The Venture Capital State investigates the diffusion of the globally-acclaimed Silicon Valley venture capital (VC) policy model to East Asia. The spread of this model has been ubiquitous, with at least 45 states across a range of countries, in terms of geography, culture, regime type, and size, attempting to build local Silicon Valley-like markets. Policymakers deploy policy as venture capital is viewed as a panacea for supporting innovation and entrepreneurship, and ultimately, job creation and economic growth. The allure of having a local VC cluster continues to grow in the post-global financial crisis world, as policymakers in advanced countries work to resuscitate economic activity and emerging markets promote innovation-led upgrading.
Whether policymakers are conceptualised as conventionally, or boundedly, rational, the expectation is that diffusion of a high-performing model, such as Silicon Valley venture capital, drives international convergence. Diffusion research has exploded over the past decade as scholars seek to explain the increasing similarity of national policies. While diffusion literature has shed light on the causes of patterns of waves, trends and dominoes, it has paid insufficient attention to important components of the diffusion process itself. As a result, diffusion frameworks are adept at explaining these convergent outcomes, but are insufficiently developed for explaining the more empirically pervasive phenomenon of diffusion resulting in similar yet diverse policy choices.
This theoretical deficiency leaves diffusion frameworks unable to explain the pattern of Silicon Valley venture capital policy diffusion. In contrast to the transcendent exuberance for creating a local Silicon Valley, policymakers in each and every state have implemented a distinct set of policies. Even states of similar population and economic sizes that are geographically and culturally proximate, and at comparable levels of industrialisation, have not implemented similar policies.
This book explains why. Policymakers are not conventionally rational; though rigorous in their studies, learning about a revered model does not supplant prior beliefs about optimal policy means. They are also not boundedly rational; they are not beholden to reproducing foreign models or unstable in their preferences. This study contributes to political economy scholarship by further conceptualising why and how policymakers pursue different adaptations of even highly revered and studied policy models. Policymakers are “contextually rational” in their learning; their context-rooted norms shape their preferences, underpinning their valuation of studied policy models. As such, to understand policy diffusion, we need to investigate the normative context of those learning about the policy – how they see themselves and what they deem to be locally appropriate policy. It informs what and how they design local policy.
It helps to explain why a cluster of East Asian states – Taiwan, Hong Kong and Singapore – employed distinct versions of the Silicon Valley venture capital policy they studied, beginning with Taiwan’s highly-effective efforts led by K.T. Li in the early 1980s. Importantly, even the core elements of the American legal and tax environment within which Silicon Valley VC emerged were not deployed in each case. Neoliberal Hong Kong’s efforts focus on offering the U.S. regulatory structure and hiring private fund managers to manage a government VC fund.
Taiwanese policymakers, in contrast, rejected the Silicon Valley legal structure in favour of a Japan-styled legal structure and a tax incentive rather than a low capital gains tax rate. Taiwan’s efforts were later called “the most successful engineering of a venture capital market”. Singapore, yet again different, deployed a tax incentive, adopted the Silicon Valley-consistent legal structure, deployed a massive fund and offered permanent residency for investors in the asset class.
Each of the policies were more interventionist than the Silicon Valley VC policy model, yet policies in each state contributed to growing local market activity. Hong Kong became the largest VC market in Asia, Taiwan the world’s third most active cluster and Singapore as an acclaimed hub for regional activity. Thus, this study offers insights into how state constitution of markets facilitates, rather than stifles, venture capital market activity.
The book offers novel insights into the international diffusion of venture capital policy as well as the building of venture capital markets in East Asia. Political economy research has, to date, devoted little coverage to the VC policy area, while polemic press, such as the Wall Street Journal, has gone so far as to dub venture capital “humanity’s last great hope.” This gap in research is surprising given the pervasiveness of venture capital aspirations expressed by policymakers the world over, and especially in East Asia. A financial market that has received so much study and investment from public policymakers is surely deserving of a better analytical understanding in political economy scholarship.
In addressing this empirical arena, the book offers new empirical insights into VC policy that are of interest to policymakers, academics and practitioners. States’ successes in building this iconic neoliberal market construct (venture capital markets) do not reflect their policymakers’ accuracy in approximating the Silicon Valley policy model. Instead, performance reflects their ability to effectively adapt the revered model for their local context. States necessarily have a visible hand in constituting and maintaining even quintessentially neoliberal markets, such as venture capital.
The manuscript is divided into eight chapters. Chapter 1 introduces the study’s area of investigation: the diffusion of the Silicon Valley VC policy model. Chapter 2 develops the contextual rationality framework, and Chapter 3 offers a new conceptualisation of venture capital policy for the political economy literature. Chapters 4, 5 and 6 are case study chapters, investigating Hong Kong, Taiwan and Singapore, respectively. Chapter 7 draws together and analyses the case study findings in light of the contextual rationality approach. Chapter 8 closes the manuscript with a discussion of current and future developments of venture capital markets in East Asia, expectations for continued diversity in the implementation of policy and a critical assessment of the role of venture capital in driving economic growth, innovation and job creation.
- Robyn Klingler-Vidra’s book, The Venture Capital State: Contextually Rational Policymaking in East Asia, is now available for pre-order with Cornell University Press, available in September.