venture capital in china: a view from europe

COMMENTARIES

Venture capital in China: A view from Europe

Mike Wright

Published online: 3 March 2007# Springer Science + Business Media, LLC 2007

Abstract This article provides commentary on the analysis of venture capital inChina by Ahlstrom, Bruton, and Yeh (Venture capital in China: Past, present, andfuture. Asia Pacific Journal of Management, 2007). The article considers issuesrelating to the scope of venture capital and private equity, the nature of venturecapital and private equity organizations, the life-cycle process of VC investing,internationalization, and foreign venture capital firms. The paper identifies areas forfuture research and compares the Chinese VC context with those in Western Europeand Central and Eastern Europe.

Keywords Venture capital . China . Returning entrepreneurs

The development of firms in emerging economies poses formidable strategicchallenges (Hoskisson, Eden, Lau, & Wright, 2000). Encouragement and support forentrepreneurship may be especially important contributors to such development(Peng, 2001). Venture capital and private equity has become a global phenomenon(Wright, Pruthi, & Lockett, 2005b). Venture capital and private equity offersinteresting potential for and challenges in financing the creation and development ofentrepreneurial ventures, especially where alternative funding sources such as bankdebt are problematical (Le, Venkatesh, & Nguyen, 2006). Ahlstrom et al.’s (2007)authoritatively written article provides fascinating insights into issues concerning thedevelopment of venture capital in China and its support for high tech entrepreneurialventures.

In this article, I comment on the points raised by their article and suggest anumber of further areas for research. In particular, I consider issues relating to thescope of venture capital and private equity, the nature of venture capital and privateequity organizations, the life-cycle process of VC investing, internationalization, and

Asia Pacific J Manage (2007) 24:269–281DOI 10.1007/s10490-006-9036-x

NO9036; No of Pages

Thanks to Garry Bruton and David Ahlstrom for comments on an earlier version, and Mike Peng foreditorial guidance.

M. Wright (*)Centre for Management Buy-out Research, Nottingham University Business School,Nottingham NG8 1BB, UKe-mail: [email protected]

foreign VC firms. The paper also compares the Chinese VC context with those inWestern Europe and Central and Eastern Europe.

Although I have conducted VC research in Asia, notably in India, Singapore,Hong Kong, and Japan (Pruthi, Wright, & Lockett, 2003; Wright, Kitamura, &Hoskisson, 2003; Wright et al., 2004b), my perspective primarily stems from mywork focusing on VC in Europe, in countries such as the UK, France, Netherlands,Belgium, Germany, Hungary, and Sweden (Karsai, Wright, & Filatotchev, 1997;Manigart et al., 2002; Manigart et al., 2006).

The scope of venture capital and private equity

A broad definition of VC includes the range of finance from early stage ‘classic’venture capital through to later stage private equity for management buy-outs andbuy-ins (Wright, Pruthi, & Lockett, 2005b; Wright & Robbie, 1998). Recognizingthis broader perspective, Ahlstrom et al. specifically focus on venture capital relatingto the funding of high tech ventures. A future research agenda might usefullyconsider other dimensions.

First, entrepreneurial growth ventures may include sectors other than those inhigh tech areas. This may be especially the case in emerging economies where thereis a need to grow service and consumer goods sectors.

Second, there is also general evidence that venture-backed management buy-outsand buy-ins may involve entrepreneurial activity in uncertain environments(Bruining & Wright, 2002; Wright, Hoskisson, Busenitz, & Dial, 2000). Manage-ment buy-outs are present in China even though they have been quite controversial.In a post-centrally-planned economy, the release of bureaucratic state constraints onventures through privatization or liberalization may lead to the emergence ofestablished organizations which have growth potential and which need investmentcapital to help realize that growth. In such environments, there may be an importantneed to reconfigure state-owned enterprises, including the divestment of parts withgrowth prospects that may be better off as independent entities.

Third, examining other dimensions may also help in identifying successful rolemodels that can contribute to building investor confidence and encouraging businessowners to consider this source of funding. As Ahlstrom et al. note, early stagehigh-tech investment typically is associated with high failure rates. Investing indevelopment capital and late stage transactions may help reduce the problems ofasymmetric information associated with early stage transactions and hence reducefailure rates. It would thus be useful to gain insights into the behavior of VC andprivate equity firms at the later investment stages in the Chinese market. To whatextent are these firms better able to address asymmetric information problems?

Venture capital organizations

VC organizations can be analyzed in terms of a 2×2 matrix with an independent vscaptive dichotomy on one axis and foreign vs domestic on the other (Table 1).Ahlstrom et al. focus on one of the four cells in this matrix, that is foreign

270 M. Wright

independent VCs, although they note that in an emerging economy, captive andpublic sector VCs may have particularly important roles to play. Drawing out thedifferences between different types of VC and greater use of quotes would havehelped to convey the richness of the authors’ insights.

A future research agenda could usefully build on Ahlstrom et al.’s approach byincorporating more observations from categories of VCs excluded from their study.In Table 1, I suggest some possible research questions.

As VC markets tend to be segmented, future research could also attempt to identifythe nature of these segments and the kinds of players that may be appropriate for eachsegment. For example, Ahlstrom et al. discuss the regional aspects of markets in China

Table 1 Some research questions for different types of VCs.

Foreign Domestic

Independent •How do these firms select between an arm’slength entry mode vs opening of offices?How does this affect the VCs’embeddedness and commitment in China?

•Are these VCs able to access moreappropriate social capital thanindependent foreign VCs?

•How do these VCs adapt informationsources compared to their home markets?

•What do these VCs offer foreign VCs insyndicating deals?

•How do these VCs build social capital? •To what extent do these VCs differ fromforeign VCs in their involvement atstrategic vs operational levels?

•What do these VCs offer to domestic VCsin syndicating deals?

•To what extent do these VCs recruitexecutives with experience in foreignVCs/markets?

•What mechanisms do these VCs use assubstitutes and complements for boardrepresentation and how effective arethey? Do they differ from domesticfirms?

•How do the actions of these VCs differ fromthose of foreign VCs when investeesunder-perform?

•How/can these VCs help build internationalmarkets and target international exits forChinese entrepreneurs?

•What are these VCs’ perceptions on natureand feasibility of exit?

Captive •What control mechanisms are adopted inrelation to the parent and what discretionis offered?

•What is the nature of incentivemechanisms?

•Do these investors invest in lower risk dealsthan independents?

•Do these VCs have less commercialobjectives than other VCs?

•To what extent do these VCs benefit fromlocal guanxi provided by parents inChina? Do these links provide for greaterembeddedness and commitment than forindependent foreign VCs?

•To what extent are the investment activitiesof captive public sector VCs compromisedby political objectives?

•Do these VCs have objectives related toidentifying longer term clients for theparent and how does this affect dealselection and investment horizon?

•How do the guanxi of these captive privateand public VCs differ from those ofindependent and foreign VCs?

•To what extent do these firms recruit fromparent’s other operations in China?

•How do the executives in these firms differfrom independent and foreign VCs interms of their expertise for selecting andmonitoring deals?

•To what extent do the parent firm’soperations in China provide a source ofdeals?

Venture capital in China: A view from Europe 271

and it may be that certain types of VC are appropriate in different regions. Similarly,some VC players in the high tech market are generalists while others are specialists(Lockett, Murray, & Wright, 2002) and it would be insightful to investigate thedifferent human capital skills of these firms in the Chinese context.

It would be interesting to know about domestic VCs’ views in respect to foreignVCs. If domestic VCs differ in their behavior from classic VCs, to what extent doesthis pose a problem for syndication between foreign and domestic firms as a meansfor developing the Chinese market (see below)? The definition of an emergingmarket implies some dynamism. Thus, domestic VCs may need to change if they areto become active players for high tech firms—what are the challenges they face inmaking such changes?

Ahlstrom et al. specifically exclude consideration of public sector VCs.Government-backed funds are, of course, different from private VC funds. Aparticular issue concerns the expertise of and incentives for investment executives insuch funds. Even in Europe problems arise with respect to the ability of public sectorexecutives to add value (Knockaert, Lockett, Clarysse, & Wright, 2006).Nevertheless, across Europe, public sector funds exist and new ones are beingintroduced to address perceived equity gaps that arise because private VC fundswere reluctant to invest in very early stage ventures that were not seen to be investorready (Wright, Clarysse, Lockett, & Binks, 2006a). In China, a major issue withpublic sector VCs also concerns the extent to which they genuinely address marketfailure versus whether they are politicized mechanisms for subsidizing non-viableactivities. Recognizing earlier limitations, attempts are being made in Europe tointroduce private sector VC expertise into these public sector funds. Whether publicsector funds in China will be able to play the kind of role that they are evolvingtowards in Europe remains a challenge.

Different types of VCs may have different investee preferences and different timehorizons for their investments. For example, captive VCs may be less constrainedthan independent VCs with limited-life funds to exit their investments within aparticular time period (Wright & Robbie, 1996). The VC market internationally hasalso seen the emergence of semi-captives that enable both larger funds to be raisedand executives to be remunerated more directly on the performance of theirinvestments than may be possible within the constraints of remuneration structure ofa larger entity within which the VC activity finds itself. The design of incentivemechanisms for VC executives within the Chinese context may be especially worthyof further analysis.

The VC process life-cycle

Ahlstrom et al. usefully adopt a VC life-cycle approach to structure their analysis.First in respect of deal sourcing, they provide insightful commentary on thedownside of guanxi, notwithstanding its important role in doing business in theChinese context (Peng & Luo, 2000; Peng & Zhou, 2005). In an environment suchas China, science parks and universities may provide an interesting context forpotential high-tech growth investments (Phan, Siegel, & Wright, 2005). Ahlstrom etal. show that university professors can be an important source of potential new high-tech

272 M. Wright

ventures but note the difficulties in locating such individuals and building relation-ships with them. Experience in Europe and the United States, however, suggests thatfurther problems for VCs in exploiting technology generated in the traditionally non-commercial environment of universities include concerns about the ability ofacademics to become entrepreneurs, bridging the very great distance between atechnological innovation and a marketable product, negotiating with universitydecision-makers (Wright et al., 2006a). These problems may be especially acute inthe Chinese context. The location of returning entrepreneurs on science parksattached to universities who can help develop innovations may be one mechanism bywhich this potential source of deals for VCs could be exploited. However, there issome evidence to suggest that returning entrepreneurs with knowledge and patentstransferred from abroad tend to locate in non-university science parks andsubsequently grow significantly faster than those locating on university parks; VCsmay do well to target these entrepreneurs (Wright, Liu, Buck, & Filatotchev, 2006b).We come back to returnee entrepreneurs below.

Second, Ahlstrom et al. rightly point to the problems arising from the lack ofinstitutional stability, poor property rights and weak rule of law in China. The workof Armour and Cumming (2006) on the important institutional characteristics ofdifferent environments that may help to stimulate VC markets also adds to thisargument. Asymmetric information may be especially problematical in an emergingeconomy such as China. Ahlstrom et al. discuss the problems of accountinginformation and due diligence in China at some length. Evidence from multi-countrystudies suggests that VCs adapt their due diligence approaches and informationsources according to the institutional context (Wright et al., 2004a, b). This researchsuggests that information sources are not easily transferred between contexts but thatvaluation techniques may be. In particular, VC firms in Asia are less likely to useinformation from interviews with entrepreneurs or business plan data than theircounterparts in the US and Europe; market information, for example available fromthe business press, and own due diligence may be especially important.

Third, Ahlstrom et al. note the difficulties for VCs in negotiating contracts. In theuncertain context of entrepreneurial investments, VCs may make use of contingentcontracts (Kaplan & Stromberg, 2003). These contingent contracts may includeconvertible and redeemable financial instruments whereby equity stakes are adjusteddepending on whether performance targets are met. We know that there isdifferential use of convertible instruments in different contexts (Kaplan, Martel, &Stromberg, 2005). Even in developed markets there may be post-contractualflexibility; deviations in outturn from expected performance may mean intensediscussions regarding the terms under which instruments are actually converted. Thecourse of these discussions may depend greatly on how well relationships have beenbuilt between the VC and the entrepreneur. Nevertheless, in economies withestablished rule of law, the contract can form a ‘backdrop’ to the operation ofrelationships in these circumstances. In a weak institutional environment such asChina’s, enforcing contingent contracts in this way may be problematical. Thedevelopment of longer term relationships involving trust may be a substitute.

Fourth, while there may be an expectation of an exit through IPO, generallyspeaking in VC markets, the most common form of non-failure exit is sale to astrategic partner. If strategic sales are to be an important exit route for VCs in China


this suggests a role for VCs in developing networks with potential purchasers bothinside and especially outside China. The concerns about majority versus minoritystakes discussed by Ahlstrom et al. are important ones. The exit issue may beespecially important in an institutional context like China where relationships arecentral. Having built a relationship with an entrepreneur, bringing it to an endthrough the traditional forms of exit may be problematical. In the European context,partial sales of VC investments to strategic buyers are quite common. These could beviewed as part of a process towards eventual full integration or they may be longerterm. Secondary deals may provide a feasible exit mechanism for one or more of theinitial VC investors in China in the context of under-developed stock and corporateasset markets. Knowing more about the approaches of different types of VCs to thetiming and nature of exit may contribute significantly to understanding the prospectsfor development of the Chinese VC market.

Internationalization

Given their focus on high-tech ventures, Ahlstrom et al. say surprisingly little aboutthe markets that such ventures may need to penetrate in order to be successful. Inparticular, the challenges in entering international markets may be more important.

In order to help internationalize high-tech ventures based in China, domesticventure capital firms in China may need to develop extensive international socialcapital, that is networks with foreign venture capital firms. Foreign venture capitalfirms may also have reputations that can enable them to certify IPOs of Chinesefirms on foreign stock markets.

By the same token, local VC firms may be attractive to foreign investors becausethey have information about the operation of the local market, including access todeal flow. Local VCs are also likely to have dense networks of contacts which canhelp foreign VCs build social capital and familiarity with different legal require-ments. Local investors can play a certification role regarding potential investees forincoming investors, that is identify attractive deals, and by being in close proximitymay be more able to provide monitoring and value adding activities than is possiblefor a distant foreign investor. This suggests that the VC market in China may be ableto develop through the syndication of investments between domestic and foreignVCs (Mäkelä & Maula, 2006; Maula & Mäkelä, 2003).

Ahlstrom et al. comment on the problems in staffing foreign firms in China. Thisis an area that is generally under-researched in the VC literature and further insightscould be obtained in the Chinese context. Wright et al. (2002) find that over nine-tenths of executives in foreign VCs in India were Indian nationals and a third hadVC experience outside the country. Pruthi, Wright, and Meyer (2006) in theiranalysis of internationalizing VCs from the UK suggest that recruiting localexecutives was significantly more important than deploying expatriates, andexpatriation was significantly more important for transferring knowledge than forother motives. If VCs in countries like China recruit executives who are mainlytrained in US approaches to VC, these may not easily carry over into an emergingeconomy context, especially with respect to the kind of information to be used inscreening and monitoring.

274 M. Wright

A further challenge to investment in high-tech ventures concerns the locus ofentrepreneurs who have the technological expertise as well as expertise tointernationalize the venture. The internationalization of firms from emerging marketeconomies such as China is itself under-researched (Wright, Filatotchev, Hoskisson,& Peng, 2005a). However, in general, human capital linked to considerable industryspecific knowledge, dense contact networks and previous international experienceappear key to the internationalization of new and small firms (Westhead, Wright, &Ucbasaran, 2001). In an emerging market such as China, until quite recently fewmanagers have been exposed to international markets. A particularly important rolein resolving a deficit of entrepreneurial leadership in China (Tan, 2007) and instimulating the internationalization of technology-based firms in emerging marketsmay be played by returning entrepreneurs. Ahlstrom et al. note the potential role ofreturning entrepreneurs who are scientists and engineers returning to start up a newventure in China, after having gained business experience and/or education in theUS or other OECD countries. Filatotchev, Liu, Buck, and Wright (2006) find from asample of 728 firms based on the largest science park in China, ZhongguancunScience Park (ZSP), of which 42% were returnee owned, that the presence of areturnee entrepreneur was significantly associated both with whether the firmexported and with the proportion of turnover that was exported. These findingssuggest that VC firms may find it advantageous to build social capital with returneeentrepreneurs and to identify possible investees prior to their return.

Foreign venture capital firms

An important issue regarding foreign venture capital firms relates to the extent towhich they attempt to replicate behavior from their domestic market or whether theyadapt to the local market.

A central point relates to what aspects of behavior are transferable to the foreigncontext and which are not. Wright, Lockett, and Pruthi (2002) compare the behaviorof foreign and domestic VC firms in India and VC firms in the US regardinginformation usage and valuation approaches; they suggest that foreign VC firmshave a greater tendency to adapt their behavior as they enter overseas markets.Similarly, Pruthi et al. (2003) find that foreign VCs in India were more likely to beinvolved in investees at the strategic level while domestic VCs were more likely tobe active at the operational level. It would be useful to examine whether this patternis also reflected in China.

Important influences on the behavior of foreign VCs in China concern the extentto which they are embedded in the country and the impact on their reputation ofparticular actions. If a foreign VC is more embedded in China through otherinvestments or co-investments with the same investors it may be more committed tomonitoring and dealing with under-performance. Foreign VCs may face damage totheir reputations if they are perceived to withdraw too precipitously from an under-performing investment (Mäkelä & Maula, 2006). Further research might aidunderstanding of the Chinese context if the influences on commitment andreputation were examined. For example, are VCs that are more geographically andculturally distant likely to be less committed?


Internationalizing VCs may implement firm-wide policies regarding variousaspects of their investment behavior but there may need to be significant discretionin decision-making for local offices overseas. It may also be important for VCs thatinternationalize into China to take a longer perspective to become familiar with localinformation sources and networks. Otherwise, VCs run serious risks of investing inpoor deals on the basis of inadequate information. This is not specific to China;many internationalizing VCs have experienced similar problems in Europe.

Concluding comments

That China is a large economy that warrants attention in its own right goes withoutsaying. Yet, going beyond this paper, viewed from Europe, a nagging question thatstill needs to be addressed is: what’s different about China? Is China unique or aresimilar aspects affecting the development of the Chinese VC market seen in othercontexts? For example, is the phenomenon of returnee entrepreneurs unique toChina? To what extent is institutional instability and weak rule of law seen in otheremerging economies? How do access to information problems in China reflect thosefound elsewhere?

These issues are of relevance both for academic and practitioner perspectives.Following Meyer (2006, 2007), Asian management research needs to be contextu-alized in the local environment but to be loosely coupled to global debates.Benchmarking China against the US only may miss interesting insights to be hadfrom comparisons with other emerging economies or other developed markets, suchas Europe (Peng, 2005). I would suggest that this argument also applies to VC inChina.

Table 2 presents a comparative summary of issues relating to the development ofventure capital and private equity markets in selected European countries and China.The table shows the UK and Germany as two markets in Western Europe withcontrasting regimes. The table also considers the transition economies of Central andEastern Europe (CEE), which are developing from central planning to marketeconomies.

In Western Europe, the developed UK market has a strong entrepreneurial culture.In Germany, the entrepreneurial culture is not traditionally strong and may not be asstrong as that in China. In both UK and Germany, VC investment role models areavailable. Reluctance by entrepreneurs to give up control of their companies is amajor concern for VCs in many countries besides China. However, moreentrepreneurs are now willing to open up their capital to VCs in the UK and to alesser extent Germany. In contrast to China, accounting information is typically morerobust in the UK and Germany but informational asymmetries still present problemsfor deal screening and post-investment monitoring (Wright & Robbie, 1998). In theUK, VCs make extensive use of convertible quasi-equity instruments for dealingwith uncertainties but this is less the case in Germany (Farag, Hommel, Witt, &Wright, 2004). In the UK and Germany, monitoring through contractual rights toinformation access and board seats is common. These provide an enforceablecontractual backdrop to relationships between investor and investees that appears tobe particularly problematical in China. Even in Western Europe, IPOs are not the

276 M. Wright

Tab

le2

Sum

marycomparisonof

factorsaffectingventurecapitalandprivateequity

marketdevelopm

entin

Western

Europe,

Central

andEastern

Europe,

andChina.

Factors

UK

Germany

Central

andEastern

Europe

China

Early

stage

ventures

University

spin-offs;

extensivenew

venture

creatio

n

Traditio

nally

technology

sector

quite

strong

Increasing

denovo

firm

creatio

npost-com

munism

butvariable

across

coun

tries

Science

parks

establishedto

support

earlystagehigh

tech

firm

sNeedto

deal

with

family

succession

problems

Moderate

Highneed

Low

Low

Needto

restructure

diversified

groups

Establishedpatterns

throug

hout

period

Becom

ingestablishedfrom

mid-199

0sIncreasingly

establishedin

early20

00s

Becom

ingestablished

from

late

1990s

Needto

privatise

state-ow

ned

companies

Wellestablished

prog

rammefrom

1980s;now

complete

Former

GDRapart,

relativ

elylittle

Bulkof

privatizations

completed

Not

completeand

political

debate

surrou

ndslarger

firm

s

Scope

for

‘going-

private’

transactions

Large

stockmarket;

few

initial

dealsno

wsign

ificant

Relativelysm

allnu

mberof

quoted

companies

Manycandidates;specific

opportunities

mustgrow

Aroun

d40

MBOsof

listedcorporations

completed;

controversial

Attitude

toentrepreneurial

risk

Was

very

positiv

efrom

early19

80s

Traditio

nally

low,changing

slow

lyPositive

amongyo

ungergeneratio

nandgrow

ingas

transitio

nprogresses

Positive

but

commercially

inexperienced;

importantrole

ofreturnee

entrepreneurs;

unfamiliar

with

private

equity

Willingnessof

managersto

buy

High

Startingto

develop

High,

butlackingfinancialmeans.

Developingbutmajor

asym

metricinform

ation

andfinancingissues

Private

equity

Grew

rapidlyfrom

Traditio

nally

smallbut

Smallbutdeveloping.

Developing;

domestic


Tab

le2

(Contin

ued).

Factors

UK

Germany

Central

andEastern

Europe

China

andventure

capitalmarket

early19

80s

relativ

eem

phasison

earlierstage

focuson

earlystage;

foreignon

laterstage

Supplyof

debt

High

Traditio

nof

high

leverage

Low

butgrow

ing

Low

Interm

ediaries

network

Highlydeveloped

Fragm

ented

Quite

developed

Developingbut

fragmented

Favourabilityof

legal

fram

ework

Favou

rable;

useof

board

seats,conv

ertib

leinstrumentsand

covenantsfor

mon

itoring

Moderatelyfavourable;

convertib

leinstruments

andredemptionrigh

tsless

evident;vesting

provisions,veto

rights

FavourableinrecentEUaccession

states

butcontractenforcem

entmore

problematicalelsewhere;accounting

inform

ationvariable;significantifnot

majority

ownershipstakes

byVCs,

convertiblesecuritiesandcovenants

such

asanti-dilutionprovisions

important

formonitorin

g

Reformsto

Com

mercial

Codebu

tcontinuing

concerns

about

property

righ

tsand

contract

enforcem

ent

Favourabilityof

taxatio

nregime

Favou

rable

Reformsin

progress

Movingto

favourable

with

EU

reform

sin

recent

accessionstates

Reformsin

progress

Stock

markets

Receptiv

eto

VCand

privateequity

cos.

From

mid-1980s;now

moredifficultforMBO

endof

market

New

issues

sparse;

secondarytiermarket

closed

Growingdo

mestic

capitalpo

oland

appetite

Lackof

exitchannels;

mainlyHon

gKon

gand

NASDAQ

Trade

sales

Highlyactiv

eM

andA

market

developing

Highlyactiv

ePotentially

important

Secondary

buyo

uts/

restructuring/

partialsales

Develop

edas

important

exitroute

Possibleroute

Possibleexitroute

Possibleexitroute

Source:

Ownresearch.Researchassistance

byLuWangisgratefully

ackn

owledg

ed.For

furtherdetails

see:

Wrigh

t,Kissane,andBurrows(200

4a)

278 M. Wright

most common exit route for VCs and secondary tier stock markets have beenproblematical due to lack of liquidity. As a result, greater emphasis has been placedon trade sales, and increasingly, secondary sales.

CEE is similar to China in that the economies are in transition, but there are somenotable differences. The influence of privatization of state assets has been moreimportant in CEE than in China because of the different trajectories that the twohave pursued towards market economies. In CEE, the entrepreneurial culture ingeneral has developed strongly, especially among the post-collapse of communismgeneration and there has been some influx of managers with Western commercialexperience. As transition has progressed, role models are now available toentrepreneurs who have successfully grown and developed their businessesalongside private equity firms; in China this lags somewhat but seems to beemerging. Issues of property rights and their enforcement have arisen in CEE as inChina. In the states that acceded to the European Union, enforcement of propertyrights has become more established than in other CEE countries that have notprogressed as far with transition. Accordingly, in CEE countries, there has typicallybeen greater emphasis on a combination of significant if not majority ownershipstakes by VCs, convertible securities and covenants such as anti-dilution provisions,board veto rights and drag-along clauses (Farag et al., 2004). In contrast to China,restructuring to create a private sector banking system in CEE has meant growingavailability of debt finance for smaller firms to complement VC investment (Wrightet al., 2004a, b). This has also been underpinned by the development of hard budgetconstraints associated with bank lending. As in China, in CEE countries exit throughIPO is generally problematical due to low liquidity in domestic stock markets andlow profile of many CEE firms overseas. Thus trade sales to incoming foreign firmsor, as transition progresses, to local groups present the most feasible exit route, withbuybacks important for early stage cases.

These similarities and differences between China and both Western Europe andCEE suggest that researchers and practitioners need to tease out: what aspects of VCinvesting are common across all markets, which are common to transition oremerging economies generally, and which are specific to China? Which aspectsbecome less problematical as transition progresses and which may persist due to theform of transition? To what extent does VC in China differ from other big emergingeconomies, notably Brazil, Russia, and India? This more fine-grained research couldcontribute significantly to our understanding of the differences between VC marketsand to addressing the challenges posed for internationalizing VCs (Wright et al.,2005b).

References

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Armour, J., & Cumming, D. 2006. The legal road to Silicon Valley.Oxford Economic Papers, 58: 596–635.Bruining, H., &Wright, M. 2002. Entrepreneurial orientation in management buyouts and the contribution of

Venture Capital. Venture Capital: An International Journal of Entrepreneurial Finance, 4: 147–168.Farag, H., Hommel, U., Witt, P., & Wright, M. 2004. Contracting, monitoring and exiting venture

investments in transitioning economies: A comparative analysis of Eastern European and Germanmarkets. Venture Capital: An International Journal of Entrepreneurial Finance, 6: 257–282.


Filatotchev, I., Liu, X., Buck, T., & Wright, M. 2006. The export orientation and export performance ofhigh-technology SMEs in emerging markets: The effects of knowledge transfer by returneeentrepreneurs. CMBOR Occasional Paper.

Hoskisson, R. E., Eden, L., Lau, C.-M., & Wright, M. 2000. Strategy in emerging economies. Academy ofManagement Journal, 43(3): 249–267.

Karsai, J., Wright, M., & Filatotchev, I. 1997. Venture capital in transition economies: The case ofHungary. Entrepreneurship Theory and Practice, 21(4): 93–110.

Kaplan, S., Martel, F., & Stromberg, P. 2005. How do legal differences and experience affect financialcontracts? University of Chicago working paper.

Kaplan, S., & Stromberg, P. 2003. Financial contracting theory meets the real world: An empirical analysisof venture capital contracts. Review of Economic Studies, 70: 281–315.

Knockaert, M., Lockett, A., Clarysse, B., & Wright, M. 2006. Do human capital and fund characteristicsdrive follow-up behavior of early stage high-tech VCs? International Journal of TechnologyManagement, 34: 7–27.

Le, N. T. B., Venkatesh, S., & Nguyen, T. V. 2006. Getting bank financing: A study of Vietnamese privatefirms. Asia Pacific Journal of Management, 2: 209–227.

Lockett, A., Murray, G., & Wright, M. 2002. Do UK VCists still have a bias against investment in newtechnology firms?. Research Policy, 31: 1009–1030.

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280 M. Wright

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Mike Wright is a Professor of Financial Studies and the Director of the Center for Management Buy-outResearch, Nottingham University Business School. He is a visiting professor at INSEAD, ErasmusUniversity and University of Siena. He holds an honorary doctorate from the University of Ghent. He haspublished over 25 books and 250 academic papers on management buy-outs, habitual entrepreneurs,venture capital, technology transfer, strategies and governance in emerging markets, etc. in journalsincluding Academy of Management Journal, Academy of Management Review, Strategic ManagementJournal, Journal of Management, Journal of Management Studies, Journal of Business Venturing,California Management Review, Entrepreneurship Theory and Practice, Research Policy, Journal ofTechnology Transfer & Journal of International Business Studies. Mike served two terms as an editor ofEntrepreneurship Theory and Practice from 1994-99 and is an editor of Journal of Management Studies.He has edited special issues of Academy of Management Journal, Entrepreneurship Theory and Practice,Journal of Comparative Economics, Journal of Business Finance and Accounting, Accounting andBusiness Research, Journal of Business Venturing, Journal of Management Studies and Research Policy.


venture capital in china: a view from europe

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