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Escalation of commitment in venture capital decision making: Differentiating between domestic and international investors

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Title: Escalation of commitment in venture capital decision making: Differentiating between domestic and international investors
Authors: Devigne, D
Manigart, S
Wright, M
Item Type: Journal Article
Abstract: Drawing upon an escalation of commitment framework, this study investigates how differences between cross-border and domestic venture capital investors in emotional, social, and institutional factors affect their decision to terminate an unsuccessful investment. We track the exit outcome of 1060 venture capital investments in 684 European technology companies. Results show that domestic investors have a high tendency to escalate their commitment to a failing course of action, while cross-border investors terminate their investments efficiently, even when investing through a local branch. This is explained by cross-border investors having a lower social and emotional involvement with the project and a lower embeddedness in the local economic and social environment, decreasing individual decision biases. Further, they are affected to a lower extent by normative pressures to further invest from their co-investment network. Local branches of cross-border investors are also shielded from escalation of commitment. We conjecture that their international investment committee acts as an organizational safeguard against individual decision biases. Domestic investors may hence benefit from mimicking the behavior of cross-border investors.
Issue Date: 10-Mar-2016
Date of Acceptance: 11-Jan-2016
URI: http://hdl.handle.net/10044/1/41899
DOI: https://dx.doi.org/10.1016/j.jbusvent.2016.01.001
ISSN: 1873-2003
Publisher: Elsevier
Start Page: 253
End Page: 271
Journal / Book Title: Journal of Business Venturing
Volume: 31
Issue: 3
Copyright Statement: © 2016, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/
Keywords: Social Sciences
Business
Business & Economics
Cross-border investments
Termination
Venture capital
Escalating commitment
Divestment
FIRMS
INDUSTRY
SYNDICATION
INVESTMENT
NETWORKS
MARKET
Business & Management
1503 Business And Management
1505 Marketing
1502 Banking, Finance And Investment
Publication Status: Published
Appears in Collections:Imperial College Business School