IMITATION IN VENTURE CAPITAL FIRMS

Abstract

The Venture Capital Industry experienced an exponential growth in terms of the number of fund recipients during the last four decades. At the same time, venture capital firms' (VCFs) successful ventures resulted in huge economic benefits to the countries where VCFs made their investments, in terms of GDP contribution and employment. Yet, only few studies have been conducted to analyze the VCFs; cross-border funding (investment) behavior. In this Academic Exercise, I investigate the phenomenon of mimetic behavior among VCFs and the impacts of various firms, industry and host country drivers on the propensity of imitation between VCFs. I also explore the potential occurrence of second market imitation phenomenon where mimetic action in one-market results in imitation in another market. I use event history modeling to test my hypotheses on 151,595 domestic and foreign direct entries made by 2,492 venture capitalist firms in 110 countries in the 1980 to 2008 period. I find that VCFs do imitate each other in their choice of investment location. Country and international experience, however, may reduce the mimetic tendencies of VCFs as the knowledge acquired from previous investments lessens the uncertainty surrounding a new venture. The competition from other VCFs in the host country may also hamper VCFs' decision to make an entry as more intense rivalry drives the industry's profitability down. Finally, the large number of cross-border investments by VCFs may result in a second-order imitation phenomenon whereby entry and imitation in one country may lead to VCFs mimicking each other's strategy in another country.