Effects of Foreign Investment on Domestic Private Equity

Abstract

Using a sample of 23 OECD countries, studied over a period of 20 years (1995–2015), we find that direct foreign investment has a spillover effect on private equity (PE) in that it supports the development of the domestic PE industry. We also show how contextual variables influence the investment process. Our results suggest that a positive effect on domestic PE dynamics can be seen if the number of foreign PE deals is measured, while calculations using the value of foreign PE investments show mixed results. The positive effect of foreign investment on domestic PE activity persists where low gross capital formation is adopted and in low value-added environments. Foreign PE investment increases overseas activity in the host country’s domestic PE industry. These effects are proportional to the size of the foreign fund. Foreign PE activity related to firms in the early stages of development encourage domestic PE industry activity in the same kind of firms.

Keywords:

• Private equity
• foreign investment
• spillover
• technological investments
• early stage investments

JEL Classification:

• F65
• G23
• G24

Acknowledgements

We would like to thank the School of Economics and Finance at Universidad EAFIT de Colombia and the Office of the Vice-President of Research, at Universidad Pedagogica y Tecnologica de Colombia –UPTC, for funding this research (Project SGI 2215).

Disclosure statement

No potential conflict of interest was reported by the authors.