A decade ago, established businesses in several industries were exceedingly frightened of the impending flood of disruptive forces. This was especially true in the FinTech industry, where a new breed of quick-footed, agile arrivals equipped with the Y Combinator playbook threatened to wreck havoc among ancient incumbents everywhere.
Several years later, though, and the situation had substantially changed, with incumbents starting to collaborate closely with entrepreneurs. The situation has once more evolved now, with established businesses playing a key role in financing entrepreneurial endeavors, a technique called as corporate venture capital (CVC).
However, as Gary Dushnitsky and Lei Yu demonstrate in a recent research paper, this local concentration provides for a relatively constrained lens to comprehend global CVC practices and goals. The study was inspired by a perplexing oddity, according to Dr. Dushnitsky: corporate venturing has spread well outside the US context. More than 60% of all CVC deals worldwide were made in the US in 2013, but by 2018, that number had dropped to 41%, putting it on pace with CVC activity in Asia.
The literature is heavily influenced by research on corporate venturing in developed nations, but it seems improbable that CVC investors in developing nations are doing so to gain a window on technology because startups in these nations frequently benefit from dramatic demand growth and are not typically a source of novel technologies; as a result, the existing scholarly explanation cannot account for the growth of CVC in China.
The researchers used an abductive method to examine the origins of CVC in China in order to explain the oddity. China was selected as the study’s location because, according to Dr. Dushnitsky, it is “a thriving entrepreneurial climate” and is second only to the United States in terms of the total number of startups and investment received.
Furthermore, famous CVC proponents in China who were quoted by the authors in their research seemed to have distinct motivations than the window-on-technology orthodoxy. For instance, Bangxin Zhang, Chairman and CEO of the educational technology company TAL Group, stated at the company’s 2016 annual conference that TAL was committed to seizing the numerous opportunities it saw in the education sector but that some of those opportunities would “not be suitable” for the company to develop internally, so instead it would use its “capital, business, and resources to support external ventures.”
Similar to this, Alibaba Vice President Joseph Tsai stated at the company’s 2017 Investor Day that when evaluating potential CVC targets, Alibaba’s top priorities were determining whether the target company could help the company increase user numbers and improve engagement, enhance the customer experience, and expand its portfolio of goods and services.
Dushnitsky and Yu built a comprehensive dataset of Chinese CVCs active in the late 2010s by fusing Chinese and foreign databases, guided by these and similar industry insights. Instead of the common perception of CVC as a window on technology, analysis of the dataset to identify cross-industry CVC patterns reveals an alternate CVC purpose that is primarily related with harnessing growth through market expansion. The results “reflect the characteristics of the Chinese scenario, where entrepreneurs profit from the dramatically increased economic activity and serve as a vehicle to harness the global innovation frontier,” claims Dr. Dushnitsky.
The researchers reference earlier research that concludes that “firms in developing countries can enjoy superior performance by leveraging rapid industry expansion; all while using technologies that already exist in the developed world”, again indicating that industry growth is an important factor in determining investments in the developing world. In addition to the conventional technology-based interpretation of CVC activity, Dushnitsky and Yu thus offer a market-based explanation. Or, to put it another way, they contend that “many investors are attracted to entrepreneurial enterprises that pursue growth by addressing rapidly rising market demands (market-based), rather than by developing novel technology (technology-based).”
The researchers reference earlier research that concludes that “firms in developing countries can enjoy superior performance by leveraging rapid industry expansion; all while using technologies that already exist in the developed world”, again indicating that industry growth is an important factor in determining investments in the developing world. In addition to the conventional technology-based interpretation of CVC activity, Dushnitsky and Yu thus offer a market-based explanation. Or, to put it another way, they contend that “many investors are attracted to entrepreneurial enterprises that pursue growth by addressing rapidly rising market demands (market-based), rather than by developing novel technology (technology-based).”
The researchers also took into account a potential third explanation for CVC rise in China: a government-based argument, given the very different institutional structure that China represents in comparison to Western institutions. According to Dr. Dushnitsky, this is “compatible with the concept that venture activities differ across institutional environments,” where “CVC would be particularly salient in industries of national strategic interest.”
Given the command-and-control nature of the Chinese market context (and the importance placed on it in the academic literature), it may seem counterintuitive, but the study’s key finding is that, at the time the study was conducted (the late 2010s), the cross-industry CVC patterns in China did not correspond to any of the sectors that the government had prioritized as sectors of national importance.
As an alternative, the researchers contend that while “a broad range of antecedents drive incumbent-startup interactions in the Chinese scenario, [CVC] activity largely adopts a “harness industry expansion” rationale and, to a lesser extent, displays a “window on technology” purpose.
This, according to Dr. Dushnitsky, “underscores the contrasting roles of CVC (in particular) and incumbent-startup partnership (more broadly) in unlocking corporate development,” which is likely caused by fundamental disparities between the US and Chinese economies.
The research provides a more comprehensive set of justifications for the possible application of CVC technique. According to the study, while technological advancement and a robust corporate R&D foundation frequently fuel CVC operations in industrialized nations, these drivers are only “partially supported” in China. The research shows that although “technology advancement might be a major enticement for CVC operations, its impacts do not rely on the R&D bases inside a given company.” Industries in China that offer businesses resources and chances to grow, such as the benevolent industries, display a high degree of CVC activity.
The study’s findings “have the potential to substantially redefine our understanding of CVC strategy and its objectives,” according to Dr. Dushnitsky, and go beyond regional coverage.
The key point is that CVC is not only a strategy for getting a window on technology; it can also be used to harness market growth, even though it’s important to note that the study’s findings are for the period of 2014–18 (hence, because the Chinese setting has changed significantly since, they are not necessarily indicative of current VC practices in China).
Every company has a marketing plan, but not all companies have the same marketing strategy, according to Dr. Dushnitsky’s instructive illustration. Our study uses China as the backdrop to demonstrate that idea. In other words, companies may employ CVC as a tactic to capitalize on market growth in nations with rapid GDP development.
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