Foreign Venture Capital as Channels of Cross-Border Knowledge Flows: Empirical Evidence From U.S. Critical Industries

Abstract

Cross-border knowledge flows may adversely affect nations’ competitive advantage and national security. This presents a dilemma not only for policymakers, but also for managers of high-tech startups looking to raise capital from foreign investors. Applying an organizational ecology lens, we empirically examine whether foreign venture capital (VC) investments in a technologically advanced host country represent a channel through which knowledge may flow back to their home country. We create a unique dataset of 1148 country-year observations of foreign VC investments made in 27 industries deemed to be “critical infrastructure” by the U.S. government. We find evidence that increased foreign VC investment is associated with an inverse U-shaped relationship with knowledge flows. This relationship is moderated by institutional and macroeconomic conditions such as the home country's intellectual property rights regime and the technology gap between the home and host countries. As an important resource for financing the development of advanced technologies, our results suggest that managers should carefully weigh the benefits of accepting foreign VC capital with the potential for cross-border knowledge flows.