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Depot, and Office Depot. A number of these firms have changed the way human beings work and interact or, to borrow a phrase from Steven Jobs, “they have changed the world.” Recently, new VC-financed firms, such as Facetime, MySpace, and YouTube, are driving yet further change.

If one agrees that the VC-financed firms are critical to the U.S. position in the global technology economy, then the globalization of the VC industry is an important topic. The VC industry is not significant in terms of either direct employment or the total capital under management. Rather its significance lies in the role of venture capitalists in finding, funding, and assisting entrepreneurs whose firms will be instruments of Schumpeter’s (1939) “creative destruction” or successful in creating “new economic spaces.” Previous studies have attempted to measure the employment contribution of firms funded by VC and found it to be extensive (see, e.g., Global Insight, 2004).

Our examination of the globalization of the VC industry proceeds as follows. The first section introduces VC as an organizational form. The second section examines the academic research on international VC investing. The following section describes the history of international VC investing, which began in the 1960s and has since grown enormously. The fourth section examines the reasons for the globalization of the VC industry and is followed by a quantitative section describing the international flows of VC. In the sixth section the growth of the VC investment in China is discussed. The concluding section discusses the implications of the findings for our understanding of the globalization of VC. We find that there is little evidence at this time to indicate that the globalization of VC is having a negative effect on the U.S. innovation system. The existing evidence does suggest that U.S. VC firms are finding viable investments in other nations and foreign VC firms continue to find viable investments in the United States.

VENTURE CAPITAL AS AN ORGANIZATIONAL FORM

Professional VC firms are the subject of this chapter and, as far as is practicable, buyout (BO) and angel investors are omitted from our analysis. Private equity (PE) firms are organizations that invest in firms with the aim of later selling this equity at a higher price to capture the capital gains. VC is a subset of PE firms. We do not include BO firms because they acquire existing firms and thus are involved not in supporting emerging firms but rather in acquiring and reorganizing existing firms. Angel investing refers to equity investment in young firms by individuals or groups of individuals using their own funds and is a practice that is hundreds of years old. The difference between angels and venture capitalists is that the venture capitalists are professionals operating an organization that has raised institutional money.

This chapter treats private VC as the ideal type and does not examine corporate VC. The reasons for omitting corporate VC are threefold: First, as a whole, corporate VC is much less important than private VC. Second, many corporate



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