Institutional trust leads to more cross-border investments

Increasing institutional trust is highlighted as a way for governments to attract more foreign venture capital investment according to research carried out by Sofia Johan, Daniel Hain and Daojuan Wang.

Research reported on the London School of Economics and Political Science blog suggests that venture capitalists that invest across borders or jurisdictions look for institutional trust, a conclusion of interest to governments seeking foreign funds.

The research carried out by Sofia Johan, Daniel Hain and Daojuan Wang examined venture capital investment flows from 2000 to 2012. They looked at the geographical, cultural and institutional proximity alongside institutional and interpersonal trust.

They found that geographical proximity and local expertise is often used by venture capitalists to identify ventures and mitigate financial risk. They also found that the physical distance between venture capitalists and the startup possibly determines the frequency of interactions.

The researchers posit that institutional trust serves as a way to generate relationships between two or more organisations. It effectively mitigates the negatives attached to the lack of proximity in cross-border investments.

On the blog post they conclude: “Governments hoping to attract both foreign venture capital investment and more sophisticated value-added expertise from foreign VCs should be building institutional trust as it provides the foundation for building up a critical mass of initial trust to enter a relationship involving proximity.”

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