What lures cross-border venture capital inflows?

The change in the business model of venture capitalists from investing locally towards investing across borders started to intensify in the late 1990s. According to a dataset of European and North-American countries, we find that countries with higher expected growth and higher lagged stock market returns receive larger net cross-border venture capital inflows. Thus, portfolio companies located in high-growth and high-return countries receive more venture capital from foreign venture capitalists than these countries’ venture capitalists invest in foreign portfolio companies. Also, countries with lower stock market capitalizations as well as those with poor tax and legal environments for venture capital intermediation exhibit larger net cross-border inflows. These findings offer important insights for policy makers since cross-border venture capital inflows partly compensate for potential limits in the domestic venture capital supply.