Corporate venture capital (CVC) activity, an emerging issue in academia, discusses relevant activities about the financing of start-ups by large, well established corporations (Knyphausen-Aufse, 2001). Different from “corporate venturing”,
“corporate venture capital activity” has the narrower scope (Guth and Ginsberg, 1990;
Thornhill and Amit, 2001). It is actually one form of corporate venturing (Sykes, 1986), or some scholars take it more specifically as a form of external corporate venturing (Keil, 2002). It is also considered as a kind of emerging corporate entrepreneurship (Miles and Covin, 2002; Sharma and Chrisman, 1999).
Typical CVC activity has a three-stage structure between parent and venture firms (Ernst, et al., 2005). Parent firms make equity investment in CVC, and take CVC as a mediator to invest in start-ups, the venture firms. Parent firms deliver value adding to venture firms through direct capital investment and other indirect channels (Chesbrough, 2000; Block and MacMillan, 1993), to exchange the contribution to their financial and strategic objectives (Ernst, et al., 2005; Brandenburger and Nalebuff, 1996; Gompers and Lerner, 1998). To sum up in a word, CVC investment constructs a reciprocal relationship between parent firms and venture firms.
In the past, firms lack of innovative capability still focus on pure internal R&D investment (Hagedoorn, 1993). It’s different now that various instruments has been vigorously developed last few decades, includes M&A, joint venture activities and of course, CVC investment. More and more corporations try to access external resources through inter-organizational activities (Luo, 2000; Bartlett and Ghoshal, 1986). In the peak of 2000, there were more than 400 CVC programs, represented $16 billion of
capital, and 15% share of venture capital market (Venture Economics, 2000). Even serious recession occurred in 2001, some renowned enterprises such as Intel, Microsoft and Merck were still engaging in it (Chesbrough, 2002). Especially to those firms in emerging Asia, they are apt at turning back the inferior position through inter-organizational resource acquiring (Child and Rodrigues, 2005; Makino et al., 2002). They approach resources in developed country by leveraging their own asset and capabilities (Thomas et al., 2002).
Parent firms can acquire many kinds of benefits from CVC programs. As an investment activity, it surely may bring financial gains for parent firms (Allen and Hevert, 2007; Miller, 1985), some ventures further may eventually become customers of their parents and thus bring motive of growth to them (Chesbrough and Scolof, 2000).
Other than direct capital return, researchers are much more interest in strategic benefits that parents can gain from venture firms (Allen and Hevert, 2007; Dushnitsky and Lenox, 2006). Corporate venture firms help parents indirectly with monitoring the development of market and technology (Keil, 2002; McNally, 1997; Winters, 1988), acquiring techniques used by other firms (Mowery et al., 1996; Stuart and Podolny;
1996) and expanding business scope to new markets (Barkema and Vermeulen, 1998;
Mitchell and Singh, 1992). There’s also indirect benefit from venture firms that they construct complementary services and products parents need (Brandenburger and Nalebuff, 1996; Gompers and Lerner, 1998). CVC investments provide a good access to external knowledge (Chesbrough, 2002; Gans and Stern, 2003; Poser, 2003; Roberts and Berry, 1985) therefore Improve their growth and internal innovation rate (Dushnitsky and Lenox, 2005; Stuart, 2000; Powell et al., 1996). More generally, this kind of corporate entrepreneurship helps firm’s survival and renewal (Stopford and Badenfuller, 1994; Guth and Ginsberg, 1990).
On the contrary, from the perception of venture firm, some scholars try to clarify the differences between IVC (independent venture capital) and CVC invested venture.
Corporate-backed venture firm not only receive capital injection but much more benefits from different kind of resources of parent firms. Parent firms can transfer their expertise and technical know-how to their children (Day et al., 2001), share professional and social networks with venture firms (Maula and Murray, 2001; Stuart et al., 1999) that provide more opportunity to access complementary assets (Pisano, 1991;
Teece, 1986) and services (Block and MacMillan, 1993). Helps from parent firms can also facilitate the entering of new market (Hines, 1957); let the acquiring of external capital more easily and at lower cost (Heflebower, 1951). In addition, some scholars declare that corporate new ventures are more likely to emphasize marketing function (Knight, 1989), and making profit from leverage parent firm’s brand reputations or trademarks (Caves and Porter, 1977; Hines, 1957). Even more, parent’s residual capacity may utilized by venture firms and thus venture firms can more easily achieve the benefit from economies of scale (Caves and Porter, 1977; Hines, 1957). At last, CVC-backed venture firms usually can get better assessment than IVC-backed firms when IPO because of those advantages (Ginsberg et al., 2003; Maula and Murray, 2001).
Even such many benefits from receiving CVC investment, there are still drawbacks mentioned by scholars. The resources from parents are usually constrained by politicized budgetary processes, and have more focus on short-term objectives (Burgelman and Sayles, 1986). Some researches claimed that IVC-backed new ventures may have more stable and long-term source of capital (Fast, 1981). Even more, CVC-backed venture firms may have to fight for those resources with other units in parent firms, and be harmed by these activities (Sykes, 1986). Compare to IVC, CVC
managers have less compensation, less bonus but more fixed salary (Birkinshaw et al., 2002) and are thus less capable hand, having less capabilities and lower motivation (Chesbrough, 2000; Block and Ornati, 1987). Control and given orders from parent firms are not welcomed (Fast, 1981), managers of corporate new ventures are but often evaluated by it (Weiss, 1981), and troubled with conflicting political and corporate objectives (Fast, 1981). In practice, corporate-backed venture firms are usually lack of entrepreneurial talent, independent venture firms but have to face operational and financial problems more often (Knight, 1989). Be brief, contrast to independent venture firms, corporate venture firms can have abundant support from parent firms but may also lead to less autonomy, more monitorship and limitation from bureaucratic inertia (MacMillan et al., 1986; Stocking and Watkins, 1951).
Given that CVC activity is such an important yet complicated issue, most of researches about CVC activities but only had discussion from the perspective of large and incumbent parent firms (Yang et al., 2008; Allen and Hevert, 2007; Dushnitsky and Lenox, 2006; Hayton, 2005), paid less attention to resources transfer process from parent firms to venture firms that how a CVC-backed venture can really benefit from its parents. To solve this gap of past literature, this research try to clarified the relationship between parent firm’s involvement, venture firm’s absorptive capacity, its innovation performance and inter-firm difference between these two. And therefore, we can finally gain more understanding about parent firms’ impact on their corporate venture children.