Managing Risk in a Transitional Environment: An Exploratory Study of Control and Incentive Mechanisms of Venture Capital Firms in China

Authors


Justin Tan, Schulich School of Business, York University, Toronto, Ontario Canada M3J 1P3. E-mail: jtan@schulich.yorku.ca.

Abstract

In this study, we examine the control and incentive mechanisms of domestic and foreign venture capital (VC) firms in China. Primary findings show that most VC firms use staged capital infusion, value reassessment based on subsequent performance, and other tools reflecting the flexible and dynamic characters of the investment systems and rarely replace management team. On the other hand, domestic VC firms are less active in monitoring, less likely to retain veto rights, and less likely to introduce stock options into target firms and for all employees. They are also less motivated to provide value-added services than their foreign counterparts. Instead, they concentrate their monitoring and participation on the financial aspects of the invested ventures. We discuss these findings and suggest directions for future research.

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