Venture capital and the international relocation of startups

Abstract

Venture capital (VC) in most economies outside the U.S. is still developing and relies heavily on foreign investment. This raises concerns that startups are migrating out of these countries as a consequence. Using a novel large-scale dataset of startup headquarter (HQ) location histories across a heterogeneous set of 17 countries, we document novel facts on startup relocation across countries. First, international startup relocation is relatively common: about 6 % of startups move across borders, representing 17 % of the total startup value created. Second, by far, most relocation (85 %) is directed to the US. Third, relocation leads to the majority of startups' workforce ending up in the foreign country. Fourth, foreign VC investment, particularly from the US, is strongly associated with relocation, with the effect implying that one in ten US investments leads to relocation. This foreign VC effect is robust to matching, panel data, and instrumental variable analyses, and is more pronounced when startup financing conditions are poor. These findings shed light on the global movement of startups and suggest that the outflow can be addressed by improving startups' local financing conditions.