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Licensed Unlicensed Requires Authentication Published by De Gruyter June 21, 2014

Foreign Investment, Institutional Quality, Public Expenditure, and Activity of Venture Capital Funds in Emerging Market Countries

Hernán Herrera-Echeverri , Jerry Haar EMAIL logo and Juan Benavides Estevez-Bretón
From the journal Global Economy Journal


This paper empirically analyzes the effects of foreign direct investment (FDI), institutional quality, and the size of a government on venture capital (VC) activity. We conclude that institutional quality, FDI, and public spending have definitive importance as elements for the development of a public policy that increases the quantity and quality of VC fund (VCF) investment. Higher institutional quality, greater FDI, and lower public spending allow the volume of VCF investment to grow. FDI shows a higher level of significance in promoting investment in high-tech companies, and institutional quality increases the productivity of FDI investment in the generation of VCF. Government spending dramatically and (counter-intuitively) adversely affects the activities of VCF. Notably, the higher the institutional quality of a country, the less state intervention is required to promote investment of VCF. The results are consistent with the hypothesis of the FDI spillover and crowding out by public spending.

JEL Classification: G24; G18

Appendix 1 Average number of agreements and average value of VC investments made, 1996–2010, in millions of dollars in emerging countries

CountryData yearsAnnual average – All VC activityActivity in companies in early stagesActivity in high-tech companiesCountryData yearsAnnual average – All VC activityActivity in companies in early stagesActivity in high-tech companies
VC accordsVC investmentVC accordsVC investmentVC accordsVC investmentVC accordsVC investmentVC accordsVC investmentVC accordsVC investment
Czech Republic156.4113.281.471.94.3394.23Qatar150.071.010000
Hong Kong, China1527.20681.627.6755.0617.411.7Saudi Arabia150.330.80.070.0890.070.089
Indonesia152.8635.980.674.461.1316.6South Africa158.1362.5626.893.3387.6
Korea, South15318.86741.09117.33167.57228.47387.01Sri Lanka151.273.080.670.860.531.18
Kuwait150.131.81000.071.33Taiwan, China1535.47220.3712.292.5732.13208.48
Malaysia1510.3343.683.6oct-947.221.49United Arab Emirates152.2717.260.731.641.478.93

Appendix 2 Description of the variables used in the models built for the study

Venture Capital (CRit)Total value of investments made by VCFs in the country in the year i for country j, measured in millions of dollars and standardized by the economically active populationThomson One’s Private Equity/Venture Capital database
High Technology (HT_CRit)Total value of investments made by VCFs in the country in the year i for country j in companies in the communication sector, computer and related, biotechnology, electronics and related medical fields, measured in millions of dollars and standardized by the economically active populationThomson One’s Private Equity/Venture Capital database
Early Stages (ES_CRit)Total value of investments made by VCFs in the country in the year i for country j in companies in early stages of development, measured in millions of dollars and normalized by the economically active populationThomson One’s Private Equity/Venture Capital database
Venture Capital Investment Accords (Dealsit)Total investment contracts signed by the VCFs in the country in the year i for country jThomson One’s Private Equity/Venture Capital database
High-Technology Investment Agreements (HT_Dealsit)Total investment contracts signed by the VCFs in the country in the year i for country j in companies in communications, computer and related, biotechnology, and related electronics, medicine and related.Thomson One’s Private Equity/Venture Capital database
Early Stages Investment Agreements (ES_Dealsit)Total investment contracts signed by the VCFs in the country in the year i for country j in companies in early stages of developmentThomson One’s Private Equity/Venture Capital database
Venture Capital Average Investment (Prom_CRit)Average value of investment by VCFs in the country in the year i for country j, measured in millions of dollars.Thomson One’s Private Equity/Venture Capital database
Institutional Quality (Ins_Qualit–1)Indicates the perception of institutional quality in a country and it is the average of the six dimensions of WGI of the previous year.World Wide Governance Indicators, World Bank Development Economics Research Group, World Bank Institute.
Business creation freedom (Bus_Freeit–1)A quantitative measure of the ease of starting, operating and closing a business in the previous year.The Heritage Foundation, Index of Economic Freedom.
Gross Domestic Product (GDPit–1)Total real GDP of the previous year in dollars, in millions.United Nations, UNCTAD database
Published Scientific Articles (Art_Pubit–1)Scientific and engineering articles published in the physics, biology, chemistry, mathematics, clinical medicine, biomedical research, engineering and technology by authors from a country in the previous year.National Science Foundation, Science and Engineering Indicators
Foreign Direct Investment (FDIit–2)Net flow of foreign investment divided by GDP of two years ago.The World Bank, World Development Indicators±direct±investment&language=EN&format=html
Tradeit–1Trade of goods as a share of last year’s GDP. It is the sum of exports and imports divided by the value of GDP in current dollars.The World Bank, World Development Indicators
Mar_Capit–1Market capitalization is the share price multiplied by the number of issued shares of domestic companies listed in the stock market in the previous year; investment companies, mutual funds or other forms of collective investment are not included.The World Bank, World Development Indicators
Gov_Expit–1Government expenditure in the previous year as a percentage of GDP; includes all government expenditures for the purchase of goods, services, and compensation of employees, excluding military spending.The World Bank, World Development Indicators

Appendix 3 Descriptive statistics for the variable sample used in the models


Appendix 4 VC foreign investment in the ten fastest growing countries in the risk capital market in recent years

ChinaIndiaSouth KoreaHong KongBrazilSingaporeTaiwanRussiaNigeriaMexico
2007Total VC investment18,446.52,171.2488.33,290.2660.8122.,269.12
VC foreign funds7,308.81,305.358.83,290.2650.2114.,772.48
2008Total VC investment21,106.94,009.1176.2141.51,418.0174.412.8409.020.012.027,479.86
VC foreign funds10,978.83,022.791.1117.51,248.0148.412.8310.720.06.015,956.00
2009Total VC investment8,923.61,427.6163.5159.684.0123.9352.126.81.750.013.013,024.13
VC foreign funds2,337.6851.572.4148.681.8111.3352.113.71.750.010.05,728.99
2010Total VC investment12,339.62,543.6386.2147.61.006.1138.076.5280.610.0162.917,091.03
VC foreign funds4,168.71,571.3185.4147.6481.4131.065.9115.910.0141.57,018.64
TotalTotal VC investment60,816.610,151.51,214.23,738.93,168.8558.5452.5748.41,812.0202.982,864.14
VC foreign funds24,793.96,750.8407.63,703.92,461.4504.7441.9449.81,789.6172.541,476.11

This table shows the most dynamic emerging countries in the last four years (China, Brazil, Taiwan, Hong Kong, Mexico, Russia, South Korea, India, Singapore, and Nigeria). The row shows the total VC investment, the VC investment by foreign funds, and the percentage of the first over the second. The analysis was repeated for all the years from 2007 to 2010. The last row is the total of each country for each year. The last column adds the total of each row for each year in all countries. One can observe that the contribution of foreign capital to the VC investment in the last four years in these countries has been fluctuating between 40% and 50%.


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