Tuesday, May 13, 2014

Corporate Venture Capital Programmes in China & India

Looking to capitalize on the rapidly growing spending power of Asian consumers, in 2009 the luxury brand holding company LVMH Group established a private equity fund, L Capital Asia, to make strategic investments in companies in the region. The fund says it has a particular focus on China and India, and it aims to be a strategic partner to the companies in its portfolio by leveraging its knowledge and resources to help them develop brands that will appeal to Asian consumers. This type of investment is known as Corporate Venture Capital (CVC), and it is the focus of a new research study comparing CVC deal activity in China and India that is co-authored by CEIBS Professor of Entrepreneurship S. Ramakrishna Velamuriand Indian School of Business MBA graduate Siva Sakthiraj Rajamani.

The LVMH Group is one of more than a dozen multinationals who have actively invested in companies in China and India between 2010 and 2013. Others include Cisco Systems, Intel, Qualcomm, Siemens and Google. Several Chinese and Indian companies have also established local CVC programmes, including Chinese internet giants Alibaba Group, Baidu and Tencent; and Bharti, Tata Group and Reliance Group in India. Prior to 2000, most CVC investing was confined to western companies, but in the last decade, the emerging economies of China and India have attracted a growing amount of CVC investment.

In their exploration of CVC programmes in China and India, the authors found that investment trends across sectors were strikingly similar in both countries; many CVC funds have bet on the consumption story in China and India, which is reflected in 29% and 28% of investments respectively in the consumer sector. The biggest shift in theme the authors found over the past few years has been an increase in IT sector investments. A recent example occurred in April this year when Cisco Investments announced it would allocate an additional US$ 150 million over the next two to three years to fund early-stage companies that build on its current portfolio theme focussed on accelerating the development of disruptive technology markets. Professor Velamuri and his co-author also found that in India there has been a noticeable rise in healthcare sector investments by CVC funds.

Looking more closely at the strategic objectives for CVC investments, the authors found three clear themes emerging. First, companies operating in sectors with high R&D intensity, such as life sciences or high-tech electronics often saw their CVC investments as external R&D which addressed gaps in their own internal R&D departments. Companies in sectors without much R&D focus tended to pursue CVC investments that helped increase their market intelligence. The authors found that the third objective for CVC investments was market penetration. This occurs when a company makes investments across the value chain in the same sector in which it operates, giving it the opportunity to enhance demand for its product downstream. A notable phenomenon that emerged from the author’s analysis of the strategic objectives of CVC programmes is that most of these investments have not been made with the eventual acquisition of the portfolio company in mind.

The results of the study appear in the paper titled “Corporate Venture Capital Programmes in China and India” which is being published by ISB Insight and CEIBS Business Review.


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