Cross-border venture capital investments play an important role in the scaling up of high-growth companies. However, when these companies obtain foreign funding, typically from US investors, there is a concern that they transfer the majority of economic activity to the investor country. On the one hand, start-up ventures may welcome the foreign capital, expertise, and networks that accompany cross-border investments. On the other hand, policymakers may worry that cross-border investments predominantly benefit foreign economies and fail to develop the local entrepreneurial ecosystem.

In our paper we review the available data and literature on cross-border venture capital investments, and synthesize some lessons for policymakers. Our leading question is whether there is support for policies that attract foreign venture capital investments. Looking at both quantitative and qualitative evidence about cross-border investments, we note that in addition to providing capital, foreign venture capital investors also provide expertise and networks. However, there are concerns that foreign investors may have insufficient understanding of and commitment to the local companies. In addition to these transaction-level trade-offs, we also consider ecosystems-level effects, for instance, the impact of foreign venture capital investments on the entire local entrepreneurial ecosystem. We examine the experiences of Israel, Canada, the UK, and France to illustrate the role of foreign venture capital in the development of the entrepreneurial ecosystem. We identify possible benefits in terms of growing the local ecosystem, providing role models, and increasing global connectivity. We also identify the potential disadvantages to local ecosystems in terms of the crowding out of local investors, brain drain, and companies relocating to the foreign investor’s country.

The analysis of advantages and disadvantages prompts the question of whether and how government policies should facilitate cross-border venture capital investments. To address this, we develop a framework for how policymakers can devise a coherent set of policies toward cross-border venture capital investments.

Certain policies strengthen the domestic base of entrepreneurial activities. Policies for this include investor tax credits and government funding programs. Most of the time, these policies are limited to domestic players. Therefore, to also attract foreign investors it is necessary to open up these policies to foreign investors. The domestic ecosystem can be strengthened by investments in human capital and attracting foreign talent. To further attract foreign capital to the ecosystem, relevant policy actions include harmonizing regulation, promoting cross-border business networks, and ensuring transparency of the domestic venture market. Overall, the most important insight is that if policymakers want to attract foreign investors, they also need concurrent policies to foster the domestic venture capital industry.

Wendy Bradley is Associate Professor at the Cox School of Business, Southern Methodist University.

Gilles Duruflé is Executive Vice-President of the Quebec City Conference and President of its Tech Innovation Platform.

Thomas Hellmann is Professor of Entrepreneurship and Innovation at Saïd Business School, University of Oxford.  He is the Academic Director of the Oxford Saïd Entrepreneurship Centre and the Academic Advisor to the Oxford Foundry.

Karen Wilson is Founder at GV Partners, Adviser at Private Sector Finance, Development Co-Operation Directorate at OECD – OCDE, and Associate Fellow at Saïd Business School, University of Oxford.