Managing Risk in a Transitional Environment: An Exploratory Study of Control and Incentive Mechanisms of Venture Capital Firms in China

Journal of Small Business Management, Vol. 46, No. 2, pp. 263-285, 2008

23 Pages Posted: 14 Feb 2010

See all articles by Justin Tan

Justin Tan

York University - Schulich School of Business

Wei Zhang

Tsinghua University

Jun Xia

Montclair State University - School of Business

Date Written: 2008

Abstract

In this study, we examine the control and incentive mechanisms of domestic and foreign venture capital (VC) firms in China. Primary findings show that most VC firms use staged capital infusion, value reassessment based on subsequent performance, and other tools reflecting the flexible and dynamic characters of the investment systems and rarely replace management team. On the other hand, domestic VC firms are less active in monitoring, less likely to retain veto rights, and less likely to introduce stock options into target firms and for all employees. They are also less motivated to provide value-added services than their foreign counterparts. Instead, they concentrate their monitoring and participation on the financial aspects of the invested ventures. We discuss these findings and suggest directions for future research.

Suggested Citation

Tan, Justin and Zhang, Wei and Xia, Jun, Managing Risk in a Transitional Environment: An Exploratory Study of Control and Incentive Mechanisms of Venture Capital Firms in China (2008). Journal of Small Business Management, Vol. 46, No. 2, pp. 263-285, 2008, Available at SSRN: https://ssrn.com/abstract=1552275

Justin Tan (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

HOME PAGE: http://www.schulich.yorku.ca/SSB-Extra/Faculty.nsf/faculty/Tan%20Justin

Wei Zhang

Tsinghua University ( email )

Beijing, 100084
China

Jun Xia

Montclair State University - School of Business ( email )

Upper Montclair, NJ 07043
United States

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