Emerging trends in government venture capital policies in smaller peripheral economies: Lessons from Finland, New Zealand, and Estonia

• DOI: http://doi.org/10.1002/jsc.2248
• Author: Colin Mason,Robyn Owen
• Date: 01 January 2019
• Published date: 01 January 2019

RESEARCH ARTICLE

Emerging trends in government venture capital policies in

smaller peripheral economies: Lessons from Finland,

New Zealand, and Estonia

Robyn Owen

1

| Colin Mason

2

1

Centre for Enterprise and Economic

Development Research (CEEDR), Middlesex

University, London, United Kingdom

2

Adam Smith Business School, University of

Glasgow, Scotland, United Kingdom

Correspondence

Robyn Owen, Centre for Enterprise and

Economic Development Research (CEEDR),

Middlesex University, The Burroughs, Hendon,

London NW44BT, United Kingdom.

Email: r.owen@mdx.ac.uk

Abstract

Emerging trends from the developing venture capital industries of three smaller peripheral

economies (Finland, New Zealand, and Estonia), demonstrate that government policy can over-

come scale and distance barriers to assist in establishing venture capital to support innovative

potential high growth ventures. Eight common policy themes for successful venture capital

development are: new venture stimulation; dedicated finance policy institutions; stable, interna-

tionally harmonized tax and regulations; business angel development; inward investment;

international venture capital fund development; smooth pipeline of investment; effective invest-

ment exit market. Venture capital policy development themes are interconnected, requiring a

holistic ecosystem approach. A blueprint for successful small peripheral economy venture capital

development requires an initial phase of new venture demand stimulation and ensuing simulta-

neity of policies to engineer venture capital development.

1|INTRODUCTION

Private venture capital (VC) can play a crucial role in assisting potential

high growth innovative venture start-ups and scale-up, and their con-

tribution to economic growth (Baldock & Mason, 2015; Cumming

et al., 2016; Lerner, 2010). However, it is concentrated geographically,

both globally and within countries (Avdeitchikova, 2012; Mason,

2007). In response, policy-makers in countries with VC gaps have

introduced initiatives intended to increase supply. Indeed, Lerner

(2010) has observed globally that most established VC markets have

been underpinned by government support. Government support has

taken two forms (Murray, 2007; Murray, Cowling, Liu, & Kalinowska-

Beszczynska, 2012). The initial approach was the creation of state

owned VC funds that were managed by government employees or

private sector managers engaged by the state. However, these

schemes have generally failed to generate sustainable private sector-

led VC (Cumming, 2014; Grilli & Murtinu, 2014; Lerner, 2009;

Munari & Toschi, 2015; Nightingale et al., 2009). Over the past quar-

ter century state owned and managed funds have been superseded

by hybrid funds, where government invests alongside private inves-

tors in privately managed funds, often on different terms and condi-

tions, to reduce the risk and enhance returns for private investors.

However, despite recent papers (Baldock, 2016; Cumming & Johan,

2016) suggesting improved impacts, concerns persist about the

effectiveness of government VC initiatives in VC-deficient economies,

providing further momentum to the recurring debate on the appropri-

ate design of government venture capital initiatives.

Small peripheral economies (SPEs) experience deficiencies in their

VC development on account of their size, lack of innovative busi-

nesses, and distance from the locations in which VC firms are located.

Where VC succeeds in becoming sustainably established, it is related

to achieving a critical mass of “smart money in smart places”(Block,

Colombo, Cumming, & Vismara, 2017). Governments in SPE countries

have therefore been particularly active in seeking to address these

deficiencies to stimulate VC investment activity. However, these dis-

advantages of SPEs create particular challenges for government to

develop effective initiatives.

This paper presents a unique insight into government strategies

to develop VC in three SPEs—Finland, New Zealand, and Estonia.

It demonstrates emerging trends for what is working well or less well

at different stages of the national VC development (Avnimelech,

Kenney, & Teubal, 2005; Avnimelech & Teubal, 2006). This contempo-

rary review and critique of government VC policy provides a theoreti-

cal VC ecosystem development framework for the study. The paper

then discusses the lessons learned from the three SPEs and presents a

blueprint for SPE governments to develop more cohesive and compre-

hensive ecosystem for sustainable VC.

DOI: 10.1002/jsc.2248

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