The doctoral dissertations of the former Helsinki University of Technology (TKK) and Aalto University Schools of Technology (CHEM, ELEC, ENG, SCI) published in electronic format are available in the electronic publications archive of Aalto University - Aaltodoc.

Essays on Cross-Border Venture Capital: A Grounded Theory Approach

Markus M. Mäkelä

Dissertation for the degree of Doctor of Science in Technology to be presented with due permission of the Department of Industrial Engineering and Management for public examination and debate in Chambers of the University Board at Helsinki University of Technology (Espoo, Finland) on the 4th of June, 2004, at 12 o'clock noon.

Dissertation in PDF format (ISBN 951-22-7117-6)   [1836 KB]
Dissertation is also available in print (ISBN 951-22-7116-8)


In this doctoral dissertation, cross-border venture capital investments and syndication are studied from a grounded theory perspective. During recent years, cross-border venture capital has become an economically important phenomenon. Scholarly inquiry into the subject, however, has remained scarce. Employing a grounded theory approach, the present study attempts to contribute to this emerging stream of literature by investigating mechanisms of how cross-border investment syndicates are created and held together, and how cross-border venture capitalists influence the internationalization of portfolio firms.

In this study, venture capital is studied from the viewpoint of the scholarly field of entrepreneurship, within which new venture financing can be viewed as part of the research stream on new venture formation. Venture capital fuels the entrepreneurial process and can critically facilitate economic development, thus being an area of research with high societal relevance. Cross-border venture capital has been found to have an important role in entrepreneurial finance, particularly in markets with a limited supply of domestic venture capital. On the venture level, prior anecdotal evidence indicates that cross-border venture capitalists can provide portfolio firms with important assistance in internationalization.

The dissertation includes five essays. The main focus of the dissertation is in answering the question: "How are cross-border venture capital syndicates formed and held together, and how do the investors of such syndicates affect the internationalization of portfolio companies?" The grounded theory method is used in the empirical part of the dissertation, and prior to this, two essays discuss the use of the method, supporting the empirical essays.

The first essay initiates an introduction to the grounded theory methodology and sets the stage for a review of the related research process. As is typical for methodology review papers, the viewpoint of one paradigm is selected. However, other possibilities for paradigmatic lenses to grounded theory are recognized, and the present work is appropriately positioned in the paradigmatic field.

The second essay presents a detailed account of the phases of conducting grounded theory research. Both of the methodology essays have a focus on the field of research of entrepreneurship. A review of more than 200 entrepreneurship papers that use the grounded theory method was performed to assess the use of this method in entrepreneurship research. Eight of these papers were selected for a detailed analysis. Throughout the two essays, we draw on our analysis and point out exemplary practices from the analyzed articles, as well as alternatives for choices in research design and areas for further improvement. In the second essay, an appendix presents a summary of the analysis of the eight exemplary papers.

The three latter essays of the study are empirical and investigate cross-border venture capital finance employing the grounded theory method. The first empirical essay investigates the formation of cross-border syndicates, especially the role of a local venture capital investor in obtaining cross-border investors. The findings imply that a local venture capitalist can be of critical importance to the development of the portfolio firm, and that the most important roles of this local investor in obtaining cross-border investors lie in providing the venture with knowledge and social capital in the local market and assisting in operational management. International social capital of the local investor can also be of crucial significance in obtaining a cross-border investor.

The second empirical essay discusses the holding together of a cross-border syndicate, especially the factors that influence investors' level of commitment. Results of the essay imply that changes in the expected value of the portfolio firm will affect the commitment levels of investors. If the expected financial returns from the investment decrease, the motivation of the investors to allocate effort and invest more in the development of the venture also decreases. We also found that there are three key moderators to this focal effect: distance, embeddedness, and financial importance that relate to the investor. More specifically, three components of distance between the investor and the investee increase the aforementioned focal effect: geographic distance, cultural distance, and location in a different country. The embeddedness of the investor in business networks in the vicinity of the venture also moderates the focal effect, as does the financial importance of the investment to the venture.

The third empirical essay discusses the effects that cross-border venture capital investors have on the internationalization of their portfolio firms. Results of this essay imply that a cross-border investor's entrance into a syndicate creates both endorsement benefits and significant transaction costs. Transaction costs stem from the relative difficulty of communication and decision-making for distant firms and people. If the cross-border investor has good fit with a target market selected in the venture's internationalization strategy, the investor may provide significant benefits by decreasing the liabilities of foreignness faced by the venture in the foreign market. For instance, the investor may be able to provide important endorsement in the market, important knowledge about the market, and social capital therein. The investor will exert isomorphic pressure that helps the venture to achieve legitimacy in the new market and thus positively affect its development. Such pressure creates isomorphic transformation, which means here that the venture will become more like its peers in the new market. This leads to the venture gaining more legitimacy, that is, better acceptance in that market. If, on the other hand, the cross-border investor does not have a good market fit, it may exert such isomorphic pressure that the venture is driven to internationalize its operations in markets that are not optimal to its internationalization strategy. This can naturally be a detriment to the venture.

The dissertation's results have a number of implications for both scholarly inquiry and the immediate practice of venture capital. The results imply new insights into international, interorganizational network building and management, and the effect of such networks for further internationalization. The results also open and point out avenues for new research and reveal important implications for practitioners.

Keywords: cross-border venture capital, syndication, internationalization, social capital, grounded theory method

This publication is copyrighted. You may download, display and print it for Your own personal use. Commercial use is prohibited.

© 2004 Helsinki University of Technology

Last update 2011-05-26