Cross-border Investing: Increasingly Important for Start-Ups and Growth

Cross-border venture capital investments play an important role in the scaling up of high growth companies, according to Strategy Professor Wendy Bradley. Foreign capital, expertise, and the networks that accompany cross-border investments are welcome by start-up ventures. However, a concern is that they transfer the majority of economic activity to the investor country. In new research, Bradley of SMU Cox and her co-authors examine cross-border venture capital (VC) investments and its implications for public policy.

“In a world with increasing nationalist rhetoric, government should find a way to be more accommodating,” Bradley states. "The movement of companies and talent is foundational to the VC industry.” Purely domestic life sciences businesses do not exist; nor is there a technology firm that’s not global. “There is a need for cross-border investments and partnerships for the advancement of science and economic growth,” says Bradley.

Entrepreneurs today have a global mindset, Bradley notes. “Entrepreneurs need investors who have a holistic vision of the market and a large network of other investors; they can help build a talent base and develop collaborative relationships based on trust.” These offerings need not come solely from local investors anymore. The research notes that the U.S. is a top global venture capital investor. Cross-European investments, as well as U.S. and Asian investments in Europe and abroad, are also becoming more common.

In the research, the authors developed a framework to help policymakers develop a coherent set of policies for cross-border venture capital investments. Their insights are informed by discussions from the Oxford Entrepreneurship Policy Roundtable, held last year at University of Oxford. High-level experts in academia, industry, and policy from across Europe, Israel, Canada, and the U.S. attended.

Cross-border investments increasing

The evidence from Europe, Israel, and Canada suggests that cross-border investments increasingly constitute a substantial part of their respective venture capital markets. They are associated with larger funding rounds and more foreign investor exits. In Europe, the U.K. has the most mature VC market, according to Bradley. “The UK has the advantage of housing one of the world’s largest financial hubs, London,” she says. “Certainly, other countries want to catch up, but our sense is that fundraising remains a big issue across continental Europe. In venture capital, size matters, and Europe has a long tail of small funds.”

Policymakers may worry that cross-border investments predominantly benefit foreign economies and fail to develop the local entrepreneurial ecosystem. “Countries are putting up both transactional and ecosystem barriers,” Bradley finds from her research. On the “transactional side,” the U.S. sanctions list has the power to impact global entrepreneurial growth by affecting syndications with local partners. On the “ecosystem side,” events like Brexit will discourage the international linkages necessary to strengthen a domestic entrepreneurial ecosystem, such as attracting global talent. The U.S. benefits from having both a financial hub, New York, and multiple innovation hubs, including Silicon Valley, which contribute to its leadership in this area, she notes.

The advantages and disadvantages of foreign investments have trade-offs to consider when making policy decisions. The research identifies two broad types of policies within a single framework: “transaction-level” policies focused on facilitating foreign investments and “ecosystem-level” policies that foster the development of the local entrepreneurial ecosystem and its associated international networks. Bradley suggests, “The most important insight from this analysis is that if policymakers want to attract foreign investors, they also need concurrent policies to foster the domestic VC industry. It is really these two things in tandem that will attract cross-border investment and benefit entrepreneurship.” For example, a stronger domestic base—bolstered with ecosystem-level policies—can mitigate the adverse effects that cross-border VC investments may have.

Their analysis identifies ten key options that policymakers have at their disposal. On the transaction-level side, they include: tax credits, funding programs, opening tax credits to foreign investors, and opening up funding programs to foreign investors. At the ecosystem-level, policies that strengthen the domestic ecosystem and encourage it to form international linkages, include:

•  Focusing R&D resources on those sectors that have comparative advantages and are internationally competitive.
• Orienting labor market policies toward attracting foreign talent, and turn brain drain into brain regain.
• Encouraging enterprise training and education to increase the human capital of potential entrepreneurs and investors.

Additionally, ecosystem policies that are attractive to foreign investors involve harmonization of policies (such as in Europe), deepening networks with soft and hard policies, and improving transparency. Bradley offers, “We have been told that conversations surrounding cross-border investing become more positive when funds, or policymakers, change from a financial services mindset to a life sciences or technology partner mindset when engaging with global-minded entrepreneurs.”

With Bradley’s interest in the direction of innovation, she asks: “Why can we cure some diseases but not others? Why do we have efficient plane travel but not better high-speed trains?” Bradley believes the origin of company financing, such as venture capital, plays an important role in why some inventions are commercialized and not others. Her research with co-authors highlights options to promote a better global investing environment for innovation, economic growth and start-ups of the future.

The forthcoming article “Cross-border Investments: What is the Role of Policy?” is authored by Wendy Bradley, Cox School of Business, Southern Methodist University; Gilles Duruflé of QCC Tech Innovation Platform; Thomas Hellmann of Saïd Business School, University of Oxford; and Karen Wilson of OECD and GV Partners. It will appear in the Journal of Risk and Financial Management as part of the Special Issue Venture Capital and Private Equity.

Written by Jennifer Warren.