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8/15/2019 5. When U.S. Venture Capital Ventures Abroad
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When U.S. venture capital ventures abroad
Khaled Abdoua
, Oscar Varelab
aDivision of Engineering, Business and Computing, Penn State University, Berks Campus,
Reading, PA, USA*bDepartment of Economics and Finance, College of Business Administration, University of
Texas at El Paso, El Paso, TX, USA
Abstract
Older, more experienced and smaller U.S. venture capital firms are most
probable to sacrifice proximate distance for new opportunities in foreign, and
mostly mature, portfolio companies. These companies are treated differently
than the domestic ones, as U.S. venture capital firms collaborate with and
delegate monitoring to foreign partners, rather than stage or syndicate.
Successful outcomes mostly occur in more mature, non-hi-tech, portfolio
companies that receive more financing per round. Our results are robust to the
investee country’s openness and industry classification, stage of the investment
and possible sample selection problems.
Key words: Venture capital; International; Globalization
JEL classification: G15, G24, G32, G34
doi : 10.1111/acfi.12005
1. Introduction
Numerous reasons besides superior returns motivate venture capital (VC)investments abroad. These include a good business environment, with private
property rights and regulatory stability, high expected economic growth and broad
economic integration. Locals’ investing in their own markets also motivates VCs
foreign investments, particularly when high-end human capital, vibrant patent
We thank the journal’s editor Robert Faff and the anonymous referee for their in-depthand thoughtful comments that significantly improved this paper. Any remaining errorsare the responsibility of the authors.
Received 26 September 2011; accepted 11 September 2012 by Robert Faff (Editor).
*Correction added on 10 March 2014 after first publication online on 2 November 2012:Khaled Abdou’s affiliation has now been corrected.
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counts and efficient stock markets exist. This paper examines within the context of
these investments the characteristics of U.S. venture capital firms that invest
abroad, in terms of reputation and size, how they manage these longer distance
investments and the characteristics that accompany their foreign successes.Gu ¨ ler and Guille ´ n (2004) find that the international investment decision depends
on superior returns, and Gu ¨ ler and Guille ´ n (2010b) find that VCs international
investments are more likely when foreign markets are innovative, have regulatory
stability, protect investors and facilitate exit. Venture capitals’ foreign investments
lag that of locals according to Ma ¨ kela ¨ and Maula (2008), as locals harbour
knowledgeof value to foreign VCs. Aizenman and Kendall (2008) find that VCs are
attracted to locations with ‘high-end human capital, a better business environment,
high levels of military expenditure, and deeper financial markets’, and Alhorr et al.
(2008) that a country’s promotion of broad economic integration influencesinvestments by foreign VCs. Higher economic growth and patent counts and more
viable stock markets, also attract foreign VCs, according to Schertler and Tykvova
(2010). Venture capital investments are also beneficial to portfolio companies,
especially when made in the portfolio company’s international target markets,
according to Ma ¨ kela ¨ and Maula (2005).1
Notwithstanding these motives, a paradox exists when VCs invest abroad.
Lerner (1995) points to the importance for monitoring that VCs have close
proximity (a few miles distance) to their portfolio companies. Close proximity
is important not just for these investments, but also for trade, as gravity models
from international economics show an inverse relation between distance and
trade between countries. Ma ¨ kela ¨ and Maula (2006) find that distance is also
inversely related to a VCs continued commitment to its portfolio company
when its prospects decline.2
Opportunities from foreign investing by VCs are associated with greater
distances between investor and investee,3 such that dealing with these
investments may require different approaches than those for domestic
investments. There is also a recognized gap in research into how VC manages
1 Other ancillary research on the VCs decision to go abroad include Wright et al. (2002)who show that U.S. VC firms in India adapt to the local market conditions, andMadhavan and Iriyama (2009) who find that immigrant groups in home and hostcountries forming ‘transnational technical communities’ serve to enhance the global-ization of VC. Ma ¨ kela ¨ and Maula (2005) also find that foreign venture capitalists canlegitimize an unknown new venture in a foreign target market so long as this marketdoes not differ from the foreign investor’s home market.
2 Distance may become marginally less important of an issue given better communi-cation infrastructures. Petersen and Rajan (2002) find that the distance betweencommercial banks and small business customers becomes less important with techno-
logical advancements.3 Sheahan (2004) shows that VCs invested $761 million into Business ProcessOutsourcing (offshoring) startups in the first half of 2004, up from $495 million duringthe same period in 2003.
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foreign investments. Wright et al. (2005) state that ‘…our review of the
literature indicates that there is a major research gap in relation to work dealing
with the crossing of country borders by VC firms.’ Since then, we have
observed research on motives that drive VC to invest abroad, but little on howthey manage their foreign investments.
Rin et al. (2011) noted in their comprehensive survey of VC research that
many questions still need to be answered regarding international money flows in
the VC industry. Schertler and Tykvova (2009, p. 14) mention areas for
international VC research that correspond to the present research as elucidated
below.
‘More specifically, it would be interesting to know whether country factors or
sector factors drive the composition of venture capitalists’ portfolios. In addition,
the entrance strategy of venture capitalists has not received much attention in theacademic literature. In particular, the analysis of cross-border syndication, i.e. the
joint investment by domestic and foreign VCs, would deserve a profound
investigation, since managing a syndicate across borders is usually much more
difficult than managing a local syndicate. Another interesting issue we have not
discussed in this paper is the success of cross-border investments in terms of the
performance of the portfolio companies as well as the venture capitalists’ returns.’
This research addresses this gap in examining reputation and size factors in
U.S. venture capital firms going abroad, and the processes that they use in
managing their longer distance investments in the foreign environment, aswell as some of the characteristics accompanying their successes. Key
contributions of this research include the following. Smaller size U.S. VCs
typically go international with investments that are less syndicated, perhaps
because they lack knowledge of partners. They possibly grandstand with
riskier investments and do not appear to use staging as a monitoring
mechanism, as they finance higher amounts per round over fewer rounds.
They appear to prefer to collaborate with foreign counterparts by delegating
monitoring to foreign partners, and they are not likely to invest in high-tech
portfolio companies, possibly because of difficulty in monitoring them.Success abroad is more probable for U.S. venture capital firms that are older,
more experienced and smaller, and which invest in mature portfolio
companies. Success also improves with increased presence on the board of
directors of the international portfolio companies and decreased reliance on
foreign VC counterparts.
The remainder of this paper is divided as follows. Section 2 describes
additional literature on VCs management of foreign investments, while Section
3 discusses the methodology and research questions. Section 4 discusses the
sample data, limitations and summary statistics. Section 5 presents theempirical results, and Section 6 examines their robustness for country
differences, industry classifications and financing stages. Section 7 concludes
the paper.
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2. Literature
The literature on the role of the VCs reputation and size in investing abroad
is reviewed below. Also, as our research examines how going internationalaffects the VCs relationship with its more distant portfolio companies, we
review literature on the monitoring, delegating and syndicating activities of
VCs in this new environment.
2.1. Experience and size
Fernhaber and McDougall-Covin (2009) find a positive relation between
reputation and going international for VCs, for the former may promote the
latter as home country advantages can promote foreign expansion. Gu ¨ ler andGuille ´ n (2010a) report that VCs local status is transferable to foreign markets
and influence the decision to invest abroad. Hall and Tu (2003) use a sample of
VC firms in the UK in 2000 and find that size is positively related to their decision
to go overseas and that young VCs are less likely to invest internationally.
2.2. Monitoring, delegating and syndicating
Monitoring appears related more to uncertainty rather than to performance
or lack thereof. Sapienza et al. (1996) find that portfolio companies are not
more highly monitored when their performance is poor. And consistent with
Lerner (1995), they find that VCs engage in more oversight in early stages and
when greater uncertainties exist. Bygrave (1987, 1988) finds that uncertainty is
directly correlated with co-investing4 and information sharing among VCs.
And VCs can control risk and reduce uncertainty by specializing in a stage and
industry, according to Norton and Tenenbaum (1993) and Bygrave (1987,
1988).
United States venture capital firms appear to behave differently towards their
portfolio companies depending on whether they are domestic or international.
Wang et al. (2002) find that participation by Singapore-based VCs in portfoliocompanies lagged U.S. VCs. Sapienza et al. (1996) compare VC governance in
the United States, UK, the Netherlands and France and conclude that VCs are
driven by different factors in different markets. Pruthi et al. (2003) find that
foreign VCs are more likely to be involved at the strategic level and domestic
ones at the operational.
Venture capitalists serve as members of the board of directors and typically
have power to fire senior management, according to Gorman and Sahlman
(1989). Lerner (1995) finds that VC representation increases around events such
as CEO turnover.
4 Co-investing refers to the sharing of investments among a group of VCs. Typically,there is a lead VC who invites other VCs to participate in an investment.
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Overall, the VCs decision to invest internationally is dependent on superior
returns, business environment, financial markets development and quality of
human capital. Distance can be a factor in terms of the commitments made and
foreign involvement can follow local involvement. Monitoring is related moreto uncertainty than to performance, and VCs behave differently towards their
international portfolio companies.
The present research probes more deeply the question about the VCs size and
reputation as factors in the foreign investment decision, and its practice of
monitoring, staging and syndicating foreign portfolio companies.
3. Methodology and research questions
3.1. Logistic regressions
Logistic regression INTPROB concerns the probability of a U.S. VC going
international, while INTSUC concerns the probability that a U.S. VCs
international investment is a success, that is, the international portfolio
company goes public. Our 1990 to 2004 sample includes sub-sample 1
consisting of United States-based VC funds that invest in non-U.S. interna-
tional portfolio companies and sub-sample 2 consisting of VC funds that invest
only in U.S. portfolio companies. The independent variables in both regres-
sions measure characteristics of the VC, including size and reputation, and its
management of the portfolio company, including its monitoring, delegating
and syndicating activities.
INTPROB is specified as:
INTL ¼ aþ b1FMAGE þ b2COAGE þ b3RNDS þ b4RNDS $ þ b5NOFM =NOFD þ b6FDINV þ b7INDþb8EXEC %þ b9FOR%þ b10NOBOD þ b1113STAGES þ b1423INDUSTRY þ e ð1Þ
where dependent variable INTL is a dummy variable equal to ‘one’ if theportfolio company is an international portfolio company funded by a U.S.
venture capital fund, and ‘zero’ if it is a domestic company. This regression
requires two sub-samples, one of international and another of domestic
portfolio companies, such that it uses sub-samples 1 and 2.
INTSUC is specified as:
SUCCESS ¼ aþ b1FMAGE þ b2COAGE þ b3RNDS þ b4RNDS $ þ b5NOFM =NOFD þ b6FDINV þ b7IND þ b8EXEC %
þ b9FOR%þ b10NOBOD þ b1113STAGES þ b1423INDUSTRY þ e
ð2Þ
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where SUCCESS is a dummy variable equal to ‘one’ if the international
portfolio company has gone public and ‘zero’ otherwise.5 This regression also
requires two sub-samples, one of successful and another of unsuccessful
international portfolio companies and thus uses only sub-sample 1, with itssub-division into successful and unsuccessful portfolio companies.
The independent variables in these regressions are the following. FMAGE is
the age of the VC firm, measured in years and serves as a proxy for the VCs
experience, and COAGE is the age of the portfolio company, measured in years
and serves as a control variable for the establishment/experience of the
portfolio company. FDINV is the average size of the VC fund’s investment (in
U.S. $ millions) in its portfolio companies and serves as a proxy for the fund’s
size. RNDS is the number of rounds the VC used to fund the portfolio
company, and RNDS$ is the average financing amount (in U.S. $ millions) perround distributed to the portfolio company. These variables serve as proxies for
monitoring. NOFM (NOFD) is the number of VC firms (funds) involved in
funding the portfolio company and serve as proxies for syndicating. IND is a
control dummy variable equal to ‘one’ if the VC specializes in the high-tech
industry and ‘zero’ otherwise.
The following variables are added for robustness checks or further controls,
as explained later. EXEC% is the percentage of the non-managing relative to
the total number of members of the board of directors of the portfolio
company, and FOR% is the percentage of foreign VC funds relative to the total
number of VC funds invested in the portfolio company. These variables serve
as proxies for delegating. NOBOD is the number of members on the board of
directors. STAGES consists of three dummy variables that control for the
different stages of financing that the portfolio companies receive, including
start-up and seed stage, early stage and later stage (stages beyond the ‘later’
stage were omitted to avoid multicolliniarity). INDUSTRY is a group of nine
dummy variables that control for the different industries of the portfolio
companies. These substitute for IND in subsequent robustness tests and include
biotechnology, communications and media, computer hardware, computer
software and services, computer related, industrial and energy, internet specific,medical health and semiconductors. Finally, ɛ is the random error term.
3.2. Research questions
Our research questions concern the experience and size of the VCs that
engage in international investments, and their monitoring, delegating and
syndicating approaches towards their international portfolio companies.
5 We do not use returns to measure success because VentureXpert has very minimalinformation about returns on the portfolio firm level and returns on the non-publicportfolio company are not available. Moreover, on the VC fund/firm level, the returnsare not available on a firm-specific basis due to privacy issues.
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Formal hypotheses are not stated due to the lack of a theoretical framework
underpinning our research questions. Nevertheless, the possible signs for the
coefficients in both the INTPROB and INTSUC regressions are summarized in
Table 1 and discussed below.
3.2.1. Experience
Experienced VCs may better handle riskier international investments, with
their greater knowledge and reputation compared with their inexperienced
counterparts. In our literature review, Fernhaber and McDougall-Covin (2009)
find a positive relationship, and Gu ¨ ler and Guille ´ n (2010a) find that local status is
transferable to foreign markets. Unseasoned VCs may be too busy accumulating
knowledge and networking to manage/monitor their domestic portfolio com-panies to bother with the international investment. Hall and Tu (2003) find that
young VCs are less likely to invest internationally. While these arguments suggest
that experienced VCs are more international, it is possible that grandstanding6
may motivate the inexperienced ones to go international. Thus, in INTPROB,
the sign for FMAGE (the age of the VC firm), which Lerner (1994b) used to
differentiate between seasoned and inexperienced VCs, is uncertain. However,
the VCs experience may be positively related to its international success,
suggesting that in INTSUC, the sign for FMAGE is positive.
3.2.2. Size
Larger size VC funds, with possibly less absolute risk aversion, may be more
willing and able to take risks relative to smaller ones, including the added
risks of international investments. In our literature review, Hall and Tu (2003)
find that size of VCs is positively related to their decision to go overseas. Yet,
smaller funds may invest internationally to enhance returns and growth,
beyond any grandstanding motives.7 Thus, in INTPROB, the sign for FDINV
is uncertain. However, size may be positively related to successful interna-
tional investments, given that larger size VC funds may be larger in partbecause of past successes, suggesting that in INTSUC, the sign for FDINV is
positive.
6 Gompers’ (1996) ‘grandstanding’ hypothesis suggests that companies backed by lessseasoned VC firms are younger and more under-priced compared to those backed byexperienced VC firms. The younger VCs grandstand to quickly distinguish themselvesfrom the experienced. From that view, inexperienced VCs will take more risks to earnthe good reputation quickly.
7 Wilson and Williams (2000) find mixed results between countries regarding the growthof smaller banks. Their results show that in Italy smaller banks grow faster than largerbanks, however no significant relation was found between size and growth in France,Germany and the UK.
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Table 1
Signs for independent variables in LOGIT regressions INTPROB and INTSUC
LOGIT regression INTPROB INTSUC
Independent variables Dependent variable: INTL Dependent variable:
SUCCESS
Experience variables
FMAGE – age in
years of VC, proxy
for VC experience
Uncertain – going international
may require experience, but
inexperience may also go
international to grandstand
>0, experience positively
related to international
success, as experience
generally correlates with
success
COAGE – age in years of
portfolio co., control variable
for establishment/experienceof portfolio co.
Control variable Control variable
Monitoring variables
RNDS – no of rounds
the VC used to fund
portfolio co.
RNDS$ – ave. financing
(in U.S. $ millions)
per round to
portfolio co.
Uncertain – greater investment
uncertainty leads to more
monitoring, but longer
international distances may
lead to delegating instead
Uncertain – successful
ventures have same
monitoring/delegating
tradeoffs already noted
in INTPROB regression
Syndication variables
NOFM –
no. of VC firmsinvolved in funding the
portfolio co.
NOFD – no. of VC funds
involved in funding the
portfolio co.
Uncertain –
syndication withmore firms and funds shares
international investments risk,
but VCs may lack knowledge
of international partners to
syndicate with
Uncertain –
same reasonas for INTPROB
regression
Size variable
FDINV – ave. size
of VC fund’s investment
(in U.S. $ millions) in
its portfolio co.
Uncertain – size positively
related to decision to go
international, but beyond
grandstanding smaller
inexperienced funds may gointernational to enhance returns
>0, larger size funds may
be larger due to prior
successes
IND – control dummy = 1 if
VC specializes in high-tech
industry, =0 otherwise
Control variable Control variable
Delegation variables
EXEC% – % of non-managing
to total members of board of
directors of portfolio co.
FOR% – % of foreign
VC funds to total
no. of VC fundsinvested in portfolio co.
Uncertain – monitoring and
delegating are imperfect
substitutes, such that the sign
for these proxies for delegating
is uncertain
Uncertain – same reason
as for INTPROB
regression
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3.2.3. Monitoring
Monitoring techniques include the number of rounds and average dollar
financing per round. After each round, the portfolio company is expected to
update the VC, as a pre-condition to advancing to the next round. Greater
investment uncertainty motivates more monitoring, according to Gompers
(1995). In our literature review, Sapienza et al. (1996), consistent with Lerner
(1995), find that greater uncertainties result in more VC oversight. We mighttherefore expect closer monitoring by VCs of their international portfolio
companies. The uncertainties derived from the greater distances within an
international setting for such investments may necessitate a greater number of
rounds (RNDS ) and less funding per round (RNDS$). However, in the
international setting, VCs may decide to use alternative approaches to monitor,
such as delegating responsibility, making its effect on monitoring uncertain.
Thus, in INTPROB, the signs for RNDS and RNDS$ are uncertain. In
addition, United States-based VCs with successful international investments
may either monitor or delegate, suggesting that in INTSUC, the signs for thesevariables are also uncertain.
3.2.4. Delegating
A VC delegates when it collaborates and assigns its monitoring function to a
counterpart, which in an international investment is a foreign counterpart.
Bushman et al. (2000) show that the value of delegation is linked with private
information, which may be relevant for a VC encountering (in an international
setting) language barriers, cultural differences and/or ignorance of local law.The proportion of non-managing to total number of directors (EXEC%) will
be smaller if delegation occurs, because only the agent VC will sit on the board
of directors. Also, the percentage of foreign VC funds to the total number of
LOGIT regression INTPROB is specified as:
INTL =
a +
b1FMAGE +
b2COAGE +
b3RNDS +
b4RNDS$ +
b5NOFM /NOFD+ b6FDINV + b7IND + b8EXEC% + b9FOR% + b10NOBOD + b11 – 13STAGES
+ b14 – 23INDUSTRY + b24 – 25COUNTRY + e
where dependent variable INTL is a dummy variable equal to ‘one’ if the portfolio company
is an international portfolio company funded by a U.S. VC fund, and ‘zero’ if it is a domestic
company. LOGIT regression INTSUC is specified as:
SUCCESS = a + b1FMAGE + b2COAGE + b3RNDS + b4RNDS$ + b5NOFM /NOFD
+ b6FDINV + b7IND + b8EXEC% + b9FOR% + b10NOBOD
+ b11 – 13STAGES + b14 – 23INDUSTRY + b24 – 25COUNTRY + e
where SUCCESS is a dummy variable equal to ‘one’ if the international portfolio company
has gone public and ‘zero’ otherwise.
Table 1 (continued)
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funds invested in the portfolio company (FOR%) will be higher if more
delegation occurs in the foreign setting, because the foreign VC funds act as the
collaborators with the domestic one.
There is uncertainty over the VCs choice between monitoring and delegatingfor international investments, as these may be imperfect substitutes, suggesting
that in INTPROB, the signs for EXEC% and FOR% are uncertain. Similarly,
United States-based VCs with successful international investments may either
monitor or delegate, suggesting that in INTSUC, the signs for EXEC% and
FOR% are also uncertain.
3.2.5. Syndicating
Venture capitalists normally share resources through network interaction andbear more risk when investing internationally. Lerner (1994a) finds that VCs are
willing to accept lower returns for lower variances and may as a result participate
in syndicates. He also shows that syndicate members may certify investment
decisions (provide second opinions) in the first and subsequent rounds of funding.
In our literature review, Bygrave (1987, 1988) correlates the level of uncertainty
directly with co-investing and information sharing among VCs.
Venture capitalists may try to syndicate their international investments to
divide risk with more NOFM and NOFDs, as more firms and funds may certify
investments through information sharing, possibly to a greater extent than for
domestic ones. The problem is that they may have fewer syndicate partners
internationally, owing to international inexperience. Thus, the signs for NOFM
and NOFD in the INTPROB and INTSUC regressions are uncertain.
4. Sample data, limitations and summary statistics
The portfolio company segment of the Securities Data Corporation’s (SDC)
VentureXpert database is the source for our data. The 1 January 1990 to 31
December 2004 study period includes the dot.com growth and bubble periods,
the 1990s robust U.S. economy (including a U.S. government budget surplus),and the period after 11 September 2001 (including the ‘war on terror’ and U.S.
government deficits).8 We have excluded the periods leading up to and after the
housing market crash in the U.S., and the recession that followed, as the story
concerning these events is not yet complete. Nevertheless, the final sample is
sufficiently large, consisting of 18,372 companies, with 4,307 international
8 Admittedly, a large percent of VC activity occurred over the dot.com bubble period,from 1997 to 2000. During this period, a large number of new VC firms appeared, manysmall in size, and this fact could affect our results. In addition, having our samplerestricted to a period that includes the bust of the dot.com bubble certainly is alimitation of this study. Also, the sample includes some portfolio companies that wereestablished in 2005 which means that VCs invested in those companies while they werestart-ups.
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portfolio companies funded by one or more United States-based VC funds and
14,065 U.S. domestic companies similarly funded.
Two sub-samples were obtained from VentureXpert database’s portfolio
company segment, which differentiates between firms, funds and portfoliocompanies’ variables. One was restricted to U.S. venture capital funds that
invest in international portfolio companies (located outside the U.S.) and
another to those that invest only in U.S. portfolio companies. The database
comes from voluntary submission of data by venture capitalists, with
companies submitting conflicting data omitted from analysis. Another limita-
tion is the database’s absence of a complete set of accounting variables for the
portfolio companies, limiting the scope of our investigation. A ‘look-back’ or
‘backfill’ bias is also possible in the data set, if the SDC fills in prior
information for companies that are currently reporting in our sample.Table 2 categorizes the frequency of the U.S. VCs 4,307 foreign investments
by 27 countries. The UK is most frequently targeted, with 821 portfolio
companies, or 19.06 per cent of the total, possibly driven by its presence as an
international financial centre with no language barriers for U.S. VCs. Canada
ranks second with 416 companies or 9.66 per cent of the total. France, South
Korea, Germany, Israel, Australia, India, Japan, Sweden, China, Ireland and
the Netherlands each account for at least 2 per cent of the total and collectively
for 59.73 per cent. Brazil and Argentina are the only Latin American countries
among the 27 country group.
The univariate descriptive statistics, unreported to conserve space, show that
international investments by VCs have higher success rates compared with
domestic ones, possibly motivating these investments.9 International portfolio
companies are also monitored less often, and experience fewer but more
intensely financed rounds. Venture capitalists syndicate international invest-
ments less than domestic ones, and those that invest internationally are smaller
than those that do not. Venture capitalists that invest internationally are less
involved in high-tech investments and delegate monitoring to one or a few
foreign VC funds, instead of syndicating. They also have more seats on the
board of directors of the investee for their international investments comparedwith domestic ones. These differences are all significantly different.
Correlation coefficients among the variables show that financing rounds are
significantly positively correlated with syndication – measured by the number of
VC firms and funds in funding the portfolio company – in both the U.S. and
international samples. These measures of syndication also have significant
positive correlation with each other, making them good substitutes. The higher
the number of VC firms and funds in funding a portfolio company, the higher
the percentage of non-managing directors and foreign VC funds. The size of the
9 The details concerning the descriptive statistics are available from the authors uponrequest. In the analysis of these statistics, the hypotheses of equal means and variancesare rejected for all variables, except for COAGE for means and FMAGE for variances.
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VCs fund and percentage of non-managing directors and number of firms,
respectively, have negative significant correlations for the international sample,
suggesting that bigger funds delegate more and have fewer firms in the
international setting. Other correlation coefficients are insignificant.
5. Empirical results
5.1. INTPROB on VCs international versus domestic portfolio companies
The results for two specifications of regression INTPROB appear in Table 3,
Panel A. The first specification includes variable NOFM and the second NOFD,
Table 2
Country rankings of U.S.-based venture capital firms international investments and number of
portfolio companies per country
Rank Country Number of portfolio companies Percentage of total
1 United Kingdom 821 19.06
2 Canada 416 9.66
3 France 408 9.47
4 South Korea 281 6.52
5 Germany 268 6.22
6 Israel 232 5.39
7 Australia 224 5.20
8 India 158 3.67
9 Japan 138 3.20
10 Sweden 138 3.2011 China 122 2.83
12 Ireland 96 2.23
13 Netherlands 92 2.14
14 Finland 79 1.83
15 Switzerland 77 1.79
16 Singapore 73 1.69
17 Belgium 71 1.65
18 Hong Kong 59 1.37
19 Denmark 55 1.28
20 Taiwan 53 1.23
21 Italy 49 1.1422 Spain 43 1.00
23 Brazil 32 0.74
24 Norway 30 0.70
25 Poland 29 0.67
26 Austria 28 0.65
27 New Zealand 24 0.56
27 Argentina 21 0.49
Other 190 4.41
Total International 4307 100.00
United States 14,065
Total 18,372
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T a b l e 3
L O G I T r e g
r e s s i o n s I N T P R O B a n d I N T S U
C r e s u l t s
R e g r e s s i o n
P a n e l A
I N T P R O B –
d e p e n d
e n t v a r i a b l e I N T L
P a n e l B
I N T S U C –
d e p e
n d e n t v a r i a b l e S U C C E S S
S p e c i fi c a t i o n
( 1 )
( 2 )
( 1 )
( 2 )
C o e ffi c i e n t
p - V a l u e
C o e ffi c i e n t
p - V a l u e
C o e ffi c i e n t
p - V a l u e
C o e ffi c i e n t
p - V a l u e
C O N S T A N T
2 . 0
5 9 0
0 . 0
0 0 0
2 . 1
5 5 0
0 . 0
0 0 0
2 . 4
3 4 0
0 . 0
0 0 0
2 . 3
8 1 3
0 . 0
0 0 0
F M A G E
0 . 0
2 2 6
0 . 0
0 0 0
0 . 0
2 3 5
0 . 0
0 0 0
0 . 0
1 5 3
0 . 0
0 0 3
0 . 0
1 4 7
0 . 0
0 0 5
C O A G E
0 . 0
0 7 9
0 . 0
0 1 1
0 . 0
0 7 6
0 . 0
0 1 6
0 . 0
3 0 1
0 . 0
0 0 0
0 . 0
2 9 9
0 . 0
0 0 0
R N D S
0 . 0
5 9 4
0 . 0
0 0 7
0 . 0
3 9 9
0 . 0
2 7 1
0 . 0
2 7 3
0 . 3
4 3 8
0 . 0
2 2 8
0 . 4
4 6 9
R N D S $
0 . 0
0 2 8
0 . 0
0 0 0
0 . 0
0 2 7
0 . 0
0 0 0
0 . 0
0 2 0
0 . 0
0 1 0
0 . 0
0 2 1
0 . 0
0 0 6
N O F M
0 . 2
0 2 0
0 . 0
0 0 0
0 . 0
6 0 4
0 . 0
0 1 8
N O F D
0 . 1
6 2 4
0 . 0
0 0 0
0 . 0
3 5 6
0 . 0
2 8 8
F D I N V
0 . 0
0 2 5
0 . 0
0 0 3
0 . 0
0 2 7
0 . 0
0 0 3
0 . 0
1 2 8
0 . 0
0 6 1
0 . 0
1 2 7
0 . 0
0 6 8
I N D
0 . 2
7 0 9
0 . 0
0 0 0
0 . 2
8 4 1
0 . 0
0 0 0
0 . 2
4 5 6
0 . 0
1 5 0
0 . 2
3 9 7
0 . 0
1 7 4
E X E C %
0 . 0
0 8 9
0 . 0
0 0 0
0 . 0
0 8 9
0 . 0
0 0 0
0 . 0
1 5 7
0 . 0
0 0 0
0 . 0
1 5 9
0 . 0
0 0 0
F O R %
0 . 0
8 4 7
0 . 0
0 0 0
0 . 0
8 4 0
0 . 0
0 0 0
0 . 0
1 0 2
0 . 0
0 0 0
0 . 0
0 9 9
0 . 0
0 0 0
N a g e l k e r k e R
- S q u a r e
0 . 6
5
0 . 6
5
0 . 1
3
0 . 1
2
C h i - s q u a r e
1 0 3 9 1 . 3
2
0 . 0
0
1 0 3 8 6 . 8
4
0 . 0
0
2 9 8 . 1
8
0 . 0
0
2 9 3 . 4
4
0 . 0
0
L O G I T r e g r e s s i o n I N T P R O B r e s u l t s c o n c e r n t h e p r o b a b i l i t y o f U . S . b
a s e d V C s i n v e s t m e n t s b e i n g i n i n t e r n a t i o n a l p o r t f o l i o c o m p
a n i e s , w i t h
I N T L a s t h
e d e p e n d e n t v a r i a b l e ,
f o r t w o
s p e c i fi c a t i o n s ( P a n e l A ) ; a n d L
O G I T r e g r e s s i o n I N T S U C r e s u l t s c o n c e r n t h e p r o b a b i l i t y o f
s u c c e s s f o r
U . S .
b a s e d
V C s i n v e s t m e n t s i n i n t e r n a t i o n a l p o r t f o l i o c o m p a n i e s , w i t h S U C C E S S a s t h e d e p e n d e n t v a r
i a b l e ,
f o r t w o s p e c i fi c a t i o n s ( P a n e l B ) T h e
v a r i a b l e d e fi n i t i o n s a r e a s f o l l o w s . I N T L
i s a d u m m y v a r i a b l e t h a t e q u
a l s o n e i f t h e p o r t f o l i o c o m p a
n y i s a n i n t e r n a t i o n a l p o r t f o l i o c o m p a n y
f u n d e d b y a U . S . v e n t u r e c a p i t a l ( V C ) f u n
d , a n d z e r o i f i t i s a d o m e s t i c c o m p a n y .
F M A G E i s t h e a g e i n y e a r s o f t h e V C fi r m a n d s e r v e s
a s a p r o x y
f o r t h e V C
s e x p e r i e n c e .
C O A G E i s t h e a g
e i n y e a r s o f t h e p o r t f o l i o c o m p a n y a n d s e r v e s a s a c o n t r o l v a
r i a b l e f o r t h e e s t a b l i s h m e n t / e x
p e r i e n c e o f
t h e p o r t f o l i o c o m p a n y .
R N D S i s t h e n u m
b e r o f r o u n d s t h e V C u s e d t o f u n d t h e p o r t f o l i o c o m p a n y . R N
D S $ i s t h e a v e r a g e fi n a n c i n g a m o u n t ( i n
U . S .
$ m i l l i o n s ) p e r r o u n d d i s t r i b u t e d t
o t h e p o r t f o l i o c o m p a n y .
N O F M / N O F D i s t h e n u m b e r o f
V C fi r m s / f u n d s i n v o l v e d i n f u n d i n g t h e
p o r t f o l i o c
o m p a n y .
F D I N V i s t h e a v e r a g e s i z e o f t h e V C f u n d ’ s i n v e s t m e n t ( i n U . S .
$ m i l l i o n s ) i n i t s p o r t f o l i o c o m p a n i e s . I N D i s a c o n t r o l
d u m m y v a
r i a b l e e q u a l t o ‘ o n e ’ i f t h e V C s p e c i a l i z e s i n t h e h i g h - t e c h
i n d u s t r y , a n d ‘ z e r o ’ o t h e r w i s e
. E X E C % i s t h e p e r c e n t a g e o
f t h e n o n -
m a n a g i n g r e l a t i v e t o t h e t o t a l n u m b e r o f
m e m b e r s o f t h e b o a r d o f d i r e
c t o r s o f t h e p o r t f o l i o c o m p a n y .
F O R % i s t h e p e r c e n t a g e o f f o r e i g n V C
f u n d s r e l a t i v e t o t h e t o t a l n u m b e r o f V C
f u n d s i n v e s t e d i n t h e p o r t f o l i o c o m p a n y .
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as these serve as different proxies for syndication. The Nagelkerke R-square for
both specifications is 65 per cent.
FMAGE is positive and statistically significant in both specifications,
suggesting that more experienced VC firms are more likely to invest ininternational portfolio companies. It does not appear that inexperienced VCs
grandstand to develop reputation by investing internationally. The control
variable COAGE is also positive and marginally significant, suggesting
that VCs target international investments in more mature portfolio
companies.
The two (uncorrelated) monitoring variables are statistically significant in
both specifications, with a negative sign for RNDS and positive for RNDS$.
These signs indicate an international monitoring style where VCs provide
higher financing per round over fewer number of rounds. While fewerinterim reports by the portfolio company are submitted to the VC, it is
likely that each report is more intensely reviewed. Thus, it does not appear
that VCs use greater levels of staging for international investments as a
monitoring mechanism.
International investments are less syndicated than domestic investments, as
the signs on the number for VC firms (NOFM ) and VC funds (NOFD) are
negative and significant in both specifications. This result may reflect the
relative inexperience of VCs in international investments and/or their lack of
knowledge of international partners with which to syndicate.
The size of VC funds measured by the US dollar value of their investments
(FDINV ) is statistically significant and negative in both specifications,
suggesting consistent with the summary statistics that smaller size funds invest
more internationally. This result does not support the idea that larger size funds
are more willing to invest internationally because their absolute risk aversion is
less. Rather, it supports the idea that smaller size funds grandstand through
riskier international investments, possibly motivated by their desire to establish
themselves and grow quickly by enhancing returns.
The high-tech industry dummy variable (IND) is statistically significant and
negative in both specifications, suggesting that VCs are not likely to invest inhigh-tech international portfolio companies, possibly because of some added
difficulty in monitoring hi-tech companies.
EXEC% has a significant negative and FOR% a significant positive sign in
both specifications. U.S. venture capitalists do not reserve many seats on the
board of directors for their international portfolio companies, but instead
involve more foreign VC funds in them. It appears that U.S. venture capitalists
prefer to collaborate with foreign counterparts, rather than sit on the board,
and thus delegate monitoring to foreign partner(s).
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5.2. INTSUC on VCs successful international portfolio companies
The results for two specifications of regression INTSUC (similar to the
specifications in INTPROB) appear in Table 3, Panel B. The NagelkerkeR-square for both specifications is 13 and 12 per cent, respectively.
FMAGE is positive and significant in all specifications, such that older VCs
have higher probabilities of SUCCESS with international portfolio compa-
nies. This result, consistent with literature, suggests that experience adds value
to the portfolio company. COAGE is also positive and significant in all
specifications, suggesting that more mature portfolio companies increase the
probability of SUCCESS . RNDS is statistically insignificant in all specifica-
tions, while RNDS$ is positive and statistically significant. It appears that
higher financing of the international portfolio company per round (RNDS )improves the likelihood of success, independent of the number of rounds
(RNDS).
U.S. VCs appear to syndicate more in the case of successful international
investments, as NOFM and NOFD are positive and significant in both
specifications, although in INTPROB international investments are on the
whole less syndicated than domestic ones.
Smaller VC funds appear to be more successful in investing internationally,
as the sign for fund size (FDINV ) is negative and significant. The portfolio
company’s status as high-tech reduces the probability of success, as the sign of
IND is negative and significant. These results are consistent with our finding
that smaller funds are more likely to invest internationally, and the view that
high-tech companies are harder to control than other companies with more
tangible assets.
The delegation variables in both specifications are statistically significant,
with a positive coefficient for EXEC% and negative for FOR%. Thus, the
likelihood of success for the international portfolio companies is higher the
higher EXEC% and lower FOR%. Venture capitalists must increase their
presence on the board of directors of international portfolio companies and
decrease their reliance on foreign VC counterparts for greater success.Interestingly, our prior finding that international investments have lower
EXEC% and higher FOR% components contrasts with their need for success,
as the delegation characteristics for investing internationally contrast with the
requirements for success.
It is possible that there is a selection bias in the INTSUC results insofar as
there may exist an endogenous matching of successful international portfolio
companies with more experienced VCs.10 To address this problem, we
employed the Heckman correction on the basic INTSUC model, with robust
10 We thank the journal’s anonymous referee for pointing out this problem andsuggesting the Heckman correction procedure.
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results, available from the authors upon request, that mostly continue to hold
even in the presence of such endogeneity.11
6. Robustness checks
6.1. Country differences
Cross-sectional differences in governance structures among the countries that
VCs are investing in may produce biased results. To address this possibility, we
classify our sample’s international investments into three country groupings,
based on openness to foreign investors, and level of financial and legal
developments. GROUP 1 is least open and developed, and includes Latin
American and African countries in our sample. GROUP 2 is more open anddeveloped, and includes India, China, Eastern European and Southeast Asian
countries. GROUP 3 is the most open and developed, and includes Japan,
Hong Kong, Canada, Australia, Western European countries, and other
offshore investment hubs. While there may be disagreement about a particular
country’s category, we believe that most would agree overall on GROUP 3 and
on GROUP 1, especially for African countries.12
Our regressions are repeated with two new dummy variables – GROUP 1 and
GROUP 2 – with GROUP 3 serving as the base. The results for INTPROB in
Table 4, Panel A show that these dummy variables are not significant
regardless of specification. It appears that the portfolio company’s country
does not affect the previously reported probability of VCs making international
investments. The results for INTSUC in Table 4, Panel B show that GROUP 2
is positive and significant, suggesting a higher probability of success in Asia,
India and Eastern Europe than in the other country groupings. Our results are
generally robust as it does not appear that the portfolio company’s country is a
factor in the probability of a VC going international or of its portfolio
company’s success. A further robustness check was conducted for country
11 The only differences are that RNDS became significant and NOFM becameinsignificant. The Mills ratio is significant. The results are unreported to conserve space.
12 The actual contracts that VCs have in different countries may not be significantlydifferent. Kaplan et al. (2003) find that U.S. style contracts are implemented regardlessof legal regime the more experienced the U.S. VC. Financing styles, however, may differbetween high enforcement, common law countries and low enforcement, civil lawcountries. Lerner and Schoar (2005) find that private equity often use convertiblepreferred stock with covenants in the former and common stock and debt, with equityand board control, in the latter. High enforcement countries also tend to have highervaluations.
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T a b l e 4
C o u n t r y g r o u p i n g r o b u s t n e s s c h e c k s r e s u l t s
f o r L O G I T r e g r e s s i o n s I N T P R O B a n d I N T S U C
R e g r e s s i o n
P a n e l A
I N T P R O B –
d e
p e n d e n t v a r i a b l e I N T L
P a n e l B
I N T S U C –
d e
p e n d e n t v a r i a b l e S U C C E S S
S p e c i fi c a t i o n
( 1 )
( 2 )
( 1 )
( 2 )
C o e ffi c i e n t
p - V a l u e
C o e ffi c i e n t
p - V a l u e
C o e ffi c i e n t
p - V a l u e
C o e ffi c i e n t
p - V a l u e
C o n s t a n t
2 . 5
6 8 0
0 . 0
0 0 0
2 . 6
5 1 8
0 . 0
0 0 0
2 . 9
5 6 5
0 . 0
0 0 0
2 . 8
7 9 9
0 . 0
0 0 0
F M A G E
0 . 0
2 3 3
0 . 0
0 0 0
0 . 0
2 4 0
0 . 0
0 0 0
0 . 0
1 6 8
0 . 0
0 0 1
0 . 0
1 6 0
0 . 0
0 0 2
C O A G E
0 . 0
0 5 0
0 . 0
7 3 4
0 . 0
0 4 7
0 . 0
8 8 4
0 . 0
3 0 7
0 . 0
0 0 0
0 . 0
3 0 4
0 . 0
0 0 0
R N D S
0 . 0
3 0 5
0 . 1
0 4 7
0 . 0
0 8 4
0 . 6
6 5 4
0 . 0
0 1 4
0 . 9
5 9 8
0 . 0
0 4 9
0 . 8
6 8 7
R N D S $
0 . 0
0 2 7
0 . 0
0 0 0
0 . 0
0 2 7
0 . 0
0 0 0
0 . 0
0 2 1
0 . 0
0 0 9
0 . 0
0 2 2
0 . 0
0 0 5
N O F M
0 . 1
6 9 6
0 . 0
0 0 0
0 . 0
8 0 0
0 . 0
0 0 0
N O F D
0 . 1
4 1 3
0 . 0
0 0 0
0 . 0
4 9 0
0 . 0
0 2 9
F D I N V
0 . 0
0 2 2
0 . 0
0 0 5
0 . 0
0 2 3
0 . 0
0 0 5
0 . 0
1 2 1
0 . 0
1 1 1
0 . 0
1 1 8
0 . 0
1 3 1
I N D
0 . 3
3 3 2
0 . 0
0 0 0
0 . 3
4 1 5
0 . 0
0 0 0
0 . 3
0 8 1
0 . 0
0 2 7
0 . 2
9 9 6
0 . 0
0 3 5
E X E C %
0 . 0
0 9 0
0 . 0
0 0 0
0 . 0
0 9 0
0 . 0
0 0 0
0 . 0
1 7 0
0 . 0
0 0 0
0 . 0
1 7 2
0 . 0
0 0 0
F O R %
0 . 0
8 7 0
0 . 0
0 0 0
0 . 0
8 6 6
0 . 0
0 0 0
0 . 0
0 9 4
0 . 0
0 0 0
0 . 0
0 9 0
0 . 0
0 0 0
G R O U P 1
2 3 . 5
7 0 9
0 . 9
9 5 1
2 3 . 5
6 7 0
0 . 9
9 5 1
0 . 1
2 7 5
0 . 7
1 3 9
0 . 1
3 6 5
0 . 6
9 3 8
G R O U P 2
2 2 . 2
4 2 8
0 . 9
8 4 4
2 2 . 2
6 8 4
0 . 9
8 4 4
1 . 1
4 6 5
0 . 0
0 0 0
1 . 1
2 7 6
0 . 0
0 0 0
N a g e l k e r k e R - S q u a r e
0 . 7
2 8 1
0 . 7
2 8 5
0 . 1
6 6 2
0 . 1
6 3 3
C h i - s q u a r e
1 2 0 7 6 . 1
8
0 . 0
0 0 0
1 2 0 8 6 . 0
1
0 . 0
0 0 0
4 0 0 . 5
7
0 . 0
0 0 0
3 9 3 . 2
4
0 . 0
0 0 0
S e e t h e f o o
t n o t e t o T a b l e 3 f o r m o r e d e t a i l e d d i s c u s s i o n o f t h e r e g r e s s i o n s a n d v a r i a b l e d e fi n i t i o n s . T h e r o b u s t n e s s t e s t f o r I N T P R O
B f o r t w o
s p e c i fi c a t i o
n s ( P a n e l A ) a n d I N T S U C f o r
t w o s p e c i fi c a t i o n s ( P a n e l B ) c o
n c e r n s t h e g r o u p i n g o f c o u n t r i e s b a s e d o n t h e o p e n n e s s o f t h
e c o u n t r i e s
i n t h e s a m p l e t o f o r e i g n i n v e s t o r s , a n d t h
e l e v e l o f t h e i r fi n a n c i a l a n d l e
g a l d e v e l o p m e n t s .
G R O U P 1 i s l e a s t o p e n a n d d e v e l o p e d , a n d i n c l u d e s
L a t i n A m e r i c a n a n d A f r i c a n c o u n t r i e s i n
o u r s a m p l e .
G R O U P 2 i s m o r e o p e n a n d d e v e l o p e d , a n d i n c l u d e s I n d i a ,
C h i n a ,
E a s t e r n E u r o p e a n a n d
S o u t h e a s t A s i a n c o u n t r i e s . G R O U P 3 s
e r v e s a s t h e b a s e a n d i s t h e m o s t o p e n a n d d e v e l o p e d , a n d i n c l u d e s J a p a n ,
H o n g K o n g ,
C a n a d a ,
A u s t r a l i a , W e s t e r n E u r o p e a n c o u n t r i e s , a n d o t h e r o ff s h o r e i n v e s t m e n t
h u b s .
© 2012 The AuthorsAccounting and Finance © 2012 AFAANZ
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differences using country-specific data instead of country dummy variables.
The results, with details available from the authors upon request, continue to
be generally robust to these additional tests.13
6.2. Industry and financing stage
Venture capitalists investing in the first round may behave differently than
those investing in subsequent rounds, making it possible that the specific stage
in the financing of the portfolio company may produce different results. While
we have tested for the number of rounds, we have not done so for the specific
stage in the financing of the portfolio company. To examine the robustness of
our results to this factor, we add dummy variables to distinguish between
rounds, representing the start-up and seed stage, the early stage, and the laterstage (other stages are omitted to avoid multicollinearity). We also add as a
robustness test the nine main industry classification categories available in our
VentureXpert database, to control for any unobserved heterogeneity through
this more detailed industry classification. The results in Table 5, Panel A, are
generally robust to our earlier findings.
6.3. Heckman correction for selection bias
It is possible that there exists selection bias for the sub-sample used for
INTSUC, as there may exist an endogenous matching of successful companies
with more experienced VCs.14 We employ the Heckman correction (using
STATA) for the SUCCESS sub-sample to address this problem. The results,
shown in Table 5, Panel B are similar to the robustness check results for the
SUCCESS sub-sample in Table 5, Panel A.2. The main difference is that, after
correcting for endogeneity, the number of firms (NOFM ) and fund investments
(FDINV ) are significant at the 5 per cent level. The results in Table 5, Panel B
are generally robust to our earlier findings, although Rho is significant at the 1
13 The results, unreported to conserve space, suggest that country groupings – at leastwith respect to intercept dummies – are not that critical to determining the probabilitythat U.S. venture capitalists will invest internationally, or that if they do, they willexperience success. It thus seemed unlikely that introducing slope coefficients wouldproduce significantly different results. Also, while there was some possibility thatdiscrete shifts in the parameters generating the data were possible for the intercept forthe given country group differences, we were less confident about how countrydifferences might affect the sensitivity of the independent variables (such as monitoring,syndication or delegation) on the probability of going international or being successfulthrough changes in the slope parameters. Nevertheless, we tested for the sake of
completeness the use of slope dummy variables in the INTSUC regression, and foundthat all their respective coefficients were insignificant.
14 We thank the journal’s anonymous referee for pointing out this problem andsuggesting the Heckman correction procedure.
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T a b l e 5
S t a g e s a n d i n d u s t r y r o b u s t n e s s c h e c k r e s u l t s f o r L O G I T r e g r e s s i o n I N T P R O B a n d I N T S U C , a n d H e c k m a n C o r r e c t i o n f o r I N T S U C
R o b u s t n e s s
P a n e l A : S t a g e s a n d i n d u s t r y
P a n e l B : H e c k m a
n
c o r r e c t i o n
R e g r e s s i o n
1 .
I N T P R O B
2 .
I N T S U C
I N T S U C
D e p e n d e n t
v a r i a b l e
I N T L
S U C C E S S
S U C C E S S
I n d e p e n d e n
t v a r i a b l e s
C o e ffi c i e n t
p - V a l u e
C o e ffi c i e n t
p - V a l u e
C o e ffi c i e n t
p - V a l u e
C o n s t a n t
1 . 5
7 7
0 . 0
0 0
2 . 2
7 5
0 . 0 0 0
1 . 7
6 4
0 . 0
0 0
F M A G E
0 . 0
2 3
0 . 0
0 0
0 . 0
1 1
0 . 0 1 1
0 . 0
1 8
0 . 0
0 0
C O A G E
0 . 0
0 2
0 . 3
7 3
0 . 0
2 2
0 . 0 0 0
0 . 0
1 2
0 . 0
0 0
R N D S
0 . 0
4 3
0 . 0
2 3
0 . 0
2 4
0 . 4 3 5
0 . 0
0 5
0 . 7
5 8
R N D S $
0 . 0
0 2
0 . 0
0 0
0 . 0
0 1
0 . 2 4 9
0 . 0
0 0
0 . 2
1 0
N O F M
0 . 1
4 8
0 . 0
0 0
0 . 0
2 7
0 . 2 0 7
0 . 0
2 6
0 . 0
3 0
F D I N V
0 . 0
0 3
0 . 0
0 0
0 . 0
0 6
0 . 1 7 7
0 . 0
0 6
0 . 0
3 1
E X E C %
0 . 0
0 4
0 . 0
0 2
0 . 0
0 9
0 . 0 0 0
0 . 0