Entrepreneurial Access to Market and Non-Market Resources:
Chinese Venture Capital and High-Speed Rail
INSEAD Doriot Entrepreneurship Conference
February 2017
Andy Wu (Harvard University)
Jiamin Zhang (Tsinghua University)
In 2010, Xunyou Technoloy Co., an online gaming startup, gave up nearly a 20% equity
stake to raise over 40 million RMB in domestic venture capital.1 However, they were not looking
for more funds. “In fact, we are not too short of money,” said the founder Yuan Xu when he
received the investment, “the demand for investment is mainly because of the resources behind the
funds.” Yuan Xu founded the Xunyou in 2004 in his hometown of Chengdu after dropping out of
the computer science program at Peking University, and he led to firm to 20 million paid
subscribers by 2010. To take his firm to the next level of success, he needed the right resources, in
the form of connections with the right people, things he did not have as an entrepreneur in the
comparatively small and uninfluential Chengdu. Two of his investors, ABC Group of Shanghai
and Trustbridge Partners of Chengdu, maintained advantageous relationships, known as “guanxi,”
with the local and central governments. The salient political resources of their investors facilitated
their eventual successful IPO2 for 1.782 billion RMB on May 27th, 2015.
Resource mobilization is a critical determinant of the success of new ventures facing the
“liability of newness”— compared with established organizations, entrepreneurial firms control
relatively few resources, leading to a higher risk of failure (Bruderl, Preisendorfer, & Ziegler,
1992). The traditional resource-based view (Barney, 1991; Wernerfelt, 1984) focuses on resources
internal or housed within the firm (e.g., Bowman & Helfat 2001; Brush, Bromiley, & Hendrickx,
1999). However, vital resources extend beyond firm boundaries (Ingram & Paul, 2009) and interorganizational connections engender relational rents and competitive advantage (Dyer & Singh,
1998). Because entrepreneurial firms rarely possess all the resources and capabilities required to
survive and to succeed, acquiring external resources is widely recognized as a critical
entrepreneurial issue (Starr & Macmillan 1990) and even “the greatest challenge faced by
entrepreneurs” (Brush & Haller 2001:71).
Besides a firm’s stock of internal resources, links to resources seemingly external to the
firm boundary are a dynamic flow that can augment the resource base of the firm if the firm takes
advantage of the real option to utilize and internalize their external resources (Mcdonald & Siegel,
1985; Quigg, 1993).3 These resource-bearing links, or connections, are embodied by the concept
of guanxi, and they are a particularly important resource in high-context cultures (Hall, 1976),
where transactions are not based on contracts as much as personal agreements which cannot be
enforced through formal procedures (Hardymon, Leamon, & Lerner, 2002). These bonds are
essential in emerging markets, like China, because they facilitate availability and access to the
resources.
1
The VC firms were Trustbridge Partners, Fortune VC, ICON and ABC Group.
http://character.zero2ipo.com.cn/en/n/2010-4-20/2010420170045.shtml
2
On the exchange ChiNext. https://cn.aliyun.com/zixun/content/2_6_1086871.html
3
This is consistent with literatures of dynamic capabilities (e.g., Teece, 2007; Eisenhardt & Martin, 2000)
1
We assess the importance of entrepreneurial access to two types of resources: market and
nonmarket (Kalnins & Chung, 2004; Holburn & Vanden Bergh, 2014; Shaffer & Hillman, 2000).
Market resources, originating from the idea of market potential, captures firm’s access to markets
for inputs and outputs (Zheng & Kahn, 2013; Donaldson & Hornbeck, 2012; Lipsey & Weiss,
1981). Since locating closer to factor pools is beneficial to firms (Juan & Wilbur, 2007), proximity
to economic hubs facilitate firms to obtaining market resources such as access to skilled labor,
specialized suppliers, customers and market, and inter-firm knowledge spillovers (Kosempel, 2001;
Autio, Kenney, Mustar, Siegel, & Wright, 2014; Alcácer & Chung, 2007). Nonmarket resources
exist out of the marketplace and are coordinated in public policy arenas to help firms gain
competitive advantage (Hillman, Keim, & Schuler, 2004; Baron, 2001). Nonmarket strategy, such
as the leveraging of political connections, facilitates access to the issuance of things like operating
licenses and public equity markets, through rent seeking public regulation campaigning.
Heterogeneity in resource access capability is a key determinant of performance. A number
of studies explore how firm characteristics—including network positions, direct and indirect ties,
top management team, absorptive capacity, and appropriation mechanisms—affect a firm’s access
to resources (e.g., Cohen & Levinthal, 1999; Beckman, Schoonhoven, Rottner, & Kim, 2013; Cox
Pahnke, Mcdonald, Wang, & Hallen, 2015; Fischer & Pollock, 2004; Hallen, 2008). For market
resources, a firm’s resource assess capability determines its efficiency in coordinate external
resources, as the literature has suggested is the case for external knowledge and the presence of a
firm specific absorptive capacity capability (Bonardi, Holburn, & Bergh, 2006; Cohen & Levinthal,
1999). Following the same logic, recent nonmarket strategy studies also posited that “nonmarket
capabilities that draw on firms’ internal processes, resources, and knowledge related to political
activities are unevenly distributed among firms and that firms with such nonmarket capabilities
should be more effective in influencing public policies” (Bonardi, Holburn, & Bergh 2006: 1210).
In the setting of VC-backed startups, entrepreneurs can access these two types of external
resources through two channels. First, the entrepreneur can directly access the external resource.
Second, the entrepreneur can access resources that their venture capital investors have access to,
resources which are passed through and augmented by the venture capitalist before it reaches the
entrepreneur. Since access to external resources can be obtained by both entrepreneurs directly and
through the venture capitalist, we ask, what distinct roles do VCs and entrepreneurs play in
facilitating the resource access of the entrepreneur? And how do the different capabilities of the
VCs and entrepreneur affect the utilization of market and nonmarket resources?
We answer these questions by focusing on a recently proposed determinant of resource
access—geographic distance—to explore how geographic distance affects a new venture’s access
to external resources through different channels. Exogenous changes in travel time from VC firms
or portfolio companies affect the travel cost and thus accessibility of resource hubs for VCs and
startups. Prior studies suggest that geographic distance between entities aggravate information
asymmetry, increase transaction costs, and act as a critical barrier to resource access (Cai, Tian, &
Xia, 2016). Simply, the firm needs access to the resources before one can benefit from them
(Banerjee, Duflo, & Qian, 2009).
Although geographic distance has a significant role in various social and economic
phenomena (Bernstein, Giroud, & Townsend, 2016; Giroud, 2013; Ye & Sevilir, 2012), it is of
particular importance in venture capital industry due to the shadow of information asymmetry
(Beckman, Schoonhoven, Rottner, & Kim, 2013). The entrepreneurial process relies heavily on
tacit information transmission with stakeholders such as venture capitalists and external partners
(Junkunc & Eckhardt, 2009). Better tacit information communication can help entrepreneurs and
2
VCs discover information-based opportunities and hence create higher values for the venture (Liu
& Maula, 2016). However, explicit information is tangible, verifiable, and codifiable, while tacit
information is not (Kogut & Zander, 1992). The communication of tacit information, such as
evaluations of intangible assets and market potentials, demands intensive interpersonal
interactions in social, political, and business occasions (Huang & Pearce 2015; Nonaka, 1994) .
This feature of tacit information and on-site involvement, in turn, makes geographic distance
important as it determines the accessibility to critical resources (Wu, 2016).
We test our theory of market and nonmarket resource access in the setting of the Chinese
entrepreneurial and venture capital industry. Despite its short history, the VC industry has
experienced dramatic growth in China. In 2015, China experienced $36 billion USD in venture
capital deal flow and led all other nations except the United States. Besides the development of
legal framework, personal networks are nevertheless still seen as implicit substitutes to formal
regulation in China. Guanxi serves as the cornerstone of Chinese society; and reciprocity of favor
exchanges is the most pervasive rule guiding Chinese social and economic interactions 4 .
Geographical proximity is important in Chinese context as the achievement of a business deals
needs frequent personal interactions to build up and cultivate social capital or guanxi. First
introduced in 2007, High speed railway (HSR) in China significantly reduced the cost for face-toface meetings and facilitated personal interactions. By the end of 2016, China has implemented
almost 19,000 kilometers of new high speed lines and carries 900 million passengers per year,
more than the half of the total high speed traffic in the world5. “What we see very clearly is a
change in the way a lot of companies are doing business,” said Gerald Ollivier, a World Bank
senior transport specialist in Beijing. Opened HSR lines by the end of 2016 are shown in Figure 1.
We exploit the introduction of the Chinese High Speed Railway system in the 2000s as an
exogenous shock to resource accessibility. High speed railway reduces the travel time between
firms and economic or political hubs, which makes it easier for VCs or entrepreneurs to get access
to market and nonmarket resources. The high speed line was introduced in phases, and differential
change in access to resources for VC-entrepreneurs pairs allows us to separately identify the
heterogeneous effects of access to market and nonmarket resources through the VC and directly
to the entrepreneur. If resource access matters, such reduction in travel time should translate into
better venture performance by allowing VCs or entrepreneurs to coordinate external resources. To
estimate the effect of travel time reduction due to HSR, we adopt a difference-in-differences
methodology.
Our unit of analysis is VC-startup pairs and we limit the sample to Chinese portfolio
companies in their first observed financing round. In total, we observe 18,502 companies that
receive first-round funding from 3080 VC firms. The startups distributed in 285 prefectural cities,
covering most of the 331 prefectural cities in China. VC distributed in 26 foreign countries and
102 Chinese cities. As for multiple offices, 103 out of 463 foreign VCs have branch offices in
China; while 424 out of 2617 domestic VCs have multiple offices in China. Both portfolio
companies and VC firms are fairly dispersed geographically in China. Figure 2 demonstrates
sample distribution across prefecture-level cities.
Based on evidence from Chinese entrepreneurial firms, we find that new ventures benefit
from both market and nonmarket resources that are held by the venture capitalist. Venture
capitalists’ greater credibility and track record make them better equipped to leverage resources.
4
Chen, X. P., & Chen, C. C. (2004: 317). On the Intricacies of the Chinese Guanxi: A Process Model of Guanxi Development.
Asia Pacific Journal of Management, 21(3), 305-324
5
According to International Railway Union’s High Speed Rail web site http://www.uic.org/IMG/pdf/high_speed_brochure.pdf
3
Further, venture capitalists have particular advantage in mobilizing nonmarket resources, which
involve a higher degree of uncertainty and imperfect information. As a new social entity, startups
lack the capability to mobilize relational resources in connections to powerful actors such as
government or industry leaders. Even for a startup with desirable resources such as superior
technology, uncertainty about exactly what the firm will contribute to a tie will still reduce its
attractiveness to potential partners (Gulati, 1995; Podolny, 1994). As compared to entrepreneurs,
VCs’ greater age and track record help them relieve information asymmetry and trust problems in
coordinating resources in uncertain environment. As suggested in prior studies, having a known
reputation facilitates trust formation in relationships (Granovetter, 1985), and deal experience
enables them to leverage bargaining power in negotiations (Carter & Manaster, 1990; Reuer, Tong,
& Wu, 2012). In addition, venture capitalists have access to detailed information about a firm’s
strategy and progress. They can use this knowledge to manage information flow, which can guard
startups from misappropriation and facilitate resource access for startups (Sapienza, 1992).
This paper extends the understanding of venture capitalists’ value adding functions. While
a growing body of literature documents solutions to the asymmetric information problem between
the venture capitalist and the entrepreneur, little attention has been devoted to studying the role
that venture capitalists can play in overcoming information and contracting problems between the
entrepreneurial company and other external actors (Lindsey, 2008). As an important departure, we
suggest that new ventures can benefit from unique resources held only by the venture capitalist. It
presents a new view on the boundary of entrepreneurial firms by showing that resources extend
beyond the boundary of the startups firm and include the VCs external connections, which
engender relational rents and competitive advantage (Dyer & Singh, 1998). The resource-bearing
links from both entrepreneurs and VCs define a current resource of the new venture. The liability
of startups in mobilizing resources—lack of track records and credibility in other markets— make
them disadvantaged in managing external relationships. Venture capitalists, however, are more
capable to gain trust and provide reciprocity in inter-organizational connections. Consequently,
VC firms’ resources and capabilities are important complementary to ventures’ own. Additionally,
we enrich the understanding of firms’ resource configurations by integrating both market and
nonmarket resources (Kalnins & Chung, 2004; Holburn & Vanden Bergh, 2014; Shaffer &
Hillman, 2000). And more importantly, we shed light on the different role of entrepreneur and VC
in mobilizing these two types of resources. Following on the argument that heterogeneous market
and nonmarket resource access is a key determinant of performance (Cohen & Levinthal, 1999;
Bonardi, Holburn, & Bergh, 2006), our results show that venture capitalists’ greater credibility and
track record make them better equipped to leverage nonmarket resources, which involve a higher
degree of uncertainty and imperfect information.
4
Wulumuqi
Shenyang
Beijing
Tianjin
Jinan
Qingdao
Zhengzhou
Xi'an
Suzhou
Nanjing
Chengdu
Wuhan
Shanghai
Hangzhou
Chongqing
Changsha
Guangzhou
Shenzhen
Conventional Railway
200-250km/hr
250-300km/hr
2016
300+km/hr
Figure.1 China HSR Network. This figure shows opened lines of China's High Speed Railway
System by the end of 2016, based on publicly available system schedules, news items, and
locations found using Google Earth and Open Street Map.
Wulumuqi
Wulumuqi
Shenyang
Shenyang
Beijing
Tianjin
Beijing
Tianjin
Jinan
Jinan
Xi'an
Qingdao
Xi'an
Zhengzhou
Qingdao
Zhengzhou
Suzhou
Suzhou
Nanjing
Nanjing
Chengdu
Wuhan
Chengdu
Shanghai
Hangzhou
Wuhan
Shanghai
Hangzhou
Chongqing
Chongqing
Changsha
Changsha
VC Multiple Offices
Portfolio Company Number
1-5
5.1 - 36
36.1 - 154
154.1 - 863
863.1 - 2442
2442.1 - 4976
Guangzhou
1-2
2.1 - 8
8.1 - 27
27.1 - 163
163.1 - 365
365.1 - 843
Shenzhen
Guangzhou
Shenzhen
Figure 2. Sample Distribution by Prefecture-level Cities. The left figure shows the
distribution of portfolio companies across cities. Right figure shows the distribution of VC
activities across cities. VC firms’ multiple offices in different cities have been considered.
Darker cities are those with more samples.
5
REFERENCES
Alcácer, J., & Chung, W. (2007). Location Strategies and Knowledge Spillovers. Management
Science, 53(5), 760-776
Autio, E., Kenney, M., Mustar, P., Siegel, D., & Wright, M. (2014). Entrepreneurial innovation:
The importance of context. Research Policy, 43(7), 1097-1108
Banerjee, A. V., Duflo, E., & Qian, N. (2009). On the Road: Access to Transportation
Infrastructure and Economic Growth in China. Working Paper, Massachusetts Institute of
Technology,
retrieved
from
http://igov.berkeley.edu/sites/default/files/On_the_Road_Access_to_Transportation_Infra
structure_
Beckman, C. M., Schoonhoven, C. B., Rottner, R. M., & Kim, S. J. (2013). Relational Pluralism
in De Novo Organizations: Boards of Directors as Bridges or Barriers to Diverse Alliance
Portfolios? Academy of Management Journal, 57(2), 460-483
Bernstein, S., Giroud, X., & Townsend, R. R. (2016). The Impact of Venture Capital Monitoring.
The Journal of Finance, 71(4), 1591-1622
Bonardi, J., Holburn, G. L., & Bergh, R. G. V. (2006). Nonmarket strategy performance: evidence
from US electric utilities. Academy of Management Journal, 49(6), 1209-1228
Bruderl, J., Preisendorfer, P., & Ziegler, R. (1992). Survival Chances of Newly Founded Business
Organization. American Sociological Review, 57(2), 305-314
Brush, C. G., & Haller, H. S. (2001). From initial idea to unique advantage: the entrepreneurial
challenge of constructing a resource base. The academy of management executive., 15(1),
64-78
Cai, Y. E., Tian, X., & Xia, H. (2016). Location, Proximity, and M&A Transactions. Journal of
Economics & Management Strategy, 25(3), 688-719
Carter, R., & Manaster, S. (1990). Initial Public Offerings and Underwriter Reputation. The
Journal of Finance, 45(4), 1045-1067
Cohen, W., & Levinthal, D. (1999). Absorptive Capacity: A New Perspective on Learning and
Innovation. Administrative Science Quarterly, 128-152
Donaldson, D., & Hornbeck, R. (2012). Railroads and American Economic Growth: New Data
and Theory. Paper presented at the Working Paper, Harvard University and Massachusetts
Institute of Technologyfrom
Dyer, J. H., & Singh, H. (1998). The relational view: Cooperative strategy and sources of
interorganizational competitive advantage. Academy of Management Review, 23(4), 660679
Giroud, X. (2013). Proximity and Investment: Evidence from Plant-Level Data. The Quarterly
Journal of Economics, 128(2), 861-915
Granovetter, M. (1985a). Economic Action and Social Structure: The Problem of Embeddedness.
American Journal of Sociology, 481-510
Gulati, R. (1995). Does Familiarity Breed Trust? The Implication of Repeated Ties for Contractual
Choice in Alliances. Academy of Management Journal, 38(1), 85-112
Hall, B. E. (2010). Beyond Culture. Anchor Press/Doubleday
Hardymon, G. F., Leamon, A., & Lerner, J. (2002). Chengwei Ventures and the hdt* Investment.
Harvard Business School Case, Boston, MA: Harvard Business School Publishing
Holburn, G. L., & Vanden Bergh, R. G. (2014). Integrated market and nonmarket strategies:
Political campaign contributions around merger and acquisition events in the energy sector.
Strategic Management Journal, 35(3), 450-460
6
Huang, L., & Pearce, J. L. (2015). Managing the Unknowable: The Effectiveness of Early-stage
Investor Gut Feel in Entrepreneurial Investment Decisions. Administrative Science
Quarterly, 60(4)
Ingram, & Paul. (2009). Interorganizational Relations. Annual Review of Sociology, 8(1), 65-81
Junkunc, M. T., & Eckhardt, J. T. (2009). Technical Specialized Knowledge and Secondary Shares
in Initial Public Offerings. Management Science, 55(10), 1670-1687
Kalnins, A., & Chung, W. (2004). Resource‐seeking agglomeration: a study of market entry in the
lodging industry. Strategic Management Journal, 25(7), 689-699
Kogut, B., & Zander, U. (1992). Knowledge of the Firm, Combinative Capabilities, and the
Replication of Technology. Organization Science, 37(7), 17-35
Kosempel, S. (2001). A theory of development and long run growth. Journal of Development
Economics, 75(1), 201-220
Lindsey, L. (2008). Blurring Firm Boundaries: The Role of Venture Capital in Strategic Alliances.
The Journal of Finance, 63(3), 1137-1168
Lipsey, R. E., & Weiss, M. Y. (1981). Foreign Production and Exports in Manufacturing Industries.
Review of Economics & Statistics, 63(4), 488-494
Liu, Y., & Maula, M. (2016). Local partnering in foreign ventures: : uncertainty, experiential
learning, and syndication in cross-border venture capital investments. Academy of
Management Journal, 59, 1407-1429
Mcdonald, R. L., & Siegel, D. R. (1985). Investment and the Valuation of Firms When There Is
an Option to Shut Down. International Economic Review, 26(26), 331-349
Nonaka, I. (1994). Nonaka, I.: A Dynamic Theory of Organizational Knowledge Creation.
Organization Science 5(1), 14-37. Organization Science, 5(1), 14-37
Podolny, J. M. (1994). Market uncertainty and the social character of economic exchange.
Administrative Science Quarterly, 39(39), 458-483
Quigg, L. (1993). Empirical Testing of Real Option-Pricing Models. The Journal of Finance, 48(2),
621-640
Reuer, J. J., Tong, T. W., & Wu, C. W. (2012). A Signaling Theory of Acquisition Premiums:
Evidence from IPO Targets. Academy of Management Journal, 55(3), 667-683
Sapienza, H. J. (1992). When do venture capitalists add value? Journal of Business Venturing,
7(92), 9-27
Shaffer, B., & Hillman, A. (2000). The development of business-government strategies by
diversified firms. Strategic Management Journal, 21(2), 175-190
Starr, J. A., & Macmillan, I. C. (1990). Resource Cooptation Via Social Contracting: Resource
Acquisition Strategies for New Ventures. Social Science Electronic Publishing, 11(1), 7992
Wu, A. (2015). Organizational Decision-Making and Information: Angel Investments by Venture
Capital Partners. Academy of Management Best Paper Proceedings (forthcoming)
Ye, C., & Sevilir, M. (2012). Board connections and M&A transactions ☆. Journal of Financial
Economics, 103(2), 327-349
Zheng, S., & Kahn, M. E. (2013). China's bullet trains facilitate market integration and mitigate
the cost of mega city growth. Proceedings of the National Academy of Sciences, 110(14),
53
7