Alexander Peter Groh

Emerging Economies’ Attraction of Foreign Direct Investment

This paper uses a composite measure to examine why some countries attract more foreign direct investment (FDI) than others. The measure considers all identified, measurable, and comparable socioeconomic aspects that affect FDI decisions on an aggregated country level. As a result, we can rank 127 countries with respect to their FDI attraction. The measure allows detailed strength and weakness analyses and enhances the discussion of why FDI flows are concentrated in advanced economies. Additionally, the findings reveal the areas in which emerging countries should improve in order to narrow existing gaps. Our robustness checks indicate that the composite measure accurately tracks real FDI activity.

Cross-Border Investments and Venture Capital Exits in Europe: Mode of Exit and Cross-Border VC Investments

Manuscript Type. Empirical. Research Question/Issue. We examine the way in which the exit mode (i.e., initial public offering – IPO, trade sale, or write�?off) of venture capital (VC) investments is influenced by the additional exit opportunities brought by cross�?border VC investors. Research Findings/Insights. We perform our analysis on a sample of 1,062 VC investments in 462 young high�?tech companies in seven European countries. Our findings indicate that, controlling for firm performance, investor characteristics, and local exit conditions, the probability of exiting via trade sale is positively correlated to the additional set of mergers and acquisitions (M&A) opportunities brought by cross�?border investors. A similar effect, but with weaker statistical significance, is also identified for exits by IPO, which are positively affected by IPO volumes in the countries of cross�?border investors. Theoretical/Academic Implications. Cross�?border VC investment may, at least partially, compensate for inadequate local exit conditions. Cross�?border investors can spillover the capital market activity of their home country and enhance exit options for young ventures. International syndicates are also quicker to write off their non�?performing investments. Practitioner/Policy Implications. Not all exit modes are equally affected by international syndication. The impact of cross�?border investors on the exit mode also depends on their country of origin and, more specifically, on the exit opportunities available there. The mechanism is stronger for trade sales than for IPOs.

The Determinants of International Commercial Real Estate Investment

We examine the determinants of international commercial real estate investment using a unique set of panel data series for 47 countries worldwide, covering the period from 2000 to 2009. We explore how different socio-economic, demographic and institutional characteristics affect commercial real estate investment activity by determining both cross-sectional and time-series estimators, running augmented random effect panel regressions. We provide evidence that economic growth, rapid urbanization and compelling demographics attract real estate investment, and also demonstrate that a lack of transparency in the legal framework, administrative burdens of doing real estate business, socio-cultural challenges and political instabilities reduce international real estate allocations.

International allocation determinants for institutional investments in venture capital and private equity limited partnerships

We examine the determinants of institutional investors when deciding about international capital allocation in venture capital and private equity limited partnerships through a questionnaire addressed to limited partners world-wide. The respondents provide information about their criteria for international asset allocation. The protection of property rights is the dominant concern, followed by the need to find local quality general partners, and the quality of management and skills of local entrepreneurs. Furthermore, the expected deal flow plays an important role in the allocation process, while investors fear bribery and corruption. Public funding and subsidies are not important for the international allocation process. Hence, private money does not follow public money. Additionally, IPO activity and the size of local public equity markets are not as relevant as proposed by other researchers. Our results can support policymakers to increase the attractiveness of their countries for institutional investors to receive more risk capital for innovation, entrepreneurship, employment and growth.

The First Step of the Capital Flow from Institutions to Entrepreneurs: the Criteria for Sorting Venture Capital Funds

We contribute to the knowledge of the capital flow from institutional investors via venture capital (VC) funds as intermediaries to their final destination, entrepreneurial ventures. To this end, we conduct a world†wide survey among limited partners to determine the importance of several criteria when they select VC funds. We find the top criteria to be the expected deal flow and access to transactions, a VC funds historic track record, his local market experience, the match of the experience of team members with the proposed investment strategy, the teams reputation, and the mechanisms proposed to align interest between the investors and the VC funds. A principal component analysis reveals three latent drivers in the selection process: ‘Local Expertise and Incentive Structure’, ‘Investment Strategy and Expected Implementation’, and ‘Prestige/Standing vs. Cost’. It becomes evident that limited partners search for teams which are able to implement a certain strategy at a given cost. Thereby, they focus on an incentive structure that limits agency costs.

A Composite Measure to Determine a Host Country's Attractiveness for Foreign Direct Investment

We contribute to the question of why some countries are more attractive for foreign direct investment (FDI) than others by constructing a composite measure that describes a host countrys attractiveness for receiving FDI. This index considers all identified major, measurable and, for our scope, comparable aspects that affect FDI decisions. As a result, we can rank 127 countries with respect to their FDI attraction. The index provides the possibility of conducting detailed strength and weakness analyses for all of our sample countries and regions. These analyses provide support to policy-makers to improve their countrys attractiveness for receiving inward FDI. They also enhance the discussion of why FDI flows still remain concentrated in advanced economies and, additionally, in which areas emerging and developing economies have to improve in order to narrow the existing gap. We provide correlation and sensitivity analyses to test the quality of our composite measure. Additionally, we benchmark our index with several alternative indices. Thereby, we show that no other index tracks actual FDI activity more closely.

The Opportunity Cost of Capital of Us Buyouts

This paper measures the risk-adjusted performance of US buyouts. It draws on a unique and proprietary set of data on 133 US buyouts between 1984 and 2004. For each of them we determine a public market equivalent that matches it with respect to its timing and its systematic risk. After a correction for selection bias in our data, the regression of the buyout internal rates of return on the internal rates of return of the mimicking portfolio yields a positive and statistically significant alpha. Our sensitivity analyses highlight the necessity of a comprehensive risk-adjustment that considers both operating risk and leverage risk for an accurate assessment of buyout performance. This finding is particularly important as existing literature on that topic tends to rely on performance measures without a proper risk-adjustment.

Private Equity in Emerging Markets

Why is there such a strong private equity market in the United States or the United Kingdom? Why is activity relatively low in several other economically important countries? And why is it zero or close to zero in many emerging regions? Spatial variations of private equity activity result from numerous factors. In this paper I summarize the literature contributions on the determinants of national private equity activity and comment on the consequences for the development of the private equity asset class in emerging markets.

Limited Partners' Perceptions of the Central Eastern European Venture Capital and Private Equity Market

Growth expectations and institutional settings in Central Eastern Europe are assumed to be favorable for the establishment of a vibrant Venture Capital and Private Equity market. Despite this, there is a lack of risk capital. We examine the obstacles to institutional investments in the region through a questionnaire addressed to (potential) Limited Partners world-wide. The respondents provide information about their perceptions of the region. The protection of property rights is the dominant concern, followed by social criteria, such as the belief in the management quality of local people, and the lacking size and liquidity of the Central Eastern European capital markets. However, Limited Partners regard the growth expectations as attractive, and those with exposure in Central Eastern Europe are satisfied with the historical risk and return ratio, they have a good knowledge of the region, are attracted by other emerging regions, and they appreciate the regions entrepreneurial opportunities and the local General Partners. Overall, the region is ranked very favorable compared to other emerging regions, and especially with respect to its economic and entrepreneurial activity.

The First Step of the Capital Flow from Institutions to Entrepreneurs: The Criteria for Sorting Venture Capital Funds

We contribute to the knowledge about the capital flow from institutional investors via Venture Capital (VC) funds as intermediaries to their final destination, entrepreneurial ventures. Therefore, we run a world-wide survey among 1,079 institutional investors to determine the importance of several criteria when they select VC funds. The expected deal flow and access to transactions, a VC funds historic track record, his local market experience, the match of the experience of team members with the proposed investment strategy, the teams reputation, and the mechanisms proposed to align interest between the institutional investors and the VC funds are the top criteria. The level of fees payable to the funds is not an important selection criterion. The VC relationship is based on a complex structure of (several) principals and agents, and functional only, if the interests of all participants are aligned. Fees are an important element of this alignment. Overall, the sorting criteria of institutional investors are very similar to what we know about the criteria applied by VC funds themselves, when selecting entrepreneurial ventures: The institutions have to mitigate the same kind of agency conflicts that VC funds and entrepreneurs are exposed to.