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Institutional distance, geographic distance, and Chinese venture capital investment: do networks and trust matter?

Author

Listed:
  • Ying Sophie Huang

    (Zhejiang University
    Zhejiang University)

  • Buhui Qiu

    (The University of Sydney Business School)

  • Jiajia Wu

    (Zhejiang University)

  • Juan Yao

    (The University of Sydney Business School)

Abstract

This paper studies the effects of institutional distance and geographic distance on Chinese venture capital (VC) investment and subsequent exit and further investigates how social capital, that is, networks and trust, moderates such effects. We document significant dampening effects of both institutional and geographic distances on the likelihood of VC investment, while such effects are mitigated by the level of trust. The dampening effect of institutional distance (geographic distance) on VC investment is enhanced (weakened) by VC firms’ network strength. These findings suggest that networks and trust play different roles in moderating the effects of institutional and geographic distances on VC investment in China, which has a unique institutional environment and flourishing VC industry. Further analysis on exit outcomes shows that institutional distance leads to lower likelihood of successful exits, and the dampening effect of institutional distance on the likelihood of successful exits cannot be mitigated by networks or trust.

Suggested Citation

  • Ying Sophie Huang & Buhui Qiu & Jiajia Wu & Juan Yao, 2023. "Institutional distance, geographic distance, and Chinese venture capital investment: do networks and trust matter?," Small Business Economics, Springer, vol. 61(4), pages 1795-1844, December.
    • Handle: RePEc:kap:sbusec:v:61:y:2023:i:4:d:10.1007_s11187-023-00751-9
    DOI: 10.1007/s11187-023-00751-9
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    More about this item

    Keywords

    Chinese VC investment; Institutional distance; Geographic distance; Networks; Trust;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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