A qualitative study of institutional opportunities and challenges for foreign venture capital investments in China

Abstract: The emerging Chinese venture capital industry is a market filled with opportunities and challenges for foreign venture capitalists. The purpose of this study is to help foreign venture capitalists identify the investment opportunities and challenges from institutional perspective in China and exploit the influencing institutional factors before entering into Chinese venture market. This descriptive, explanatory and qualitative study accesses information exacted from interviews with 5 venture capitalists at different foreign venture-based companies in Shanghai. In order to have comprehensive and holistic understanding of topic, the author chooses institutional theory and investing theory as two main ground theories to explore. Besides, the previous study in terms of development of foreign venture capital investments in China as well as foregone work done by Fung et al.,(2008) and Walker & Pukthuanthong (2007) provide the perceived cognition from institutional perspective. With respondents from interviews, the author figures out there exists considerable debates towards regulatory system as it can be both favorable and baffling respects for foreign venture capitalists. Chinese government has recently relaxed certain restrictions and facilitates the inflow of foreign venture capital investment into China, whereas the company law and their enforcement are still weak. Moreover, information asymmetries also give rise to insufficient protection along with inadequate legal resources to foreign venture capitalists when they fund the firms. Meanwhile, shortage of professional managers would create great opportunity for foreign venture capitalists as foreign venture capitalists are experience, and resourceful in networks or operation in their home countries. This would benefit SMEs at their trial stage. The most different but important aspect needs considering is the guanxi between firms they fund and managers on the board as well as with government. It takes times to develop and requires foreign venture capitalists offering equivalent benefits to those parties who aims to build close relationship. Therefore, in line with Chinese culture and establish broad networks help the foreign venture capitalists overcome this potential challenges. In this research, all the respects related to institutional perspective are illustrated. However, it still requires more data and time to explore other potential opportunities and investigate potential challenges in the future.