Discussion Paper of the Institute for Organisational Economics 9/2019

The Influence of Institutions on Venture Capital 
How Transaction Costs, Uncertainty, and Change Affect New Ventures

Felix Hoch/Todor S. Lohwasser
September 2019



Institutional dynamics and uncertainty in a country are crucial considerations for investors when searching for venture capital opportunities. International entrepreneurship literature has focused on the impact of unidimensional measures of institutions, despite that institutional environments undergo substantial and continuous changes in multiple dimensions. This study connects literature on the institution-based view and transaction cost economics by examining the effects of reduced transaction costs and uncertainty as institutional outcomes on entrepreneurial activities. Empirical results from 85,711 ventures in 120 countries during the period from 1996 to 2018 show that ventures raise higher funding in countries with (1) generally lower transaction costs that are not constrained by overregulation, (2) higher uncertainty, and (3) institutional environments undergoing change. Funded ventures are more likely to survive in countries with (1) lower transaction costs, (2) lower uncertainty, and without (3) general or (4) disruptive institutional change. Hence, we promote a dynamic perspective for investors and founders when assessing entrepreneurial opportunities in heterogeneous countries since institutional effects driven by uncertainty and transaction costs depend on the individual business purpose.