The influence of institutional environment on venture capital development in emerging economies: The example of Nigeria

• Author: Ignatius Ekanem,Robyn Owen,Antonio Cardoso
• Date: 01 January 2019
• DOI: http://doi.org/10.1002/jsc.2249
• Published date: 01 January 2019

RESEARCH ARTICLE

The influence of institutional environment on venture capital

development in emerging economies: The example of Nigeria

*

Ignatius Ekanem

1

| Robyn Owen

2

| Antonio Cardoso

1

1

Department of Management, Leadership and

Organisation, Middlesex University Business

School, London, United Kingdom

2

Department of Management, Leadership and

Organisation, Centre for Enterprise and

Economic Development Research (CEEDR),

Middlesex University Business School, London,

United Kingdom

Correspondence

Ignatius Ekanem, Middlesex University

Business School, The Burroughs, London NW4

4BT, UK.

Email: i.ekanem@mdx.ac.uk

Abstract

Venture capital (VC) can be nurtured in the right environment, within an emerging economy, to

be attractive to private VC investment development. Venture capitalists require stable institu-

tional frameworks, regulations, and tax regimes alongside clear exit strategies. Informal institu-

tion such as networking is important for VC development. Governments of emerging economies

need to stimulate entrepreneurial awareness of equity finance through training and promotion

to facilitate investment readiness.

1|INTRODUCTION

Emerging economies are characterized by institutional changes as

their economies start to develop (Urban & Kujinga, 2017). How insti-

tutional environments of emerging economies influence the venture

capital (VC) development process has only just begun to be addressed

(Li & Zahra, 2012; Lingelbach, 2015).

Notwithstanding the proliferation of studies examining the effect

of institutional environment on the VC process, the theoretical frame-

work has still not been sufficiently developed (Lingelbach, 2015).

Therefore, this article explores how institutional environment impacts

on VC development in emerging economies and how individuals and

organizations can respond to those institutions (Lounsbury & Crumley,

2007). Despite the significance of VC in mature economies, emerging

economies are lagging behind in VC development. Lingelbach (2015)

suggests that the influence of institutions on VC activity can be of

special relevance in emerging economies. Thus, VC in developing

countries offers a natural laboratory for investigation of the impact of

institutions on entrepreneurial activity.

Emerging economies typically have institutional environments

that are considerably different from those of more developed econo-

mies (He, Tian, & Chen, 2007). In particular, emerging economies tend

to have inadequate regulatory and enforcement regimes (Peng, 2000).

They have underdeveloped and inadequately enforced laws to sup-

port the fulfillment of contracts. Therefore, companies tend to pursue

alternative, less formal, mechanisms such as relying on personal rela-

tionships and guarantees to ensure that parties fulfill obligations

(Scott, 2002). Consequently, emerging economies offer a useful set-

ting for understanding the impact of institutions on a given industry

undergoing a swiftly changing environment (Bruton, Ahlstrom, & Li,

2010; Marcotte, 2014).

The benefit of focusing on the single subject of VC is that

institutions are typically situation specific. Therefore, one can evaluate

institutional characteristics with regard to a specific phenomenon

such as an entrepreneurial system, rather than in terms of general

arrangements (Busenitz, Gomez, & Spencer, 2000; Muhammad,

Ullah, & Warren, 2016).

VC is a widely used form of financial intermediation that is partic-

ularly well suited to stimulate the development of innovative fast-

growing businesses that can make an impact on the local/national

economy. It is a niche form of financing which is most established in

the United States and United Kingdom; however, even in these coun-

tries, it is only around 2% of SMEs with potential high growth (PHG)

that use VC (North, Baldock, & Ullah, 2013). However, in Nigeria's

emerging economy, there are PHGs which are underfunded and

therefore offer a potential role for VC. VC requires an ecosystem

building approach, enshrined in Gilson's simultaneity theory of engi-

neering VC, with a balance between encouraging a pipeline of suitable

businesses and the right environment for it to flourish (Gilson, 2003;

Lerner, 2010).

The article investigates the development of VC in Nigeria, an

emerging economy lacking the fully developed legal and financial insti-

tutions necessary to support flourishing sustainable VC financing. It

explores two research questions: (a) How does institutional environ-

ment influence VC development in an emerging economy? (b) Where

*JEL Classification Code: G24.

DOI: 10.1002/jsc.2249

Strategic Change. 2019;28:95–107. wileyonlinelibrary.com/journal/jsc © 2019 John Wiley & Sons, Ltd. 95