Globalization of Venture Capital: A Product- and Asset-Cycle View: An Examination of Information Technology Ventures

Abstract

Classic production models in the global economy proceed through a product cycle of innovation at home, followed by commoditization, pressure for cost minimization, and then some combination of production abroad, sales abroad, and export to the original and other foreign markets. Asset and financial market models can exhibit dramatic swings in prices and investment activity apparently caused by incomplete information and herd behavior, among other things. Investments financed by venture capital entail both a 'bet' on a particular stage of innovative product or service as well as a flow of financial capital - hence could exhibit characteristics of both the product cycle as well as the asset cycle. This paper uses data on individual venture deals in the fast-innovating information technology sector to investigate patterns of venture finance to see whether venture capital exhibits either or both of these cycles. There is significant evidence of a product cycle based not only on both traditional theory of cost minimization, but also on more modern theories of demand patterns and technological innovation. It is hard to argue that there is not an overall internet-related asset cycle, particularly in software investment in foreign portfolio firms. There is little evidence of herding toward specific investments by product or services type or by country, although there is some evidence of herding toward later-stage investments for all countries, particularly for India.