1 Venture Capital in APEC Economies: Comments Professor Stephen Yan-leung Cheung Faculty of Business City University of Hong Kong

2 Contents Funding problems of SMEs Funding problems of SMEs Role of government Role of government Impacts of globalization on SMEs Impacts of globalization on SMEs Policy implications Policy implications

3 Funding Problems Despite efforts by financial institutions financial institutions public Sector public Sector to close financing gaps SMEs continue to experience difficulty in obtaining risk capital

4 Funding Problems These funding gap related to Firm size Firm size Risk Risk Knowledge Knowledge Flexibility Flexibility

5 Funding Problems Difficulties SME borrowing requirements are small and frequently do not appeal to financial institutions SME borrowing requirements are small and frequently do not appeal to financial institutions More collateral may be required than SMEs can pledge More collateral may be required than SMEs can pledge Financial institutions may lack expertise in understanding knowledge-based business Financial institutions may lack expertise in understanding knowledge-based business The flexibility in terms and conditions that many SMEs require may not be available The flexibility in terms and conditions that many SMEs require may not be available

6 Funding Problems Difficulties Information Asymmetry Information Asymmetry – On-line information to small business – Dutch SMEs account aims to reduces information asymmetry problem between SMEs and financiers Start-up stage Start-up stage – Credit loans, leasing companies, personal and family relations – Seed capital funds to fund high risk projects

7 Funding Problems The funding needs of high risk high risk knowledge-based knowledge-based technology-based technology-basedby venture capital venture capital business angel networks business angel networks

8 Government can affect the supply of venture capital rules and regulations rules and regulations pension funds participation pension funds participation tax incentives tax incentives directing venture capital to seed firms in growth sectors directing venture capital to seed firms in growth sectors

9 Globalization, SMEs and Venture Capital Global competition Global competition Rapid changes in technologies Rapid changes in technologies Evolving market conditions Evolving market conditions Rising R&D costs Rising R&D costs

10 Globalization, SMEs and Venture Capital Technology factors Technology factors Strategic alliances Strategic alliances – cross border alliances Mergers and acquisitions Mergers and acquisitions Information networks Information networks – clusters

11 Policy implications Sizes of venture capital declined in 2001 Sizes of venture capital declined in 2001 – Venture capital (US) rose from USD 20 billion in 1998 to USD 100 billion in 2000 and dropped to USD 38 billion in 2001 Secondary stock markets – poor performance Secondary stock markets – poor performance – GEM Pension funds Pension funds – Venture capital (US) rose from USD 20 billion in 1998 to USD 100 billion in 2000 and dropped to USD 38 billion in 2001 – participation in venture capital

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