Geography of Corporate Venture Capital Investment

Social scientists have long been aware of the significance of geography in economic activities. Scholars from various disciplines have demonstrated that economic activities are not distributed randomly and evenly across locations and that the geographic pattern of economic activities changes across time. At the organizational level, the geographic location and geographic scope of operation and investment of a business organization are part of its product–market scope and strategic management. This article focuses on the geography of corporate venture capital investment.

The venture capital industry is a good testing ground for the significance of geography. First, empirical research have demonstrated a high level of geographic concentration of venture capital firms and investment in a few locations such as Silicon Valley, Boston, and New York. Second, geographic factors are closely related to cultural factors in the venture capital industry. Third, although challenges such as information asymmetry and agency problem are shared by all business organizations, venture capital industry faces with even bigger risks when they are geographically distant from investment opportunities.

The geographic location of venture capital firms and geographic scope of venture capital investment, as well as the effect of geographic scope on the behavior and performance of venture capital firms, are well-documented in the literature. However, there is virtually no study on geography of corporate venture capital investment. This study intends to fill in this gap. Corporate venture capital programs differ significantly from independent or institutional venture capital firms in multiple ways, which might affect their decisions on location and geographic scope of investment. First, while institutional venture capital firms are mostly organized as limited partnerships, corporate venture capital programs are formed as corporate subsidiaries. One of the most important implications of this specific organizational structure is that corporate venture capital programs have yet another objective beyond financial returns: strategic benefits. To illustrate, venture capital investment helps facilitate and promote the ecosystems established by parent corporations through investing in entrepreneurial companies that adopt the standards defined by parent corporations. Second, geographic location of large corporations is more dispersed than venture capital firms; therefore, if all large corporations have a venture capital arm, one would expect a dispersed geographic distribution of corporate venture capital programs. Third, parents of corporate venture capital programs are typically large corporations that have already operated in multiple locations; therefore they are more equipped to disperse geographically.

Using data of corporate venture capital investment from 2001 to 2014, the article first examines the locations of corporate venture capital investment. Second, it offers a quantitative analysis of geographic scope (i.e., the degree of geographic concentration) of corporate venture capital portfolios. It tests the following hypotheses: (1) Financial oriented corporate venture capital programs prefer a more geographically concentrated portfolio. (2) Larger corporate venture capital programs prefer a more geographically dispersed portfolio. (3) Corporate venture capital programs that invest in early stages prefer a more geographically concentrated portfolio. (4) Corporate venture capital programs that have a broader syndication network prefer a more geographically dispersed portfolio.