Economic Externality and Government Roles in Environmental VCs Mannie Manhong Liu 刘曼红 Renmin University of China VCChina, Beijing WRI Conference: Oct. 2004

Environmental VCs Two social benefits: –Beneficial externalities –Technological innovation

The relationship between VCs and Environment

Environmental VCs Different from other VCs:

Economic Externality the problem of an externality usually concerns the results of market activity. voluntary exchange as mutually beneficial to both parties in an exchange. On the other hand, either the consumption of a product (perfume, nice clothes) or its production may have external effects Those who suffer from external costs do so involuntarily, while those who enjoy from external benefits do so for free

Consumers producers money Products services Consumer’s External cost Or benefits Producer’s External costs Or benefits Government roles Economic Externalities

Who share the cost of externality Smoking –Smokers –Family of the smokers –Second hand smokers –Many more: Air quality Hospital cost: –Direct cost –opportunity cost All other people

Who will benefit from an environmental friendly product Green products or organic products –Who get the benefit? –Buyers, yes; sellers, yes –But much more: Earth Echo system Water All people in the area All people in China All people in the world All animals All plants

Social Effect Externalities: –Positive social effects –Negative social effects Government role Imposing punishment if there is a negative social effect Obliging rewards if there is a positive social effect

What Entrepreneurs get For a beneficial product: entrepreneurs get less than what he should get, compared with all the external benefit Government intervention

Relationship between Venture capital and innovation

The impact of venture capital on innovation –Venture capital spurs technological innovation, among both the firms receiving the financing and entire sectors. Kortum and Lerner, “Assessing the Impact of Venture Capital on Innovation,” Rand Journal of Economics, Winter 2000.

What they found out Venture capital appears ~3 to 4 times more powerful than corporate R&D. From late 70s to mid-90s, VC was only 3% of corporate R&D, but responsible for ~10%-12% of privately funded innovations. Potentially even greater influence in more recent years. Empirical evidence in China???

Chinese Government Efforts Initiatives: first domestic VC: 1986 Second wave: –Shanghai high tech VCs- 600 million RMB –Jiangsu; 150 million –Chongqing; 200 million –Guangdong; 1 billion Third wave: proposition number 1, march 1997 Other government programs –State incubators; technology innovation centers –863 program; Torch program –High tech zones: National 53; local: 150+

The Relationship between innovation and venture capital Are they directly related? Yes and no Commercialization of innovation

mature expansion Sales Firm Life Cycle Investment window $1B $50M $100M $3M $1M startup stable time seed

Seedstartupexpansionmaturestable Three F Angels government Venture capital Commercial banks Public market Private equity innovation Commercialization Of innovation

The Torch Program and : march of 1986 Torch: 1988 Torch: SME Innovation fund: –2 billion 1 billion from government 1 billion from bank loans Problems: –Expansion effect –Commercialization effect