Not All Distances are Created Equal: Culture, Geography, and the Interaction Effect of Networks on Private Equity Investments in Three Emerging Market Regions
Authors: Santiago Mingo and Francisco Morales (University of Colorado – Boulder)
Abstract: How is the investment strategy of a private equity (PE) firm investing in an emerging market affected by the cultural and geographic distance between the PE firm’s country and the emerging market destination? How do these effects interact with the centrality of the firm within the syndication network of PE firms investing in the region where the emerging market is located? We propose that a PE firm has a lower (higher) probability of investing in a country that is more distant (proximate) culturally or geographically. We hypothesize that the positive effect of cultural proximity strengthens when the PE firm is more central in the regional syndication network. Finally, we propose that the positive effect of geographic proximity strengthens when the PE firm is less central in the regional syndication network. The empirical analysis is based on a novel dataset covering more than 5,000 investment transactions made by more than 500 private equity firms in three emerging market regions—Latin America, Eastern Europe and Southeast Asia—during the period 1996-2011. The results are consistent with our main theoretical propositions.
Keywords: private equity, venture capital, networks, culture, geography, emerging markets.