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The Impact of the Increase in Institutional Distance on the Flow of Cross-border VC Investment: In the Context of the Adoption of Euro by European Union  

Kim, Yujin (Sogang University Business School)
Publication Information
Asia-Pacific Journal of Business Venturing and Entrepreneurship / v.15, no.6, 2020 , pp. 43-54 More about this Journal
Abstract
This paper investigates the causal impact of the increase in institutional distance between two geographic regions on the flow of cross-border Venture Capital (VC) between the regions. While cross-border VCs are believed to have competitive advantages at identifying and managing promising startups in a local market compared to local counterparts, the discrepancy in institutional characteristics between two markets exacerbates the difficulty of credible information exchange and negotiation, significantly increasing transaction cost related to a cross-border venture capital investment. This study conducts a difference-in-difference analysis to examine the relationship between institutional distance and the flow of cross-border VC investment using the fact that the official adoption of the Euro currency by member countries of the European Union except the UK created an institutional chasm between the UK and other EU member countries. The outcomes of the analysis suggests that UK-based VCs significantly decreased the VC investment into EU-based startups and that EU-based VCs reduced the investment into UK-based startups. The results have meaningful implications for understanding the impact of the change in institutional difference on cross-border VC investment, which seems to increasingly take place with the recent trend of de-globalization and the rise of protectionism.
Keywords
Cross-border venture capital investment; Venture Capital(VC); institution; institutional change; European Union(EU); Euro zone;
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Times Cited By KSCI : 4  (Citation Analysis)
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