The role of culture as an informal institution in cross-border venture capital investments

Grounded in Hofstede cultural dimensions theory, we examine how informal institutional factors shape cross-country venture capital (VC) flows. Separating VC activity into flows, our method studies how an increment in inflows supports ventures, and an increment in outflows more investing activity. Results suggest that (1) uncertainty avoidance negatively affects investors and ventures (the last with a larger effect), (2) individualistic attitudes equally support both investors and ventures, and (3) a higher level of power distance contributes to a larger private investors sector, an effect that is greater under strong formal institutions (FIs). Effects of masculinity, long-term orientation, and indulgence are inconclusive. Results are robust to various specifications, use of instruments, and endogeneity treatments. The implication is that the optimal characteristics of informal institutions for fostering VC activity differ depending on the level of FIs, as both institutions interact to affect both investors and ventures.