Escalation of Commitment in Venture Capital Decision Making: Differentiating between Domestic and International Investors

19 Pages Posted: 19 Mar 2016

See all articles by David Devigne

David Devigne

Ghent University; Vlerick Leuven Ghent Management School

Sophie Manigart

Vlerick Business School; Ghent University

Mike Wright

Imperial College London

Date Written: March 17, 2016

Abstract

Drawing upon an escalation of commitment framework, this study investigates how differences between cross-border and domestic venture capital investors in emotional, social, and institutional factors affect their decision to terminate an unsuccessful investment. We track the exit outcome of 1060 venture capital investments in 684 European technology companies. Results show that domestic investors have a high tendency to escalate their commitment to a failing course of action, while cross-border investors terminate their investments efficiently, even when investing through a local branch. This is explained by cross-border investors having a lower social and emotional involvement with the project and a lower embeddedness in the local economic and social environment, decreasing individual decision biases. Further, they are affected to a lower extent by normative pressures to further invest from their co-investment network. Local branches of cross-border investors are also shielded from escalation of commitment. We conjecture that their international investment committee acts as an organizational safeguard against individual decision biases. Domestic investors may hence benefit from mimicking the behavior of cross-border investors.

Keywords: cross-border investments, termination, venture capital, escalating commitment, divestment

Suggested Citation

Devigne, David and Manigart, Sophie and Wright, Mike, Escalation of Commitment in Venture Capital Decision Making: Differentiating between Domestic and International Investors (March 17, 2016). Journal of Business Venturing, Vol. 31, 2016. Available at SSRN: https://ssrn.com/abstract=2749086

David Devigne

Ghent University ( email )

Sint-Pietersplein 7
Gent, 9000
Belgium

Vlerick Leuven Ghent Management School ( email )

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HOME PAGE: http://www.vlerick.com

Sophie Manigart (Contact Author)

Vlerick Business School ( email )

Reep 1
Ghent, BE-9000
Belgium

Ghent University ( email )

Sint-Pietersplein 7
Gent, 9000
Belgium

Mike Wright

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

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