Nationality-Based Homophilic Preferences Against U.S. Venture Capital Firms in the Chinese Venture Capital Industry

Abstract

My dissertation focuses on homophilic preferences based on shared nationality and includes two papers. The first paper focuses on the formation of venture capital investment syndicates. Both Chinese and U.S. investment firms generally prefer including their fellow compatriot firms over comparable non-compatriots in the syndicates that they assemble. When a Chinese investor initiates a collaborative first move by including a U.S. investor in a syndicate, however, the U.S. investor no longer prefers comparably familiar U.S. investors over the Chinese investor when it subsequently chooses among prospective partner firms to include in its investment syndicates. In such cases, familiarity triggers impartiality; the experiential trust that was garnered from the collaborative first-move engagement initiated by the Chinese investor diminishes the nationality-based homophilic preferences of the U.S. investor. Similar dynamics when the tables are turned are not found. When a U.S. investor initiates a collaborative first move by including a Chinese investor in a syndicate, the Chinese investor subsequently remains partial to fellow compatriot firms that are otherwise comparable to the U.S. investor. The homophilic preferences and identity-based trust between Chinese investment firms grounded in shared nationality are resilient to any goodwill created by U.S. investment firms when they initiate collaborative first moves. Shifting to new ventures’ perspectives, the second paper shows that Chinese new ventures seeking funding may also be biased against U.S. investment firms. Although conventional wisdom suggests that foreign firms can overcome such bias by being highly qualified, this study suggests otherwise. It finds that Chinese new ventures are more inclined to choose a Chinese investment firm as their initial venture capital investor over more qualified U.S. firms when these competing investors are of higher quality. When competing investors are of high quality, any sacrifice in investor quality that a new venture makes by rejecting a more qualified U.S. firm is relatively inconsequential in proportion to a somewhat lesser qualified Chinese firm. To affirm that the empirical results are due to a distaste toward U.S. investors due to their foreignness, this study shows that they are significantly stronger for Chinese new ventures embedded in provinces that are less cosmopolitan and, thus, less accepting of foreigners in general.