Institutional Barriers to Venture Capital Investment in Iran: A study to explore the incentives of investment in technology based small firms

Venture capital (VC) investment is an important tool for financing of technology based small firms (TBSF). However, the lack of incentives to invest in such firms has prevented the development of VC industry in Iran. Since the institutions create frameworks that shape the incentives and behavior of economic actors, the current study has adopted institutional approach to answer the question: “Why incentives to venture capital investment are lacking in Iran?” Therefore, this research is applied in terms of purpose, and to answer the mentioned question, has used qualitative grounded theory research method (Glaisarian approach). The statistical population includes VC fund managers, TBSF managers, policy makers and academic experts, 29 of which were selected in a purposive-theoretical sampling. Data were collected and analysed through conducting semi-structured interviews. The research finding suggest that 5 defective investment stream decrease the incentives to invest in innovation. Institutions such as information disclosure, tax regulations, financial markets, inflation, labor regulations, property rights, law enforcement and several other socio-cultural institutons are critically important in shaping that defective investment streams. Finally it is recommended that policy makers reform institutions rather than direct interventionist policies.