International Organisation for Knowledge Economy and Enterprise Development
IKED - International Organisation for Knowledge Economy and Enterprise Development

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The Role of Venture Capital
..:: The Role of Venture Capital, Global Trends and Issues from a Nordic Perspective

Venture capital is not a panacea for higher growth and increased economic dynamism. But it is becoming increasingly important for many countries around the world, alongside other forms of funding for start-ups and early-stage business expansion and in the presence of appropriate conditions for restructuring, technology development, diffusion and entrepreneurship. Yet a number of factors are holding back venture capital’s economic contribution. It is up to individual countries to identify their own problem areas and ways forward, and here ample opportunities exist to learn from the experiences of others. Most lessons have so far tended to derive from the US experience, but in this new report IKED has taken stock of developments in the Nordic countries, notably Sweden and Denmark. The report combines observations of international patterns and trends in investment behaviour with assessments of the Nordic experience, highlighting specific areas where lessons can be learned.

Turning new technology and knowledge into commercial achievements is a cumbersome and risky task. Though national venture capital markets differ widely in terms of their characteristics and performance, they are becoming more responsive to the specific demands of national and regional industrial structures. Up to now, the US venture capital industry has been studied most extensively and efforts often aim to replicate this model elsewhere. Yet Sweden and Denmark are both ranked among the strongest in the world in terms of innovation and the knowledge-based economy. Both countries’ venture capital markets have expanded strongly in recent years and are now mature and dynamic.

Based on global trends and a comparative assessment of Nordic venture capital markets, the report concludes that more should be done to enable diversified flows of international and cross-border investments in different countries. The public sector has an important role to play in the early stages of enterprise formation and technology commercialisation, and must take steps to cherish the development of more mature venture capital markets. However, governments must act on market conditions and arrange for socially motivated risk reduction without crowding out private initiatives if they are successfully to promote public investment strategies. Further, governments often play a counter-productive role through a range of factors affecting entrepreneurship and industrial renewal. Reforms are needed to encourage a bottom-up spirit of renewal.

For the Nordic countries specifically, the report examines the surge in Sweden’s private equity market, which was one of the most expansive in the world in the 1990s and showed remarkable resilience post-2001. In Denmark, the public sector has boosted its seed activity and higher investment has been allocated to innovative, early-stage companies. Both Sweden and Denmark should, for example, dismantle restrictions on institutional investors and reduce taxes on capital gains to encourage investment by business angels and entrepreneurs. In a cross-border context, the Öresund region provides an example of transnational processes being hampered by the weakness of seed capital in southern Sweden, of exit markets in Denmark and of effective mechanisms for cross-border investor and entrepreneur networks.

The report adds to existing studies on venture capital in at least four ways. First, it views the venture capital industry from a global perspective and examines and compares market trends and policies over a number of years. Second, it emphasises the unique role of venture capital as connected to other players that are greatly relevant to innovation, including entrepreneurs, and underlines the role of policy initiatives to ensure a healthy interaction in this respect. Third, it critically reviews the role of public intervention and the public sector’s way of handling risk when fostering technological development. Last, it looks in some depth at both good and flawed policy practices from the Nordic countries – whose experiences are rooted in great strengths with regard to innovation as well as rapidly evolving venture capital markets – and highlights current policy issues which may also be of more generic interest.

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