Yohanna, Babangida (2021) The internationalisation and localisation of foreign venture capital investments in the United Kingdom: geography, evidence, impact and implications. (PhD thesis), Kingston University, .
Abstract
The internationalisation of venture capital (VC) is a growing field in academic research, as more VC investors (VCs) become involved in cross-border investment activity. The rising demand for VC money could be influenced by increasing search for high-quality deals beyond the investor’s national borders. The flow of foreign VC receives little attention despite the volume of international financing flowing into UK companies. This thesis analyses 5,932 VC backed deals made to 3,279 UK companies between 2002 and 2017. The empirical data do not distinguish between foreign, national, and local funds, hence the variables were manually created. Twelve research participants, consisting of domestic venture capital professionals, foreign venture capital professionals and entrepreneurial company founders or senior executives, are interviewed to explore how VC backed deals originate. Firstly, the thesis investigates the geography of foreign venture capital (FVC) investment at regional level, assessing the attractiveness of the 12 UK regions to international investors. It identifies the volume and patterns of FVC investment, whether investors co-invest or make stand-alone investments and whether they invest in early or later rounds. It reveals the flow of FVC money across UK regions, identifying the regions with high and low investment. It provides insight into the function of FVC investors providing seed and growth capital to UK companies. The findings reveal that nearly one-third of all VC deals in the UK have one or more foreign investor, and the USA is the most active foreign nation investing in UK regions. There are sizeable differences between the regions in terms of the proportions of companies that receive FVC investment, and three regions, London, South-East England and the East of England are identified as receiving most FVC investment. Secondly, the thesis investigates the investment activities of domestic venture capital funds (DVCs) and local venture capital funds (LVCs) in the UK, specifically the volume and flow of VC investment transactions that take place between regions, and the level of regional VC self-sufficiency. The results show that more than half of UK companies receive investment from one or more domestic investor. There is regional disparity in the volume of investments, and fewer companies from South-East England and the East of England receive investment from LVCs. Thirdly, the thesis investigates deal origination for FVCs and DVCs in the UK. It examines how foreign VC funds discover deals in UK regions, especially those in remote locations, and the influence of social networking in facilitating deals. The results suggest that the prospect of a company raising VC money is dependent on factors beyond location and deal quality. The quality of the investor’s network directly influences deal flow. Entrepreneurial firms located in regions with a high concentration of high-quality human capital have increased prospects of attracting investment. Distance between VC investors and fundraising companies is less relevant. Little is known about directional flow of FVC money in the UK, despite it being among the top global investment destinations for foreign VCs. Therefore, this thesis contributes to the literature of economic geography at national and regional scale. It recommends policies to foster cross-regional and cross-border VC investment in the UK, directed at attracting FVC investment while promoting inter-regional investment. It recommends increasing the level of co-operation between higher education and private companies, government funding for private companies, and tax breaks for investment partnerships. The research adds a theoretical contribution to location theory by presenting new results which indicate that VC firms with international experience have minimal geographic limitations when scouting for deals. Therefore, deal location does not restrain VC firms from investing, but presents them with an opportunity to break into new markets. Companies located in regions with better infrastructure, talent and information have a higher likelihood of attracting both FVC and DVC investment. The research finds that fundraising companies gain VC investors’ confidence through existing relationships, thereby reducing agency problems. The contribution to information asymmetry theory is that information about distant deals is often transmitted through network ties, so poor ties between regions lead to reduced confidence and trustworthiness of investment-related information.
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