Click here to load reader
Upload
adebola-daramola
View
340
Download
3
Tags:
Embed Size (px)
DESCRIPTION
An exploratory research employing systematic evolutionary approach (Avnimelech and Teubal 2002) to study Venture Capital and New Technology Based Firms in Nigeria. It offers a history of economic agents, actors activities and linkages in the creation of technology based firms in Nigeria, with due consideration to their economic outcomes and social impacts (Gault 2010). Though Nigeria has no defined VC policy, the paper assumes so with Supply side policies such as the Venture Capital (Incentives) Decree No .89 1993 and 2001 Small and Medium-Scale Industries Equity Investment Scheme (SMEIS). Macroeconomic factors (such as supply side and demand side policies) would support the emergence of NTBFs as seen from the study. In Nigeria, tremendous efforts have been made to resolve small business finance, with no particular attention directed at technology-based firms. There is an increasing need for demand side policy changes (i.e. initiatives to improve both financial and managerial capabilities of technology entrepreneurs in Nigeria). Infrastructure supports for Nigerian NTBFs are misplaced with continuous reliance on technology transfer above creative creation within the economy. With this study, knowledge has been extended about the policy environment that foster Venture Capital and NTBFs in Nigeria.
Citation preview
New Technology Based Firms and Venture Capital policy in Nigeria*.
Adebola Daramola*
National Centre for Technology Management, Obafemi Awolowo University, Ile-Ife
(NACETEM)
This paper was prepared for presentation at the Summer School 2011 of the Research Network on Innovation –SITE Clersé , Dunkerque, France with theme: Entrepreneurship, Innovation and Sustainable Development. August 31, 2011 – September 3, 2011
Introduction
• The presence of institution such as Venture capital (VC) serves as a strong mechanism for innovation, by providing early stage equity and strategic support in form of vested interest in the success of the technology based firm ( Oyelaran-Oyeyinka and Sampath, 2007; Debbie Ariyo 2000).
• The development of high growth technology based firms (TBFs) in Silicon Valley, Israel, Bangalore and UK is attributed to Venture Capital. They helped create new industry and sectors, which in turn provides job creating opportunities for these nations. Research works in universities have been commercialized through the backing of Venture Capital fund. Novel ideas (like Facebook) from people with little or no business pedigree have known commercial success all with the support enjoyed from VCs.
Background
• With a colonial history traced to the British, we can describe the emergence of risk finance and venture capital policy in Nigeria to development financial institutions (DFIs).
• The design of private equity and venture capital firms takes a clue from the DFIs, these institutions are designed to provide medium and long term financing, with provision of technical and managerial services, in addition to monitoring effectively the progress of the investee firms.
Literature on Venture Capital Policy and Technology –
Based firms.
• Earlier research ( Donna Situ; Nef; Lefton ; Ansari & Uddin Mohd)on the role of VC firms and NTBFs; VC firms and Innovation ( Rahman, Manan, Azrai & Sanjivee (2008); Bowonder & Mani( 2002);)in different countries as a case, we have come to a better understanding of the public policies that foster the creation of new jobs, service activities and commercialization of research findings . The effect of this development has led to increasing entrepreneurship and innovation in countries around the world.
• Some people have written about the Nigerian Venture Capital Industry (Isiadinso(2002); Ariyo(2000); Agbana(2010); Dagogo & Ollor (2009), their major coverage of the subject have been any of an analysis of the market and its role in support of SMEs and business environment. We have seen little or no interest in its role in cultivating NTBFs, which is of interest to us in this paper
Research approach to NTBFs and Venture Capital Policy
• Rosiello, Teubal and Avnimelech (2008) posit that research on venture capital and New Technology Based Firms have followed two route ; firstly: finance literature where venture capital is seen as an arm of the financial system only , restrictive in approach and confines the assessment of NTBFs and VC Policy to the definition of VC as a pool of blind funds to invest in new starts up and later stage companies, the second method is the systematic evolutionary( SE) takes into cognizance the relevance of interlinked policies in achieving new start up development, a combination of all economic and Science, Technology and Innovation(STI) policy.
• The use of systematic evolutionary (SE) approach (Avnimelech and Teubal ,2002) to understanding VC Policy is rooted in a broader history of economic agents and actors activities and linkages in the creation of new startups, with due consideration to their economic outcomes and social impacts ( Gault 2010)
Policy Environment for NTBFs and Venture Capital
• With the knowledge of Innovation system approach, we are aware that policies matter. Policies play a role in setting the parameters within which actors make decision about learning, investment and innovation (Adebowale 2010). Government drives economic development through policy decisions and incentives. This takes the form of economic, institutional and regulatory frameworks through which market can channel resources to new innovative enterprises.
External factors
These are macroeconomic and other factors affecting both the supply and the demand for
venture capital.
Nature of Supply side policies Types Description
DIRECT SUPPLY OF CAPITAL Government equity investment To make direct investments in venture
capital firms or Technology –Based
firms(TBFs)
Government loans To make low-interest, long-term and/or
non-refundable loans to venture
capital firms or TBFs
FINANCIAL INCENTIVES: Tax incentives To provide tax incentives, particularly
tax credits, to those investing in small
firms or venture capital funds
Loan guarantees To guarantee a proportion of bank
loans to qualified Technology-Based
firms
Equity guarantees To guarantee a proportion of the
losses of high-risk venture capital
investment
Investor regulations: To allow institutions such as pension
funds or insurance
companies to invest in venture capital
Demand side
policies
Consideration
Major factor of
importance
Rationale/Description
Cultural
Environment
Personal
entrepreneurial
characteristics (PEC).
This refers to the underpinning characteristics of entrepreneurs in the economy, the
need for achievement, personal locus of control and risk taking propensity.
Demographics Give attention to age, gender and educational background and former work experience
as an impact on entrepreneurial intention and endeavor such as establishing TBFs
Education Structure Entrenching changes in education that encourages training in entrepreneurship and
business. Encouraging education in Science, Technology, Engineering and
Mathematics as a building block to NTBFs creation.
Infrastructure &
Support
Business Incubator
( government –funded
or private-public
partnerships)
A designated area to create and nurture SMEs with physical infrastructure and various
services such as business planning, financial advisory, management training,
advertising, secretarial , security, intellectual property protection and post incubation
support.
Technology Parks An environment designated by government , universities or research institutions with
incentives such as access to research facilities, technology transfer and spin-off
offered to companies to relocate to catalyses the process of growing more TBFs ,
provide entrepreneurs with access to expertise, networks and business support to
make their venture successful. They have strong R&D components in their
organizational structure.
Technology Incubators A special type of business incubator that focuses on new ventures that employ
technologies, it serves as a market for commercialization and diffusion of technologies.
Clusters This could be based on factors such as natural resources or geographical advantages
.It is a critical mass of firms allowing economies of scale and scope, a strong science
and technology base, and a culture conducive to innovation and entrepreneurship.
Export Processing
Zones(EPZs)
This is a mechanism employed by economies to acquire and diffuse technology in the
local economy by permitting participating firms to acquire their imported inputs free as
long as they export 100% of their products. The focus is attracting FDI and providing
access to infrastructure and tax incentives leading to increase productivity in host
country.
Support Agencies These refers to government ministries, agencies(MDAs) and department established to
support the growth of TBFs.
Evolution of Venture Capital in Nigeria Pre 1997
1997-2002 2003-Date
Key Features of the period Preceded by the emergence of development
financial institutions (DFIs), commercials banks,
Major government investments in heavy industry
(steel, aluminum, fertilizer etc)— poorly planned
and executed
Several development plans conceived to push the
country into the frontier economy failed
Presence of White Elephant project
Inefficiency of management of DFIs investee
companies
The exit of military in the governance of
Nigeria
Deregulation
Privatization of Government –owned
Industries
Liberalization of Telecommunication sector
Continual democratic governance
Reforms-banking consolidations and pension
Privatization of Government –owned
Industries
Emergence of adoptable
Technologies/Model for inclusive
penetration of markets- MobileMoney, M-
Health
Return of Nigerian diaspora in droves to take
up management and creation of business
VC’s Presence and Funding
Focus Development financial institutions (DFIs) and
negligible number of VCs- prominent were the
National Risk Fund Plc and Venture & Trust
Company
investments in manufacturing, agro-allied, tourism
and hotel etc
More VC players
public investments in heavy industry (steel,
aluminum, fertilizer etc)
privatized companies, Telecommunication
companies; Financial Services, Oil and Gas,
FCMGs,
More VC firms, with increase in deals
VC Industry development with specialty firms
emerging
privatized companies, Telecommunication
companies; Financial Services, Oil and Gas,
Infrastructure, Technology based or
Technology Business model companies,
Power/Energy;Shipping,
Government’s Role toward VC
development and NTBFs High levels of effective protection including outright
bans on imports for domestic manufactures
Poorly designed product and location specific
incentives, including tax and import duty rebates,
and development of export processing zones.
Several of these schemes were subject to gross
abuse because of weak governance
the First National Policy on Science &Technology
was developed
National Risk Fund was introduced
Facilitated the establishment of Small and
Medium-Scale Industries Equity Investment
Scheme (SMEIS)
Initiated favorable business policies
Review of the first National S&T policy
The Investment and Securities Decree was
passed into law
Establishment of the Investment and
Securities Tribunal for speedy resolution of
disputes arising out of investment deals
Investment friendly policies leading to
enormous interest by foreigners and
confident earned from the locals
Full review of the first National S&T
policy(2003)
Introduction of a Science, Technology &
Innovation policy draft (2011)
Bank consolidation, strengthen the financial
landscape
Venture Capital Firms activities in Nigeria
• With the establishment of Small and Medium-Scale Industries Equity Investment Scheme (SMEIS) in 2001 and the liberalization of telecommunication in Nigeria, venture capital activities have expanded leading to a corresponding increase in the presence of VC firms in Nigeria or outside with focus on Nigeria (Sub-Saharan Team often based in London, South Africa or Ghana).
• The use of ICT in Nigeria is growing, with the financial services sector outside the Oil and Gas Industry, a major consumer of technology and the agriculture business sector (renewable energy, seed production) enjoying interest from the VCs.
• The interest to invest in Nigeria over the last ten years by both local and international venture capital funds is attributable to the stable macroeconomic indicators fuelled by a continual democratic governance and entrenchment of rule of law and economic policies.
New Technology Based Firms- Definition
• The origin of the term NTBFs is attributed to the Arthur D. Little Group. They defined it as” an independently owned business established for not more than 25 years and based on the exploitation of an invention or technological innovation which implies substantial technological risks.
• James Allen’s definition as quoted in the Bank of England report (1996) on “The Financing of Technology-Based Small Firms”, state that NTBFs is a business whose products or services depend to a significant extent on the application of scientific or technological skills or knowledge (whether it be novel application of advanced technology to provide a totally new product or service, or an application of existing technology in an innovative manner).
Classification of Technology Based Firms (TBFs)
• In this research, our understanding of what qualify as a technology based firms (TBFs) employ ISIC Rev.3, also known as the OECD classification of industry based on technology.
• It is a division of industries into high-technology, medium-high-technology, medium –low-technology and low-technology groups, it includes a new division of services classified according to their “knowledge-intensity. This enables knowledge based services such as Finance, Insurance, business services, Telecommunication, Education and Health.
Nature of New Technology Based Firm (NTBF) in Nigeria
• NTBFs in Nigeria are enterprises across industries which utilize technological innovation or exploit an invention; the common driver has been ICT. They fall within the medium –low-technology; low-technology and Knowledge Intensity services groups.
Industry Description of Technology or
Invention
Technology Innovation
(tick off)
Exploitation of
Invention
(tick off)
Examples of TBFs in Nigeria
Education E-learning, On-line
Registration/Examination √ National Open University of Nigeria, JAMB,
Medicine TeleMedicine, Assisted
Reproductive Technology, √ √ NAFDAC,
Telecommunication GSM, BroadBand Technology, ICT √ MTN, Etisalat, Aitel, Globacom, V isafone
Financial Services ATM, Online Banking, e-commerce √ Commercial Banks, Etransact, Interswitch,
Agriculture Seed production, mechanization
farming, Animal Production, √ √ Obasanjo’s Farm, Animal Farm
Oil and Gas Refinery, Oil Drilling, √ √ Shell, Oando,
ICT Computers, Software √ √ Resourcery, Omatek, Zinox, Chams,
Logistics &Transportation Online Reservation √ Arik, Dana, ABC Transport,
Mass Communication broadcast, electronics and print
media √ Silverbird, ePunch, FM radion stations
Defense Intelligence Gathering, Artillery
Manufacturing √ √ Armed Forces
Government Election registration √ INEC, FGN MDAs
Entertainment Movies, Music, Video √ Silverbird, StormRecords,
Manufacturing FCMG, Paints, Wire & Cable √ √ Promasidor, Ayoola Foods,
Nigerian experience of NTBFs and VC Policy
Policies and programs VC-directed policy
(tick off)
VC –related policy
(tick off)
Financial incentives(Tax ) √
Venture Capital (Incentives) Decree No .89 1993 Act. √
the Small and Medium Enterprises Equity Investment Scheme (SMEEIS) 2001 √
Science, Technology & Innovation policy draft (2011) √
Entrepreneurship Development syllabus introduced into Primary, Secondary,
University (2006) √
Technology Incubation Centres √
Clusters( Otigba, Nnewi) √
Support Agencies( SMEDAN, BOI, NOTAP, √
Establishment of Intellectual Property and Technology Transfer Offices √
Stable macroeconomic environment (1999-Date) √
Export Processing Zones(EPZs √
Educational and Research Organisations √
Entrepreneurial characteristics of the diverse tribe in the country √
Research Methodology
• Relied on secondary source material as well as conducted open (unstructured) questions interviews of selected members of the Venture Capital Association of Nigeria (VCAN) and executives in technology-based firms( Vassilev ,2005).
• For the secondary source material, data were collected from several sources: electronic searches were performed to identify previous research on the topic: venture capital policy and NTBFs, Venture Capital in Nigeria and the classification of technology based firms (TBFs).
• Research report of leading consulting firm, Private Equity firm and Africa Venture Capital Association were scanned for relevant data. Nigerian based and focused Venture Capital firm website was visited to compile useful information for the study. Company press announcements and Industry leader’s presentation were equally scanned.
Data Analysis and Presentation of Results
• At this level of presentation, the research is exploratory with reliance on secondary source material and opportunity to gather more data. So far, interviews were conducted with five (5) members of the Venture Capital Association of Nigeria (VCAN), with between 9-25 years work experience in the Nigerian Financial Industry, particularly Venture Capital firms. They were Senior Investment Analyst (2), Investment Principal (2) and Regional CEO/Partner (1). Further face-to-face interviews scheduled with executives in technology –based firms could not be held, but the researcher took time to interview about six (6) executives and professional services consultant over the phone. Each interview with the total eleven (11) individuals lasted no less than one hour.
Findings
• Insight from the interviews was the need for demand side policy changes to encourage an upsurge of entrepreneurial and inventive discovery in the country, with proper framework such as intellectual property to support the growth of TBFs. This should take emphasizes on Sciences, Technology, Engineering and Mathematics (STEM) education above the Management Sciences education as we currently have.
• Infrastructure supports to foster NTBFs are misplaced with continuous reliance on technology transfer above creative creation within the economy.
• Also government incentives targeted toward TBFs are minimal or non-existent which invariably affects the level of VC investments in Nigeria
Conclusion
• With this exploratory research, we have extended knowledge about New Technology Based firm and Venture Capital policy in Nigeria (Andreas Pfeil,2000) using the Systemic Evolutionary (SE) perspective (Rosiello, Teubal and Avnimelech ,2008; Avnimelech and Teubal ,2002 ).
• There is room for indepth data gathering and collection across all actors of the Innovation ecosystem beyond the members of the Venture Capital Association of Nigeria (VCAN) and some executives in technology-based firms to assess VC Policy in support of NTBFs creation
THANK YOU FOR YOUR ATTENTION!