture capital funds are more comprehensive, in particular, are obviously enjoying preferential tax policy; (2) foreign venture capitalists are more self-regulatory and can follow a relatively detailed industry behavior guidelines; (3) as for the source of funds, because most of foreign venture capital comes from pension funds and other institutional investors and therefore can be put into the earlier stages, while domestic venture capital funds are mostly come from personal funds and are facing greater pressure from short-term returns.In addition, under the unprecedented great pressure of this global financial tsunami, the global economic recession has become more and more uncontrollable, and finally has had a great negative impact on venture capital industry. In China, the fundraising and investment of foreign venture capital drops sharply in the third quarter last year, and situation has become more serious since the beginning of this year. Frankly speaking, China's venture capital industry is confronted with a larger systematic risk than past five years.At the basis of the above analysis, in order to build a proper Chinese-style venture capital development path, we have made the following recommendations: (1) improve and implement laws and regulations of venture capital, make both foreign and local venture capital institutions are regulated in the same provisions; (2) establish a unified self-regulatory organizations and promulgate industry guidelines as soon as possible; (3) expand the sources of venture capital and encourage long-term funds to enter this field; (4) Speed up the construction of multi-level capital market.