A comparison of foreign and domestic venture capitalists’ investment preferences in China

Abstract

We compare investment preferences between domestic and foreign VC firms in China. We combine (i) qualitative evidence from in-depth interviews with investment professionals at 34 major VC firms, and (ii) analysis of over 1,000 transactions effected by 160 VC firms between 1990 and 2006. We find that domestic and foreign VCs differ in their choice of stage of investment projects, R&D intensity of invested companies, and capital size of investment. In general, foreign firms seem to take on more risks in their investment than domestic firms do. We suggest that such differences are linked to the institutional arrangements of the VC firms. In particular, corporate governance, incentive structure, decision-making and budget systems are possible reasons for the observed difference in domestic and foreign VCs investment patterns.