Influences of Foreign and Domestic Venture Capitalists on Internationalisation of Small Firms.
| Autor | Carneiro, Jorge |
| Cargo | Research Article |
INTRODUCTION
Due to their limited resources, small firms face constraints to their growth potential, including their internationalization prospects. In fact, "[w]hich resources are the most important for international entrepreneurship" is still a relevant research question (Dana, 2017, p. 483). In this regard, VCs may represent a relevant source of financial and non-financial resources.
According to the resource-based view (Barney, 1991), the sustained growth and success of a firm depend on the interplay between its resources/capabilities and the external environment. Internationalization is a form of organizational growth and some studies (Hitt, Bierman, Uhlenbruck, & Shimizu, 2006; Westhead, Wright, & Ucbasaran, 2001) have provided arguments and empirical evidence of the relationship between a firm's resources and its internationalization path.
Fernhaber and McDougall-Covin (2009) argue that VCs can serve as a facilitator of new venture internationalization by providing knowledge and reputation resources. However, while the literature offers some evidence about how the internationalization of small firms can be affected by the participation of a VC in the firm's equity capital base, empirical evidence is still scarce, and findings from previous studies have been to some extent controversial, and in fact there has been observed a large variation in growth of firms backed by VCs (Standaert, Knockaert, & Manigart, 2021).
Moreover, differences between the contributions of foreign versus domestic VCs within the same market have received limited attention (Pruthi, Wright, & Locket, 2003). We speculate that the impact of a VC should be the outcome of value-added contributions, which can differ between a foreign venture capitalist (FVC) and a domestic venture capitalist (DVC). An FVC may add several crucial internationalization attributes to an investee that a DVC may not be able to provide--for example, specialized international networks, further international exit opportunities, global outsourcing opportunities, access to international partnerships, and further funding. Additionally, due to geographical distances, coaching and monitoring mechanisms, such as contractual and behavior restriction of investees, may differ in terms of FVCs vs. DVCs (Pruthi et al., 2003). In fact, some studies, admittedly not all related to internationalization, have suggested differences between FVCs and DVCs in their influences on small ventures' operations/management and resulting success.
FVC attributes may be even more relevant for emerging market ventures since lack of international experience, coupled with institutional voids and difficulties of fund raising, are more critical than in advanced markets. These special features of emerging economies pose challenges for small firms in their path to internationalization.
Given this backdrop, this study examines:
(a) What contributions do VCs deliver that foster the internationalization of small firms?
(b) Are there differences among the contributions brought by FVCs vs. DVCs?
(c) Are there any contingencies that might modify (i.e., strengthen or else weaken) the impact of VCs on the internationalization of small firms?
This study adopts a qualitative approach, based on the triangulation of views of foreign and domestic VCs as well as those of small investee firms in order to understand the mechanisms by which the participation of distinct VC types affects the growth of small firms--particularly, their internationalization efforts and results--and the contingencies that might modify such impact.
Additionally, this study contributes to the literature on internationalization of VC-backed companies by presenting empirical evidence from an emerging market--Brazil, while the literature has focused either on advanced markets or on a particular emerging market--China (Cumming, Guariglia, Hou, Lee, & Newman, 2014; Dai, Jo, & Kassichieh, 2012; HumpheryJenner, Suchard, 2013a; 2013b; Jiang, Cai, Keasey, & Wright, 2011), which is quite different from Brazil and Latin American countries in general.
LITERATURE REVIEW
Small firms usually suffer from lack of resources, especially human capital resources (Dabic, Maley, Dana, Novak, Pellegrini, & Caputo, 2020; Westhead et al., 2001)--which may hamper their growth and success prospects.
Fernhaber, McDougall-Covin, and Shepherd (2009) note that some researchers have argued that VCs provide resources, beyond the financial, to new ventures by adding management expertise (Baum & Silverman, 2004; Ruhnka, Feldman, & Dean, 1992), reputation (Chang, 2004), employee recruitment (MacMillan, Kulow, & Khoylian, 1988), and strategy capabilities (Fried, Bruton, & Hisrich, 1998; MacMillan et al., 1988). Similarly, Sazvar and Yahyazadehfar (2019) contend that VCs can bring several managerial benefits to investee firms such as development of entrepreneurial culture, which can foster the internationalization drive, establishment of supportive rules, and education of human resources, among others. Carpenter, Pollock, and Leary (2003) claim that VCs have a positive impact on the internationalization of SMEs because of the control and risk management mechanisms they provide. Sun and Liang (2014) also report a positive effect of venture capital on the internationalization of investee firms. Such influence may be stronger if VC managers have international experience (Carpenter, Pollock & Leary, 2003).
Besides, the literature presents arguments about the potentially distinct influences of FVCs and DVCs on how to mitigate possible agency conflicts between investor and investee. Agency problems of moral hazard and adverse selection arise when principal and agent interests are misaligned (Jensen & Meckling, 1976). While VCs in general have been argued to help mitigate these information asymmetries and agency costs (Cumming, 2006; Huang, Kenney, & Patton, 2015), higher geographical distance between an FVC and its investee may increase the intensity of the agency problem, since an FVC does not have as much information about the investee and the local business environment as a DVC does (Humphery-Jenner & Suchard, 2013b). Therefore, FVCs and DVCs may behave differently in supporting their investees' international expansion.
Influences of venture capitalists
Our literature review indicates that the contributions of VCs to small start-ups--particularly, the impact on their internationalization path and results--derive from five main mechanisms: provision of financial resources, management support, access to networks, reputation/ credibility, and organizational culture. In addition, the literature suggests that the contribution of the VC to internationalization seems to be stronger for FVCs than DVCs because the former tend to have more international familiarity and network connections, more experience with IPOs (initial public offerings), and tend to be larger.
'Provision of financial resources'. VCs can provide two types of financial resources: direct capital and the structuring of financial operations in order to attract additional investors. Staged financing is often used to strengthen monitoring and to mitigate agency problems (Wang & Zhou, 2004). Contrarily to DVCs, FVCs usually place more restrictions on further funding rounds (Pruthi et al., 2003). Once a VC has invested in a firm, other potential investors may perceive a lower risk of information asymmetry, diminishing the risk of moral hazard and adverse selection (Bruton, Filatotchev, Chahine, & Wright, 2010). In emerging countries, where local sources of funding are still incipient, FVCs can help new ventures get trained and prepared for additional rounds of financing (Yu, Wang, Lin & Zhong, 2019).
Besides, as VCs monitor and certificate their investees, they help these small companies raise money with lower underpricing at their initial IPO (Jiang, Cai, Keasey, Wright, & Zhang, 2014). Additionally, Humphery-Jenner and Suchard (2013b) found evidence that an FVC would increase the likelihood that a portfolio firm lists successfully on a foreign exchange. Such additional resources may prove particularly necessary in foreign mergers and acquisitions (M&A) processes (Sun & Liang, 2014). As VC fund raising is positively related to the degree of development of capital markets, a developed market also can provide important financial resources to foreign operations (Dias & Silva, 2016).
'Management support'. The literature indicates that entrepreneurs' personal factors, such as global industry knowledge and foreign experience, would lessen perceived barriers and facilitate international expansion (Baum, Schwens, & Kabst, 2013; Manolova, Brush, Edelman, & Greene, 2002). Not all entrepreneurs possess these personal skills, though; therefore, a skilled financial investor can contribute in several ways: via the VC's experience in the internationalization processes of firms in similar industries, corporate governance, provision of control and monitoring mechanisms, restructuring and professionalization of processes, strategy formulation (MacMillan et al., 1988; Rosenstein, 1988), and upgrade in human resource policies and employee recruitment, implementing new compensation formats, such as stock options, which can motivate managers to spur growth (Florin, Lubatkin, & Schulze, 2003; Hellmann & Puri, 2002). Overall, VCs, particularly FVCs, "may help professionalize local entrepreneurial firms given their experience of advising and nurturing portfolio companies in their home countries" (Devigne, Manigart, Vanacker & Mulier, 2018, p. 1440).
An interesting interplay between different knowledge provided by the VC and the investee (Park, LiPuma, & Prange, 2015) may in fact leverage the knowledge pool and boost a venture's international expansion. Fernhaber and McDougall-Covin (2009) found a positive relation between the international knowledge of a VC and the internationalization of the investee and such impact was higher the...
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