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... ure capital in Western Europe 4. 1 General As we have seen in chapter 2. 2 venture capital is about innovation: the process of bringing invention into use. Venture capital cannot exist other than in an innovative environment. The fact that Western Europe in the years between 1945 and 1970 was a less innovative place than the U. S. A.
is well documented. An Organisation for Economic Cooperation and Development (OECD) study of 1970 uses two statistical indicators to measure the innovative performance in Western Europe and the U. S. A.
First the study establishes the location of first commercial exploitation of 110 selected significant innovations from 1945 to 1970. Located in the U. S. A were 74 and in the industrialized Western European countries 42 innovations (The numbers of innovations in the countries considered do not sum up to the total number of innovations considered, due to the fact that innovations sometimes originate in two or more countries at the same time (OECD, 1970) ). Second the study establishes the monetary receipt for patents, licenses and know how in international payments for the U.
S. A. and Western Europe. The receipts for the U. S. A. 348, 7 and for Europe 222, 7 million dollars.
During the interview with a venture capitalist it was indicated that the absolute numbers of innovations and of monetary receipts for patents are not a precise indication of the innovate performance and that the numbers weighted for the average workforce would be much better. When the OECD numbers are weighted for the average workforce in Western Europe (+/- 45. 000. 000) and the United States (+/- 25. 000. 000) over this period, the percentage of the total innovations is 75 % in the U. S. A. to 25 % in Western Europe.
For receipts for patents, licenses and know how these percentages are 74 % to 26 %. This indicates a level of innovation in the U. S. A. about three times as high as in Western Europe. In view of this OECD study it is not a surprise that numerous references were found to support the statement that Western Europe was poor at innovation (Bryant, 1970).
Almost all authors are in agreement that innovation is a function of the environment. To explain the later emergence of venture capital in Western Europe compared to the United States the environmental factors that contributed to a lower innovative performance must be looked at. 4. 2 Environmental factors influencing innovation 1) Basic and applied research Innovation is a function of the quantity and quality of the basic and applied research capabilities of an area. This is obvious when it is understood that an invention is more likely to occur when the inventor is exposed to science and technology. Table 1 depicts the percentage of GNP that was spent on R& D by universities, government institutions and industry in 7 European countries and the U. S. A.
between 1963 and 1964. It is very clear that the U. S. A. outperformed Western Europe. Table 1: Gross national expenditure on R and D, 1963 - 1964 (From OECD, 1970) 2) The presence of larger firms Innovation is a function of the presence of larger firms in more than one way.
First, the existence of larger industrial firms determines to a great extent the level and sophistication of the technology available in an area as large industries must engage in product innovation simply in order to keep up with its competition (Schon, 1967). Second, large firms provide (willingly or unwillingly) an incubator environment for innovative ideas and entrepreneurs through the exposure they offer to technology and the marketplace. Third, larger industrial firms influence the demand for innovation. When technology advances, industrial firms need more sophisticated machinery and equipment.
This offers the opportunity for other, often small firms, to develop specialized equipment. The total number of industrial firms of a significant size in Western Europe was considerably smaller than in the U. S. A. at that time (annual issues of the magazine Fortune). 3) Educational level of the labour force Innovation is a function of the number and utilization of high level manpower (graduates of universities and high level occupational schools) in the labour force. A study of the OECD in 1970 has the following results: - The U.
S. A devoted a higher % of its GNP to education than any of the European countries. 6, 2 % versus 3, 4 - 5, 7 %. - The U. S. A. had a higher % of its population enrolled in educational institutions. 27 % versus 19 %. This was especially the case for higher education. 2, 4 % versus 0, 7 %. - The U.
S. A. had a higher % of high level manpower in its total labour force. 17 % versus 10 % for Western Europe (OECD, 1970) This information clearly shows that the U. S. A.
performed better in producing and using high level manpower than Western Europe. 4) Universities Innovation is not only a function of the total enrolment in universities as showed above, but also of the quality of and the attitude within these institutions. This is logical when considering that universities bring together the intellectually most promising students who will be the scientists, technicians and managers of tomorrow. Two observations can be made. - U. S. A. universities have been described a more entrepreneurially oriented than Western Europe (Ben David, 1968). - It is often stated that the interconnections in Western Europe between the financial community, industry and universities were less fluid and scarcer than those that exist in the U.
S. A. 5) Government procurement Technological innovation is essential to a country. Innovation is a function of the magnitude and nature of public projects (Schon, 1967). Government agencies buy advanced technological products for defence, aerospace, infrastructure, education and many other purposes and therefore are stimulators for innovation. Government procurement especially in high tech applications played a considerable smaller role in Western European countries than in the U. S.
A. at that time. 6) Capital Innovation is a function of the capital resources available for innovative projects. Financial resources for existing industrial firms depend on retained profits, publicly floated equity and bank financing. In the 60 's the capital markets in the U. S. A.
were flexible and liquid. European capital markets (with the exception of London) on the contrary, lacked depth and scope, were fragmented and illiquid. The debt / equity ratio of the average Western European firm at that time was considerably higher than was the case in the U. S.
A. (Rolfe, 1967). As a consequence Western European firms were less flexible in their financing, which had an adverse effect on innovative efforts. The lack of capital markets in Western Europe at that time in which young growing firms could be brought public made it unattractive to provide equity capital to starting enterprises as an exit to the capital markets did hardly exist. (Cowie, 1999) This also had a negative effect on innovation through small firms. 7) Income per capita Innovation is a function of the income per capita. This relationship is clear when it is understood that all production, in the end, is aimed at consumer satisfaction, because this is the source of revenue. Consumers have a role with respect to technical innovation; the new product must "meet their needs" (Schon, 1967) When the income per capita rises, more technologically advanced products, are demanded. This results in a demand for innovation.
Income per capita in the U. S. A. at that time was considerably higher than in Western Europe. 8) Markets Innovation is a function of market potential. When the market potential is high it means a high return on investment can be reached. This provides the monetary incentive for innovation.
Market potential is determined by the ease and speed with which products can be introduced in the market and the number of units that can be sold. A competitive environment leads to innovation. Fragmented markets are barriers for innovation; they slow down the introduction in the market and increase the chances that fragments are taken by competitive efforts (profiting from these barriers). Different languages, different customs, different laws and regulations are obstacles to innovation. All these factors were a significantly less advantageous to innovation in Western Europe then in the U. S.
A. 9) Socio-economic and cultural factors Innovation is a function of the interconnections between markets, people, information, companies and institutions. The effectiveness of these interconnections is dependent on a number of socio-economic and cultural factors. The most important are mobility, education, attitudes towards change and experience with other languages and costs. From this chapter is clear that the environmental factors influencing innovation in the period discussed were much less favourable in Western Europe than in the United States. As a consequence it is no surprise that in 1970 in the U.
S. A. around 600 venture capital firms existed against around 10 in Western Europe. Although beyond the scope of this paper, it is safe to say, although the environmental factors influencing innovation have improved dramatically over the last 35 years, that the innovative environment in Western Europe as of today still is less developed in Western Europe than in the U. S.
A. This is particularly true for market barr...
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