The Impact Of Institutional Environment On Venture Capital Practices:Comparative Study Of China And Russia

Venture capital financing officially appeared in the US in1960s and developed there up to the point of becoming a distinct type in private equity financing with its own special features and process steps. Later in1970-1980s this best practice US venture capital model started to spread into emerging economies and other countries. Key two emerging markets in the world today are China and Russia. Showing to be extremely successful in the US, governments of emerging economies made efforts to encourage the formation of the local venture industry. Nowadays the US venture capital model is successfully applied in emerging economies and many other countries. However, when implementing the same model in different countries venture capitalists have to adapt and adjust its strategies, practices and operational activities of venture capital cycle, starting from VC fund organization and up to exit options.One of the reasons for those different VC practices and strategies among countries is distinct institutional environment of each country, which determines certain level of investors’rights protection, regulation, availability of business infrastructure, tax incentives, transparency, etc. The United States, China and Russia have substantially different institutional environments, in terms of regulations, effectiveness of their enforcement, government involvement, etc. Thus, contrasting US venture capital model application in China and Russia, while benchmarking both emerging countries to the US, will allow to better understand how venture capitalists’ respond and adapt to distinct regulatory and social settings.Analysis of historic background and current regulations on VC financing in China and Russia helps to set baseline and understand public policy content, in which venture capital firms have to operate. Better understanding about the role of institutions can be obtained by comparing their impact on VC strategic actions and decisions, as well as operational practices on different markets. Thus, summary and analysis of the latest VC practices during the process of VC cycle implementation in Russia and China are developed. The more VC investors and VC firms, especially foreign ones, would know about and understand the peculiarities of the institutional environment in a particular country, the more they will be able to foresee opportunities, manage risks, minimize transaction costs, and, thus, more willing to set up a VC business in that country. This, in turn, will foster country’s long-tern economic development and innovative activity.