Institutional Distance, Geographic Distance, and Chinese Venture Capital Investment: Do Networks and Trust Matter?

Abstract

This paper studies the effects of institutional distance and geographic distance on Chinese venture capital (VC) investment and subsequent exit, and further investigates how social capital, that is, network and trust, moderates such effects. We document significant dampening effects of both institutional and geographic distances on the likelihood of VC investment, while such effects are mitigated by the level of trust. Moreover, the dampening effect of institutional distance (geographic distance) on VC investment is enhanced (weakened) by VC firms’ network strength. These findings suggest that network and trust play different roles in moderating the effects of institutional and geographic distances on VC investment in China, which is characterized by its unique institutional environment and flourishing VC industry. Further analysis on exit outcomes shows that institutional distance leads to lower likelihood of successful exits, and the dampening effect of institutional distance on the likelihood of successful exits cannot be mitigated by network or trust.

Keywords: Chinese VC Investment; Institutional Distance; Geographic Distance; Networks; Trust

JEL Classification: G11, G24, M13