Fencing Off Silicon Valley: Cross-Border Venture Capital and Technology Spillovers

Abstract

The treatment of foreign investors is a contentious topic in U.S. entrepreneurship policy. We
model a setting where foreign corporate investments in Silicon Valley may allow U.S. entrepreneurs
to pursue technologies that they could not otherwise, but may also lead to knowledge
spillovers. We show that despite the benefits from such inbound investments for U.S. firms, it
may be optimal for the U.S. government to raise their costs to deter these investments. Using as
comprehensive as possible a sample of investments by foreign corporate investors in U.S. startups,
we find evidence consistent with the presence of knowledge spillovers to foreign investors.

Keywords: Innovation, Foreign Direct Investment, Corporate Venture Capital

JEL Classification: O31, O33, G24, F13