Do cultural differences matter to VC-CEO interaction?

NeXt Globalization Conference 2008 THE IMPLICATIONS OF INTEGRATION FOR GLOBALIZATION: TRANSNATIONAL ENTREPRENEURSHIP Wilfrid Laurier University April 30 - May 1, 2008

Do cultural differences matter to VC-CEO interaction? Qian Ye Rodney R D’Souza Jason Fitzsimmons

Corresponding Author: Qian Ye Mailing Address: Department of Management, College of Business, University of Louisville, Louisville, KY, 40292, U.S. Telephone: 859-9793428 E-mail: [email protected]

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ABSTRACT Sapienza and Gupta (1994) examined the impact of agency risks and task uncertainty on venture capitalist—chief executive officer (VC-CEO) interaction. They found that the frequency of interaction depended on the extent of VC-CEO goal congruence, the degree of the CEO’s new venture experience, the venture’s stage of development, and the degree of technical innovation. But their model overlooks the situation under which VCs invest overseas, making the internationalization of venture capital remain an unfilled gap at VC-CEO interaction in cross-cultural contexts. Drawing on Sapienza and Gupta’s work, we consider the moderating effects of cultural differences on VC-CEO interaction. We propose that cultural differences affect the strength of the functions of agency risks and uncertainty on VC-CEO interaction by influencing not only VCs’ assessment of agency risks and uncertainty, but also VCs’ behavioral responses to their assessment. INTRODUCTION Research on venture capitalists (VCs) decision making suggests that VCs play an important role not only in funding of the venture, but also in other value added activities such as establishing policies, providing financial and business advice, monitoring managerial activities, and networking (Bygrave & Timmons, 1992; Gomez-Mejia, Balkin, & Welbourne, 1990; Hellmann & Puri, 2002; Sapienza, Manigart, & Vermeir, 1996a). Studies have also found that the extent to which these value added activities are performed is directly related to the frequency of involvement between the VC and the CEO of the firm (Elango, Fried, Hisrich, & Polonchek, 1995; Sapienza & Gupta, 1994). Frequent VC-CEO interaction can reduce the risks or add value to the portfolio

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2 companies, however, greater governance from intensive control may not always be cost effective (Barney, Busenitz, Fiet, & Moesel, 1989; Gorman & Sahlman, 1989; Sapienza, Manigart, & Vermeir, 1996). Therefore, the frequency of VC-CEO interaction is an important tradeoff between costs and benefits by VCs. Sapienza and Gupta (1994) found that low goal congruence and CEO experience were positively related to the VCs’ perception of agency risk. In turn, this increased perception of agency risk lead to higher interaction between the VC and the CEO. They also found that ventures in their earlier stages of growth, and ventures with high levels of innovation represented higher levels of task uncertainty to VCs. Therefore in these cases as well, there was higher interaction between the VC and CEO (Sapienza et al., 1994). Although helpful, Sapienza & Gupta’s (1994) study overlooks the situation under which VCs invest overseas or they are involved into the business with entrepreneurs who have different cultural backgrounds. According to their model, VCs behave in similar cultures and they respond to agency risks and uncertainty equivalently in different surroundings. However, since the early 1990s cross-border VC activity has risen quickly (Aylward, 1998). This is consistent with what Hall and Tu (2003) argued that VCs are undertaking a wider basis investment rather than a simple domestic one. Even though recent studied have explored VCs governance in different countries (Sapienza, Manigart, & Vermeir, 1996b), and compared the difference between foreign and domestic VCs in their monitoring of investees (Pruthi, Wright, & Lockett, 2003) (Bruton & Ahlstrom, 2003); they failed to explain how and why cultural differences impact VCs monitoring mechanism in the context of VCs cross-border business.

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3 This is where we suggest that under different situations, the VCs perception and tolerance of agency risks and uncertainty, which are associated with social norms and cultural values, could vary. As a consequence, cultural differences may impact the strength of the relationship between agency risks and VC-CEO interaction, as well as the relationship of uncertainty and VC-CEO interaction. Thus, understanding VC-CEO interaction in the multicultural context may help us better understand the activities between VCs and entrepreneurs, and give more insights for how to achieve efficient governance in the cross cultural VC-CEO relationship. In this paper, we attempt to explore the cultural effects involved in VC-CEO interaction in the context of cross-national business. In order to understand the effects of cultural difference on the VC-CEO interaction, it is important to recognize that, the alliance between VCs and entrepreneurs, like other business alliances, may be susceptible to cultural differences too. Furthermore, VCs’ perceptions of agency risks and uncertainty, and their behavioral responses could differ in different cultures as other individuals do. This normally leads to a situation where VCs may respond differently to uncertainty and agency risks even if they are under the same economic situation. Consequently, VCs monitoring activities may be influenced by the degree of cultural match of VCs and the CEO, who have different cultural backgrounds. Thus, under such circumstances, cultural difference between VCs and CEOs may influence VCs’ perceptions of agency risks and uncertainty and induce them to be more actively involved in activities with investees. As a result, our research provides a novel contribution to emerging literature of VCs transnationalization, and examines agency theory in a new context of VCs cross-border activity, linking governance and cultural forces.

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4 In the following section, we provide a theoretic background regarding agency theory and the impacts of agency risks and uncertainty on the frequency of VC-CEO interaction. Next, drawing on the literature of cultural differences, we develop propositions regarding the effects of cultural differences on the functions of agency risks and uncertainty on the frequency of VC-CEO interaction. Finally, the implications of the study in this area are discussed.

THEORY BACKGROUND AND PROPOSITIONS Agency Theory and VC-CEO Interaction Entrepreneurs seek to obtain VC investments to finance the development of their potential ventures. On the other side, VCs provide not only crucial capital to entrepreneurial ventures, but also value added activities by assisting and monitoring the top management team (Hellmann et al., 2002; MacMillan, Kulow, & Khoylian, 1989). In this context, scholars have accepted agency theory as a dominant theory to explain VCCEO relationship. Agency theory prescribes actions that focus on the protection of VCs’ (principal) investment against the harmful behaviors of the entrepreneurs (agent) (Arthurs & Busenitz, 2003). It assumes that both the agent and the principal are self-interested and rational (Eisenhardt, 1989). Agency problems are rooted in suboptimal effort of the agent (Kaplan & Stromberg, 2004), lack of agent ability (Walsh & Seward, 1990), information asymmetry (Busenitz, Fiet, & Moesel, 2004), goal conflict (Sapienza et al., 1994), and potentially different risk preferences (Bruton, Fried, & Hisrich, 1997). As a consequence, principals are actuated to design a monitoring mechanism to control agents’ actions (Sapienza, Korsgaard, Goulet, & Hoogendam, 2000). However, monitoring activities can

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5 be costly and time consuming. In order to achieve efficient governance, VCs must consider the frequency and extent of their involvements in their portfolio companies. Sapienza and Gupta (1994) propose that the frequency of VC-CEO interaction depends upon the level of agency risks and uncertainty. VCs conduct greater monitoring when agency risks are high, and they are involved in more VC-CEO interaction for more information to cope with ambiguity when uncertainty is greater (Sapienza et al., 1996b). According to Sapienza and Gupta, first of all, beside the managers’ willingness to make efforts to maximize profits, as long as both VCs and the CEO have disagreements over the direction of effort, agency problem could arise for the VCs. Besides, because a founder’s unique technical and managerial capabilities are critical for the success of a new venture, the managerial ability of the CEO is associated with VCs’ assessment of agency risks. As a result, these concerns of agency risks may induce greater VCs monitoring efforts. Second, when ventures are at the early stage and pursuing high innovation, VCs and CEOs need to frequently exchange information to cope with inherent high task uncertainty. They must facilitate joint decision making through strategic and administrative interaction. Thus, the earlier the stage of a venture’s development and the higher the level of innovation, the more time VCs devote into VCCEO interaction (Sapienza et al., 1994). Cultural Differences in New Venture Contexts Since the late 1970s, U.S. VC firms have expanded into the international markets, with UK and Ireland being among the first countries to attract VCs (Pukthuanthong & Walker, 2007). Since then, the globalization of venture capital has been marked by increasing cross-border investments into emerging markets (Aylward, 1998). VC markets

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6 have a presence of either domestic or foreign VC firms. As more and more player entered into the arena, VCs increasingly tend to syndicate with each other, which enables them to spread their risks (Bygrave, 1987). As a consequence, VC firms became increasingly larger with well diversified investment portfolios including both domestic and foreign investees. On the trend that VCs are now developing cross-border to fund entrepreneurial businesses, it is inevitable for them to encounter cultural issues. Culture is defined by Hofstede (1984) as “the collective programming of the mind which distinguishes the members of one group from another”. Simply put, culture is a set of shared values, beliefs, and expected behaviors (Hayton, George, & Zahra, 2002b). It provides norms and is reflected in tendencies of persistent preferences over others (Tse, Lee, Vertinsky, & Wehrung, 1988). Diversified national or ethnic cultures reflect different attitudes and values of the society in which they are embedded. In the context of VCs and entrepreneurs, entrepreneurs pursue opportunities without controlling the required resources by using more efficiently what they already have (Hamel & Prahalad, 1993), or gaining resources from outside (Jarillo, 1986). As a result, focusing on building strategic alliance is an important entrepreneurial approach (Sarasvathy, 2001). Scholars have found that culture can influence business alliances because different cultural types create different psychological environments for the joint partners and result in differences in practices which have a negative impact on performance (Barkema, Bell, & Pennings, 1996). Business alliances are more likely to be successful for culturally similar partners than dissimilar ones (Pothukuchi, Damanpour, Choi, Chen, & Park, 2002b). In such a situation, cultural differences have been reported to impact communication (Pukthuanthong et al., 2007), cooperation (Chen, Chen, &

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7 Meindl, 1998), commitment (Cullen, Johnson, & Sakano, 1995), and conflict resolution (Johnson, Sakano, & Onzo, 1990). Like other business alliances, the partnership between VCs and entrepreneurs can be influenced by cultural differences encountered by these two parties (Pothukuchi et al., 2002b). In this context, cultural differences may occur when VCs are in alliance with CEOs who have different cultural background within the same country; or when VCs explore foreign markets outside their home country. Research has found support for differences in organizational behavior in Asia from that of the West. For example, Asian culture is collective-oriented which has strong commitment to shared responsibility, while Western culture is rooted in individualism. This cultural difference between Asian and the West is likely to result in very different means for decision making, carrying out tasks, and commitment. As a result, potential agency problem may exist. In order to minimize agency risk, VCs may devote more time to monitor entrepreneurs’ activities and they believe it is beneficial to maximize returns. In the next section, we describe how cultural differences moderate the strength of the functions of agency risks and uncertainty on VC-CEO interaction. Moderating Effect of Cultural Differences on the Function of Agency Risks on VCCEO Interaction According to Sapienza & Gupta (1994), the effect of agency risks on VC-CEO interaction is a function of (1) the level at which VCs see agency risks on the CEOs, (2) the probability that assessing greater agency risks will lead VCs to engage in greater frequency of VC-CEO interaction. Cultural differences can affect the strength of agency risks—VC-CEO interaction relationship by working as a moderator.

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8 Assessed CEO commitment

Agency theory suggests that VCs will see agency

risks if they consider managers have less incentive to work toward the benefit of a venture. Cultural differences may create problems in generating commitment in business alliance because there is a cultural mismatch between partners in their satisfaction. For example, Cullen (1995) and his colleagues found that unlike their US counterparts, who are more concerned with immediate results, Japanese partners are concerned with longterm performance and the nature of relationships. This suggests that Japanese and US partners differ in their perceptions of satisfaction; which could consequently generate different commitment (Cullen et al., 1995). Therefore, in the setting of VCs and the CEO, differed commitment may also be generated due to different cultural expectations between VCs and the CEO, which may induce VCs to see the managers airing greater agency risks than those holding shared cultural values. Further, extensive empirical research has shown that cultural differences are strongly associated with allied partners’ routines, repertoires, and working styles (Morosini, Shane, & Singh, 1998). For instance, unlike the Western managers, Japanese managers prefer personalized business practices to formal contracts (Cullen et al., 1995). In such a situation, VCs may consider greater agency risks because they will assess Japanese entrepreneurs at low task commitment according to the standard of their own routines. Furthermore, it has been reported that, according to the routines in US, VCs typically gain a membership on the management board of directors to monitor entrepreneurs’ activities and their commitment to the benefit of stakeholder wealth. However, the different repertoires and routines that reflect cultural differences do not guarantee VCs a board seat in a host country (Low, 2002) and provide them the same

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9 benefits as they enjoy in their home countries (Bruton et al., 2003). As a consequence, VCs frequently seek greater governance mechanisms by adding extensive minority protection clauses to their contracts (Bruton et al., 2003). Nevertheless, VCs still often find it difficult to enforce their rights when they face underdeveloped regular, a comparatively weak legal system, and insufficient commercial code (Pukthuanthong et al., 2007), which strongly associated with cultural differences (Morosini et al., 1998). As a result, when cultural differences occur, VCs may perceive more agency risks and respond by more frequent interacting with CEOs. Thus, Proposition 1: Cultural differences between VC and the CEO moderate the relationship between the agency risks and VC-CEO interaction. Proposition 1a: The frequency of VC-CEO interaction will increase when the assessments of CEOs’ commitment decrease. But it is at a faster rate for those with greater cultural differences between VCs and CEOs. The congruence between VCs and the CEO

Sapienza and Gupta (1994) argue

that even if VCs and the CEO have same commitment to the maximization of shareholder wealth, agency problems may still arise when VCs and the CEO have disagreements over the direction of their efforts because they have no clue to the best approach to achieve their goal. Under the circumstance that cultural differences exist, VCs may assess more agency risks because cultural differences make it difficult to achieve an agreement with the CEO. VCs and entrepreneurs may identify or interpret problems differently, which may create low congruence on problem solutions and associated strategies. For example, Schneider and Meyer (1991) find cultural differences influence the interpretation of a problem and the response to strategic issues. Tayeb (1988) finds that cultural differences

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10 increase the disagreements of choices of solutions. He notes that people interpret and identify problems diversely because they have various risk preferences or uncertainty avoidance that embodies their cultural values. In contexts such as new ventures, in which VCs and the CEO face high uncertainty, VCs whose culture favors uncertainty avoidance are likely to prefer a more stable and conservative environment, thereby they are more likely to prefer risk aversion approaches; on the contrary, CEOs whose cultural backgrounds are characterized by low uncertainty avoidance are more comfortable with instability, thereby they are more open to risk-taking approaches. In such a situation that VCs encounter the CEO who has conflicting cultural values, VCs will perceive higher agency risks about whether the CEO is pursuing the best business behavior for maximizing stakeholder benefits. Another evidence that VCs and the CEO who encounter cultural differences feel hard to achieve congruence can be seen in Xiao’s (2002) finding that it is difficult for VCs and Chinese CEO to reach an agreement due to their cultural beliefs, Chinese managers frequently demand for retaining their voting control in the firm regardless of the amount of capital VCs contribute. Thus: Proposition 2: The frequency of VC-CEO increases with the decrease of VC-CEO congruence, but at a faster rate for those with greater cultural differences between these two parties. VCs’ assessment of managerial ability

According to agency theory, another

agency problem is rooted in a lack of managerial ability, which can be vital for the success of a venture (Chandler & Hanks, 1994). In order to reduce this agency risk, VCs frequently spend a considerable amount of time on people evaluation to avoid making mistakes in picking the wrong person. Cultural differences may also affect the strength of

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11 the relationship of agency risks and VC-CEO interaction by influencing VCs’ assessment of the CEO’s managerial ability and VCs’ response to the assessment. Normally, VCs screen new ventures though the process of due diligence, which includes a careful assessment of the value of an investment as well as an examination to confirm the information provided by entrepreneurs (Fried & Hisrich, 1994). However, cultural differences may affect VCs’ due diligence procedure and their assessment of entrepreneurial managers’ ability, especially under the circumstances that VCs step into a foreign market. First, in certain cultural contexts, VCs may proceed with little or no due diligence because the lack of a proper support system needed for proper checks (Yiu, 1999). Second, VCs may suffer difficulties in obtaining accurate and reliable information in due diligence (Bruton et al., 2003). For example, different financial or accounting standards adopted by the host country make it difficult for VCs to reach transparent, easily accessed, reliable, and useful financial information. Moreover, the information required by VCs is normally controlled by bureaucrats and only shared in exchange for favors (Bruton et al., 2003). Third, cultural differences may lead VCs to fail to make appropriate judgment on the CEO’s managerial experience and ability. For instance, Chinese culture is strongly collectivistic oriented rather than individualistic, in which collective actions are responsible for a given task rather than an individual makes decisions (Pukthuanthong et al., 2007). Therefore, assessing Chinese CEOs by taking individuals out of a group and ask them to work alone will dramatically influence the proper evaluation on their competencies (Earley, 1993). Finally, the standards used by VCs to evaluate the CEO in their home country may not be appropriate to evaluate a person whose background or working environment are characterized by different cultural

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12 values. Further, VCs may encounter both legal and cultural barriers when they check the CEO’s background in a different cultural context (Pukthuanthong et al., 2007). Therefore, in such a situation, VCs will be encouraged to invest into building a strong relationship with the entrepreneur in their investees to acquire the information they need to evaluate and monitor the activities of the CEO. Thus: Proposition 3: The frequency of VC-CEO increases with the decrease of VCs’ assessment of managerial ability, but at a faster rate for those with greater cultural differences between VCs and CEOs. Moderating Effect of Cultural Differences on the Function of Uncertainty on VCCEO Interaction Similar to the function of agency risks on VC-CEO interaction, the effect of uncertainty on VC-CEO interaction is a function of (1) the level of uncertainty, (2) the probability that assessing greater uncertainty will lead VCs to engage in greater frequency of VC-CEO interaction. Cultural differences can affect the strength of the relationship between uncertainty and VC-CEO interaction by working as a moderator. The stage of a venture’s development and the level of innovation Sapienza and Gupta (1994) defined task uncertainty as the difference between the information to perform a task and the information already possessed. According to their model, the earlier the stage of a venture and higher levels of innovation induce VCs to perceive higher levels of task uncertainty, thereby VCs devote much more time with the CEO for more required information to cope with uncertainty. They proposed three types of task uncertainty faced by VCs and the CEO: technical uncertainty; novelty, and marketing uncertainty. In this model, Sapienza and Gupta implicitly assume that the effects of the three types of uncertainty on VC-CEO relationship are constant across different VCs. Put

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13 another way, they assume VCs respond similarly when they face the same task uncertainty. However, researchers have argued theoretically and showed empirically that individuals differ in their perceptions of uncertainty, in their levels of tolerance of uncertainty, in their beliefs of controlling uncertainty, as well as in their abilities to bear uncertainty (Duncan, 1972b, 1972a; Ireland, Hitt, Bettis, & de Porras, 1987). Therefore, even though VCs are under the same objective economic situation of uncertainty, their perceptions and responding activities may differ. Cultural differences are the underlying reasons for individuals adopting divergent approaches to formulate, control, or adapt business strategies (Schneider et al., 1991). In addition to affecting VCs’ assessment of uncertainty, cultural differences may also affect VCs’ response to unstructured and ambiguous situation they face at the early stage of a venture or at the high level of innovation, thereby moderate the effects of uncertainty on VCs-CEO interaction. Scholars have argued that in high uncertainty avoidance cultures, individuals are more likely to feel uncomfortable dealing with uncertainty than those in low uncertainty avoidance cultures. By contrast, members in low uncertainty avoidance cultures show a greater tolerance for uncertainty, therefore they feel easy in unfamiliar situations (Geletkanycz, 1997; Hofstede, 1984). In settings of new ventures, like other individuals, VCs whose cultural backgrounds are characterized by low uncertainty avoidance can be more comfortable with instability (Geletkanycz, 1997), and be less likely to be novelty aversion (Hambrick & Brandon, 1988). As a result, VCs who are of uncertainty avoidance and feel uncomfortable for ambiguity may engage in more activities interacting with the CEO for greater structure, clearer rules, and standardized operating procedures than those who have greater tolerance for uncertainty do. As a

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14 consequence, with the effect of cultural differences, the frequency of VC-CEO interaction may vary consistently with their different perceived uncertainty. Thus: Proposition 4: Cultural differences moderate the relationship between uncertainty and VC-CEO interaction. . Proposition 4a: The frequency of VC-CEO increases with the early stage of a venture’s development, but at a faster rate for those with greater cultural differences between VCs and CEOs. Proposition 4b: The frequency of VC-CEO will increase with the increase of the level of innovation, but at a faster rate for those with greater cultural differences between VCs and CEOs. IMPLICATIONS AND LIMITATIONS Implication for Theory Previous research on cultural differences has focused on the influence of culture in joint venture performance or organizational alliance in multinational corporations. This article contributes to both the cultural differences and venture capital literature by extending our understanding of the cultural forces on firm governance in the setting of venture capital. In doing so, we apply the lens of agency theory and go beyond previous scholarly works by focusing on the moderating effect of cultural differences on the association between agency risks and the frequency of VC-CEO interaction, as well as the association between uncertainty and the frequency of VC-CEO interaction. Examining the effects of cultural differences is consistent with the current trend that attracts scholarly attention on the role culture plays in exchange (Doney, Cannon, & Mullen, 1998). Today’s companies are facing increasingly diverse and multicultural

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15 workforce (Nemetz & Christensen, 1996), and the business world is becoming in increasing globalization. Cultural factors have been extensively reported to influence organizational performance (Barney, 1986; Chatterjee, Lubatkin, Schweiger, & Weber, 1992; Ogbonna & Harris, 2000; Saffold Iii, 1988a, 1988b; Wilkins & Ouchi, 1983). In the context of entrepreneurship, previous studies have found that cultural factors are positively correlated with national rates of innovation (Shane, 1993); cultural differences impact regional rates of new-firm formation (Davidsson, 1995); and cultural differences are associated with preferences for investment decisions (Shane, 1994). Nevertheless, there is an unfilled gap at cultural effects on venture capitalist—chief executive officer (VC-CEO) interaction in cross-cultural contexts. However, the internationalization of VC is a new trend of VCs’ investment. As Hall and Tu (2003) argued, VCs are undertaking a wider basis investment rather than a simple domestic one. Therefore, understanding VCCEO interaction in the international context may give a deeper insight into the activities of VCs and entrepreneurs. The relationship of VCs and entrepreneurs is one sort of business alliances. Entrepreneurs pursue opportunity by focusing on building strategic alliance with partners such as VCs to gain necessary resources (Sarasvathy, 2001). Research evidence has suggested that cultural differences affect business alliances (Pothukuchi et al. 2002; Cartwright & Cooper, 1993). In the context of VCs and entrepreneurs, the alliance between these two players, like other business alliances, may be susceptible to cultural differences too. Furthermore, VCs’ perceptions of agency risks and uncertainty, and their behavioral responses could differ in different cultures as individuals do. Agency theory suggests that problems arise if there is low commitment of the entrepreneur to the

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16 maximization of stakeholder wealth, less congruence between VCs and the CEO, lack of managerial ability, or asymmetric information between these two players. As a result, in order to reduce agency risks, VCs seek an efficient governance mechanism to monitor the activities of CEOs. However, VCs do not always behave in same cultural settings. Cultural differences may occur when VCs are in alliance with the CEO who has a different cultural background; or when VCs explore foreign markets outside their home country. As a result, the degree of the cultural match of VCs and the CEO will play a role in VCs monitoring activities, and influence the extent and frequency of VCs being involved into activities of their investees. Implication for Practice This article suggests that the relationship between VCs and entrepreneurs are moderated by cultural differences. From an entrepreneur’s perspective, this argument indicates that the differences in cultural values influence VCs’ perception and their behavioral responses. In order to gain more supports from VCs, the CEO of a new venture should understand the effect of cultural differences, and avoid “noisy” communication, misinformation, and misunderstanding in order to decrease the cultural distance and reach cultural match with VCs. Thus, how to deal with cultural differences, minimize cultural conflicts, and achieve cultural congruence should have big concerns to the entrepreneur. From the venture capital perspective, although monitoring is crucial to reduce agency risks, a better understanding of the existence of cultural differences in the context of VC-CEO is beneficial to establish an effective governance mechanism to avoid wasting time and money. Therefore, we suggest that it is appropriate for VCs to consider

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17 different approaches to involvement and governance mechanisms according to a specific market and the CEO who has different cultural values. As a result, a general comparative analysis of culture can help VCs to appropriately evaluate the CEOs in their portfolio companies, set up strong relationship with invesees, efficiently deal with entrepreneurs of different cultural backgrounds in joint decision making, and achieve success of investment. Limitations and Future Research There are several areas of limitation for future research to develop. One of the greatest challenges is how to define exactly what cultural difference is and how one measures it (Pettigrew, 1990). The deficiency in clear concepts and measures of cultural factors may explain why it is so difficult to conduct cultural research (Leidner & Kayworth, 2006). For example, because culture represents an aggregation of values or beliefs of individuals, there is a problem of making distinctions between cultural values and individual values (Hayton, George, & Zahra, 2002a). It is highly desired for future research to define a reliable measure of cultural differences. Culture has different levels of influences such as national, organizational and individual (Leidner et al., 2006). Future researchers should consider the possible interaction of cultural effects at one or more levels, and theorize the interactive effects of culture on the relationship of VCs and entrepreneurs. The interaction of different levels of cultures and their joint effects upon the VCs’ governance mechanism can provide further insight into the VC-CEO relationship. It should be noted that, in this article, we examine only the venture capital and entrepreneur as a two-party relationship. However, there is growing recognition that both

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18 sides of the relationship can involve multiple players (Lockett, Ucbasaran, & Butler, 2006). In that situation, the interactive associations among culture, institutional structure and entrepreneurship are becoming more complex. What factors influence VCs’ decision to finance an entrepreneurial firm that has different cultural backgrounds? Are VCs who have experience in dealing with cultural issues more likely to be seeking to expand in international market? Future research is required to produce a more cogent conceptualization of interactions among these factors. Finally, in this paper, we only suggest that cultural differences moderate the functions of agency risks and uncertainty on the frequency of VC-CEO interaction. Future researchers may examine if there are direct effect of cultural factors on the relationships. Further, because the theory of this article proposes a causal relationship, longitudinal studies will help to address the problem in the specific causal links. CONCLUSION Cultural differences have been identified as an important factor that influences social behaviors. Understanding the effects of cultural differences on the relationship of VCs and entrepreneurs will help us understand the activities of VCs and entrepreneurship in the context of cross-border business. Our goal of this paper is to extend the important contributions from recent research in this area. We believe that this study will make an important contribution to our understanding of how cultural differences between VCs and the CEO affect VCs’ perceptions of agency risks and uncertainty and how these differences may or may not enhance VCs monitoring activities for an efficient governance.

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