Global investments in corporate venture capital
In the era of globalization, few business practices remain unchanged. Venture capitalists increasingly target startups across national borders even though scholars suggest that local investments are preferable. The share of cross-country VC investments has grown six-fold from mid-nineties to early 2000s. In the corporate world, globalization has left no rock unturned: after early experiments with offshore manufacturing, companies turned their attention to the global sourcing of innovation. Yet, when it comes to our understanding of corporate venture capital – the practice through which corporations provide equity investments to startups with valuable technological insights – scholars seemingly have no opinion regarding the benefits and drawbacks of investing across borders. Is there any evidence that companies seek investment targets globally? If so, are such practices justified? Should they seek local partners or should they avoid getting too close to third parties if they decide to go global?
Increasing global footprint of corporate VC programs
Sergey Anokhin, an Entrepreneurship Professor from Kent State University, explains that de facto corporate venture capital investments have long gone global. Although roughly half the startups supported by corporate VC are still located in the U.S., the other half is fairly well distributed around the world. The same goes true for how corporations run their CVC programs: many of them set up foreign offices whose job it is to identify potential investment targets and work with them throughout the investment relationship. That is, the global footprint of CVC programs is growing, and corporations routinely employ globally sourced ideas in their daily operations.
Does it pay to go global?
Research tells us that independent venture capitalists profit more from their global investments than from domestic ones. Similarly, in terms of innovation, CVC investments lead to increased patenting, and R&D offshoring is positively related to corporate innovation. It is only logical to expect that cross-country CVC deals should be especially beneficial to corporate investors – both financially and strategically. Research data supports this notion, says Dr. Anokhin, who studied the link between global CVC investments and resulting patenting rates of hundreds of corporations across a number of years. There is a clear positive relationship between the global footprint of a corporate VC program and rates of corporate innovation. The main reason is that distant knowledge has a higher degree of novelty while local investments are more or less homogenous. This higher novelty is clearly beneficial, and corporate patenting rates provide clear evidence.
How should global CVC programs be run?
Despite the fact that many corporations set up foreign offices to manage the investment process, the big question is whether or not they should invite local investors into the mix. Generally, when syndicating their deals, corporations should be wary of losing more than they gain from sharing their strategies, policies, and secrets with fellow-investors. In the case of global investments, however, this should not stop corporations from syndication, suggests Professor Sergey Anokhin. If knowledge leak does occur, corporations will lose their less valuable local knowledge but gain more valuable distant insights. Not only should corporations actively seek global investment targets but they should also eagerly enter investment syndicates and invite foreign investors to join the pool.
What it all means
What it means in practical terms, suggests Dr. Sergey Anokhin (Kent State), is that the global footprint of CVC investors is likely to keep rising. And this is a good thing, because it pays both financially and strategically, in terms of innovation. Globalization waters may be harder to navigate, but a rising tide tends to lift all the boats that were brave enough to test them.
The article created in April 2018
