The Global Venture Capital               and Private Equity               Country Attractiveness Index               2009/...
The Global Venture Capital and Private EquityCountry Attractiveness Index2009/2010 annualAlexander Groh & Heinrich Liechte...
Contents         Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...
Forewordfrom the research teamIn this annual, we want to present the results of acomprehensive research project on how to ...
Professor Josh Lerner                                                               Jacob H. Schiff Professor of Investmen...
Sponsors    We are very grateful to our sponsors IESE Business School/CIIF, Ernst & Young,    and DLA Piper Weiss-Tessbach...
About the editorsProf. Alexander Groh                           Prof. Heinrich Liechtenstein                              ...
I.10   The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual
The Global VC/PE CountryAttractiveness IndexArticle written by Alexander Groh, agroh@iese.edu, and Heinrich Liechtenstein,...
The Global VC/PE Country Attractiveness Index     How to measure a country’s attractiveness     for limited partners      ...
What are institutional investors’                            Importance of Economic Activity                  the findings ...
The Global VC/PE Country Attractiveness Index     personal income tax raise the probability of      ting standards have a ...
tivity. Furthermore, Romain and von Pot-          For the index calculation, it would betelsberghe de la Potterie (2004) fi...
The Global VC/PE Country Attractiveness Index     The 2009/2010 Index     Assessing six latent key drivers                ...
Table 1: Structure of the VCPE Index, the separate VC, and PE Indices, and the weighting schemes                          ...
The Global VC/PE Country Attractiveness Index                                                      The countries we cover ...
Exhibit 1: 2009/2010 VCPE Country Attractiveness Index                                 0           10      20        30   ...
The Global VC/PE Country Attractiveness Index                                                      Rankings according to t...
Exhibit 2: Rankings of the three different indices        United States (1.)                Canada (2.)      United Kingdo...
The Global VC/PE Country Attractiveness Index     Comparisons of regions and countries     The general pattern: What rende...
Exhibit 3: Six key driving forces. Comparison of the US, Slovenia and Venezuela                                1. Economic...
The Global VC/PE Country Attractiveness Index                                                      Regional comparison    ...
Exhibit 5: Ranking of geographic regions North America                                                         97     Aust...
The Global VC/PE Country Attractiveness Index                                                      Historic comparison – i...
Exhibit 8: Rank changes between index version 2005/2006 and 2009/2010                                       -15         -1...
The Global VC/PE Country Attractiveness Index     Tracking power of our index     The idea of our index is to assess the a...
kings with respect to these two key drivers    we expect several emerging countries tobefore the financial crisis. IPO and ...
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Iese vcpe index_annual_2009

  1. 1. The Global Venture Capital and Private Equity Country Attractiveness Index 2009/2010 annual Alexander Groh & Heinrich LiechtensteinSponsored by
  2. 2. The Global Venture Capital and Private EquityCountry Attractiveness Index2009/2010 annualAlexander Groh & Heinrich Liechtenstein Sponsored by
  3. 3. Contents Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Sponsors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 About the editors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Research team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9I. The Global VC/PE Country Attractiveness Index . . . . . . . . . . . . . . . . . . . . . 11 How to measure a country’s attractiveness for limited partners . . . . . . . . . . . . . . . . . . . . . . . 12 The 2009/2010 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Comparisons of regions and countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Tracking power of our index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Summary and outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30II. Legal systems, taxes and VC and PE activity. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 After the storm: a global view on post-recession opportunities and challenges for the PE and VC industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Global Venture Capital and Private Equity Country Attractiveness Index - Legal Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36III. An insight into different VC and PE markets . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Africa: Governance, development and budding VC and PE activity . . . . . . . . . . . . . . . . . . . . 40 Asia: Does vibrant entrepreneurial activity and expected growth compensate some weaknesses? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Latin America: VC and PE in Latin America after the crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46IV. Regional and country profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 How to read the country and regional profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Regional profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Country profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70V. Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 Computation of the index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204 Statistical validation of the index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 Limitations of our index and FAQs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 Table with sources and explanations of the data series . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216
  4. 4. Forewordfrom the research teamIn this annual, we want to present the results of acomprehensive research project on how to measure theattractiveness of a country for investors in Venture Capital(VC) and Private Equity (PE) limited partnerships. The projectwas initiated at IESE Business School in Barcelona in 2006with a European pilot study. From the European study wegained experience and the confidence to extend the studyglobally. Since 2006 two professors, one doctoral student, andmany research assistants have worked on the project.We selected and collected more than 300 different data seriesfrom all kind of providers – some ranging back to 2000. Weattempted to include as many countries as possible inthe study, and handled approximately 200,000 individualdata records.We would not have been able to realize this without thegenerous financial and non financial contributions fromour sponsors, and we greatly appreciate the support of IESEBusiness School, their International Center for FinancialResearch (CIIF), Ernst &Young, and DLA Piper Weiss Tessbach.This is the first edition of the Venture Capital and PrivateEquity (VCPE) Country Attractiveness Index. This index willbe subject to critique and we invite constructive feedback tohelp us improve future editions of the index. Selected dataseries may be subject to change in future editions and newand more appropriate data series may be used as a substituteto existing data. The quality of data and the number ofcountries covered will increase. As a result, our index will bea dynamic product that always considers the most adequateand recent data. We believe this index is unique in providingthe VC and PE market segment with such a broad scope. Wehope investors will appreciate the information included in thisindex; politicians may utilize the index to make improvementsin their countries to attract international risk capital.We hope that you find our 2009/2010 Venture Capital andPrivate Equity Country Attractiveness Index of value. Website Please visit our website http://vcpeindex.iese.us/ where you will find more information, links to literature and several analytical tools for benchmarking purposes.
  5. 5. Professor Josh Lerner Jacob H. Schiff Professor of Investment BankingForeword Harvard Business SchoolVirtually every high growth business needs Another important trend has been thecapital. Investors allocate assets to earn professionalization of the venture capitalsubstantial returns. One would imagine that industry itself. Venture capital and privatethe two facts above would bring venture equity organizations have matured. Theircapitalists and entrepreneurs together. investment policies, procedures, and systems have been refined over decades of experience,But, in fact, a significant gap separates the two and are becoming formalized and structured.groups. Entrepreneurs live in great uncertainty As a result of these two trends, it is no surpriseand assume significant risk in pursuing their that many nations are making greater efforts tobusiness, whether a young start up or a encouraging venture capital activity with an eyerestructuring division. Venture capitalists and to boosting innovation and entrepreneurship,private equity investors are a special breed, who and to counteracting the recessionary impactseek to help entrepreneurs triumph, but have of the global economic crisis on growth.fiduciary responsibilities to their own investors(whether pensions, sovereign wealth funds, With the emergence of venture capital andendowments, or families), which limit their private equity investment as a professionalability to absorb all the risk in new ventures. practice, understanding the way in whichWhile venture capital and private equity this industry works is critically important forhas become a well developed industry in the policymakers, practitioners, and would beUnited States and Western Europe, in many practitioners, whether they are (or aspire to be)other parts of the world, a gap in experience working for entrepreneurial ventures, ventureand expectations has slowed the adoption of capital and private equity firms, or largeventure capital and private equity funds, and institutional capital pools. I applaud Alexanderlimited the success of the pioneering funds. Groh and Heinrich Liechtenstein, who have taken the heroic step of trying to draw together all theBut in the past few years, the venture information needed to assess whether a marketcapital and private equity industry has been is ready for venture capital and private equity.globalizing at a dramatic pace. Funds areincreasingly being raised internationally and The country attractiveness index—which buildsinvested globally. More and more firms have on academic research into the determinantsestablished multinational operations. There is of these funds world wide—provides valuablean increasing appreciation by entrepreneurs information to investors and political leadersworld wide of the benefits that venture and about which markets are most suited forgrowth equity investors can bring. Company private investments. The index results bothmanagers are increasingly setting ambitious provide answers and raise questions—e.g., togoals and looking to these investors to provide what extent will the financial crisis upendthe capital, advice, and strategic partnerships the established order of the most attractivethey need to bring their plans to fruition. markets?—but represent an important step in systemizing our understanding of these issues. Enjoy the reading! The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 7
  6. 6. Sponsors We are very grateful to our sponsors IESE Business School/CIIF, Ernst & Young, and DLA Piper Weiss-Tessbach for the financial support, their feedback throughout the project and their direct contributions to the index. IESE Business School – University of Navarra Business School and has established itself as a nu- is one of the world´s top 10 business schools and cleus of study within the School’s activities. has pioneered executive education in Europe since Sixteen years on, our chief objectives remain its foundation in 1958 in Barcelona. In 1964 IESE the same: introduced Europe’s first full-time MBA program. • Find answers to the questions that confront the IESE distinguishes itself in its general-management owners and managers of finance companies, approach, extensive use of case method, interna- and the finance director of all kind of compa- tional outreach, and emphasis on placing people at nies in the performance of their duties. the heart of managerial decision-making. With a • Develop new tools for financial management. truly global outlook, IESE currently runs executive- • Study in depth the changes that occur in the education programs on four continents. market and their effects on the financial dimen- The CIIF, International Center for Financial Re- sion of business activity. search, is an interdisciplinary center with an inter- All of these activities are programmed and carried national outlook and a focus on teaching and re- out with the support of our sponsoring companies. search in finance. It was created at the beginning Apart from providing vital financial assistance, our of 1992 to channel the financial research interest sponsors also help to define the Center’s research of a multidisciplinary group of professors at IESE projects, ensuring their practical relevance. Ernst & Young is a global leader in assurance, tax, Our private equity and venture capital practices transaction and advisory services. Worldwide, our therefore offer a holistic, tailored approach that en- 144,000 people are united by our shared values and compasses the needs of funds, their M&A process an unwavering commitment to quality. We make a and portfolio companies while addressing market, difference by helping our people, our clients and industry and regulatory concerns and opportunities. our wider communities achieve their potential. We hope that the Global VC/PE Country Attrac- Potential is a key word for equity capital ma- tiveness Index proves to be a valuable tool in hel- nagement. Deal success doesn’t end when the deal ping funds navigate through this uncertain time. closes. Acquirers know success and stakeholder For more information please visit www.ey.com value lie in portfolio companies’ continued growth under their watch and after their exits. including corporate, M&A, venture capital and DLA Piper Weiss Tessbach is part of DLA Piper, capital markets, banking and finance, litigation one of the largest global legal services prac- and regulatory, general commercial law, real es- tices, with over 3,500 lawyers in 67 offices in 29 tate, employment law, IT, telecoms and IP and ad- countries. From its offices in Asia, Europe, the vises its clients as a full-service firm in all relevant Middle East and the US, legal and business ad- areas of business law. visers provide a broad range of services to local, For further information, please visit: regional and international clients. The firm is hi- www.dlapiper.com. ghly acknowledged in its core areas of expertise8 The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual
  7. 7. About the editorsProf. Alexander Groh Prof. Heinrich Liechtenstein Research team Alexander GrohDr. Alexander Groh is Visiting Professor at Dr. Heinrich Liechtenstein is Professor of Visiting Professor,IESE Business School, Barcelona – Univer- Financial Management at IESE Business IESE Business School Barcelonasity of Navarra, Spain. His research activi- School, Barcelona – University of Navarra,ties focus on VC and PE, and include va- Spain. His areas of interest are entrepre- Heinrich Liechtensteinluation issues, performance measurement neurial finance, VC and PE, wealth ma- Assistant Professor,and socio-economic determinants for the nagement, and owners’ strategies. He is IESE Business School Barcelonadevelopment of national markets. He is active in several supervisory and advisoryAssociate Professor of Finance at GSCM – boards of family holdings and founda- Karsten LieserMontpellier Business School, France. Prior tions, as well as a private equity firm. Visiting PhD Student,to that, he was visiting INSEAD, Fontaine- Dr. Liechtenstein has experience in IESE Business School Barcelonableau, France, and was Assistant Professor wealth management and owners strate-of Corporate Finance and Entrepreneurial gies at Liechtenstein Global Trust, a family Miriam HesseFinance at Darmstadt University of Tech- holding, and as a consultant at The Boston Research Assistant,nology, Germany. He is involved in training Consulting Group. He has previously foun- IESE Business School Barcelonacourses for the European Venture Capital ded and sold two companies.and Private Equity Association (EVCA), and Dr. Liechtenstein was born in Leoben, Renata Semmelthe Indian Venture Capital and Private Austria, and received an MA in Business Research Assistant,Equity Association (IVCA), and has worked Administration from the University of IESE Business School Barcelonafor Quadriga Capital, a Frankfurt based Graz, an MBA from IESE Business School,Private Equity fund, since 1996. and a Doctoral Degree of Business and Sarp Vardarizi Dr. Alexander Groh was born in Frank- Economic Sciences from the University of Research Assistant,furt, Germany. He received a joint Master’s Vienna. IESE Business School BarcelonaDegree of Mechanical Engineering andBusiness Administration from Darmstadt Matthias WichUniversity of Technology, where he also Research Assistant,gained his Doctoral Degree in Finance. IESE Business School Barcelona Tobias Götz Research Assistant, IESE Business School Barcelona Markus Grabellus Research Assistant, IESE Business School Barcelona Markus Biesinger Research Assistant, IESE Business School Barcelona The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 9
  8. 8. I.10 The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual
  9. 9. The Global VC/PE CountryAttractiveness IndexArticle written by Alexander Groh, agroh@iese.edu, and Heinrich Liechtenstein, hl@iese.edu,both, IESE Business School Barcelona. The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 11
  10. 10. The Global VC/PE Country Attractiveness Index How to measure a country’s attractiveness for limited partners The purpose of our index is to in particular nations and will benchmark benchmark countries with respect to them. A politician has the opportunity their attractiveness for institutional to influence the conditions that attract investors who decide upon international (or deter) international risk capital: an allocations in VC and PE limited investor will respond to policy actions. partnerships. We therefore take an Therefore, attempts to increase risk institutional investor’s point of view for capital market activity in a particular the aggregation and analyses of socio- country should focus on the relationship economic data. We want to contribute between the parties that deserve capital to solving the investor’s problem: where and those who provide it. Risk capital is to allocate the capital. However, a a high liquid asset class with respect to politician may conclude that a vibrant international allocations. Funds will flow risk capital market supports innovation, quickly into regions and countries where entrepreneurship, economic growth, investors expect opportunities. Nations employment, and wealth. Both the (and regions) are in strong competition politician, who would like to increase risk for receiving allocations from limited capital market activity, and the investor, partners. who seeks adequate compensation for the investment risk, will observe strengths and weaknesses, risks and opportunities12 The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual
  11. 11. What are institutional investors’ Importance of Economic Activity the findings are equally valid for the laterselection criteria? Intuitively, the state of a country’s eco- stage. Jeng and Wells (2000) stress thatOur index addresses the concerns of insti- nomy should affect the VC/PE activity. IPO activity is the main force behind cy-tutional investors and looks at the criteria An economy’s size is an indicator of the clical swings because it reflects the poten-they base their international VC and PE quantity of corporations and deal flow op- tial return to the VC/PE funds. Kaplan andallocation decisions upon. Their allocation portunities in general. Economic growth Schoar (2005) confirm this. Analogous tocriteria will include, in the first instance, should lead to demand for finance. Gom- Black and Gilson (1998), Gompers and Ler-the expected economic opportunities of pers and Lerner (1998) focus on the VC ner (2000) point out that risk capital flou-a country or region from a macro pers- segment and point out that more attrac- rishes in countries with deep and liquidpective. However, they will also include a tive opportunities exist for entrepreneurs stock markets. Likewise, Schertler (2003)particular investment strategy of a fund if the economy is growing quickly. Wilken uses either the capitalization of stock mar-management team, the team’s compe- (1979) argues that a situation of econo- kets or the number of listed companies astence, their track record and other para- mic prosperity and development facilitates a measure for the liquidity of stock mar-meters. The latter criteria will be addressed entrepreneurship, as it provides a greater kets. She finds that the liquidity of stockas part of their fund due diligence before accumulation of capital for investments. markets has a significant positive impactlimited partners consider committing to a The ease of start-ups is expected to be re- on VC investments in its early stages.particular general partner. These criteria lated to societal wealth, not solely due to Alongside the disadvantages of bank-are beyond of the scope of our index be- the availability of start-up financing, but centered capital markets, Greene (1998)cause they depend on individual cases. Our also to higher income among potential emphasizes that low availability of debtindex points to the general opportunities customers in the domestic market. Ro- financing is an obstacle for start-ups inthat arise from the socio-economic state main and van Pottelsberghe de la Potterie many countries. Entrepreneurs need toof a country or region and as a result, we (2004) find that VC/PE activity is cyclical find backers - whether banks or VC/PEcontribute to the macro perspective of the and significantly related to gross domestic funds - who are willing to bear risk. Ce-fund due diligence. Our index provides va- product (GDP) growth. torelli and Gambera (2001) provide evi-luable information to investors as it is the dence that bank concentration promotesfirst time that the different factors that de- Importance of the Depth of a Capital the growth of those industrial sectors thattermine the attractiveness of a country for Market have a higher need for external finance bylimited partners have been summarized in Black and Gilson (1998) focus on the diffe- facilitating credit access to younger com-a composite measure. The decisive factors rences between bank-centered and stock panies in said industry sectors.that render a country attractive have been market-centered capital markets. Theyextensively discussed in literature about the argue that a well-developed stock mar- Importance of Taxationdeterminants of vibrant VC and PE markets. ket that permits venture capitalists to exit We assume that two types of taxes affectWe give a brief overview over this literature through an initial public offering (IPO) is VC and PE activity; those directly related toand group the articles into six sub-chap- crucial for the existence of a vibrant VC the asset class, such as taxes on dividendsters that already reveal the structure of our market. In general, bank-centered capital and capital gains, and those with an im-index. Each heading represents one of six markets show less ability to produce an ef- pact on corporations and entrepreneurship,key drivers that we regard as important, ficient VC infrastructure. They affirm that such as corporate tax rates. Gompers andappropriate and quantifiable to determine it is not merely the strong stock market Lerner (1998) stress that the capital gainsthe attractiveness of a country for limited that is missing in bank-centered capital tax rate influences VC/PE activity. In fact,partners. The key drivers name and define markets; it is also the secondary institu- they confirm Poterba’s finding (1989), whoa set of criteria we need to assess for our tions, including the bankers’ conservative builds a decision-model to become entre-sample countries.1 approach to lending and investing, and preneur. Bruce (2000 and 2002), and Cullen the social and financial incentives that and Gordon (2002) prove that taxes mat- reward entrepreneurs less richly (and pe- ter for business entry and exit. Djankov et1. Groh, Alexander, Liechtenstein, Heinrich and Lieser,Karsten (2009a) : The European Venture Capital and Private nalize failure more severely), that compro- al. (2008) show that corporate tax ratesEquity Country Attractiveness Indices, forthcoming in the mise entrepreneurial activity. While their strongly affect entrepreneurship. Bruce andJournal of Corporate Finance (Re-print). Available athttp://ssrn.com/author=330804. paper focuses on the early stage segment, Gurley (2005) explain that increases in the The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 13
  12. 12. The Global VC/PE Country Attractiveness Index personal income tax raise the probability of ting standards have a significant impact Rigid labor market policies negatively becoming an entrepreneur. Hence, the dif- on the governance of investments in the affect the evolution of a VC/PE market. ference between personal income tax rates VC/PE industry. Desai et al. (2006) show, Lazear (1990) and Blanchard (1997) dis- and corporate tax rates tends to be an in- that fairness and property rights protec- cuss how protection of workers can reduce centive to create self-employment. tion largely determine the growth and employment and growth. Black and Gilson emergence of new enterprises. Cumming (1998) argue that labor market restric- Importance of Investor Protection and Johan (2007), meanwhile, highlight tions influence VC/PE activity, though not and Corporate Governance the perceived importance of regulatory to the same extent as the stock market. Legal structures and the protection of harmonization with respect to increasing Djankov et al. (2002) investigate the property rights also influence the at- institutional investor commitments to role of several societal burdens for start- tractiveness of a VC/PE market. La Porta the asset class. La Porta et al. (2002) find ups in different countries. They conclude et al. (1997 and 1998) confirm that the a lower cost of capital for companies in that the highest barriers and costs are legal environment strongly determines countries with better investor protection, associated with corruption, crime, a lar- the size and extent of a country’s capital and Lerner and Schoar (2005) confirm ger unofficial economy, and bureaucratic market and local companies’ ability to re- these findings. Johnson et al. (1999) show delay. ceive outside financing. They emphasize that weak property rights limit the rein- the difference between statutory law and vestment of profits in start-up compa- Importance of Entrepreneurial the quality of law enforcement in some nies. Finally and more broadly, Knack and Culture and Opportunities countries. Roe (2006) comprehensively Keefer (1995), Mauro (1995), and Svens- Access to viable investments is one of the discusses and compares the political deter- son (1998) demonstrate that property most important factors for the attracti- minants of corporate governance rules for rights significantly affect investments and veness of a regional VC market, especially the major economies and focuses on the economic growth. for early stage or start-up deals. The num- importance of strong minority sharehol- ber of potential investments relates to the der protection to develop a vibrant capital Importance of the Human and Social research output in an economy. Gompers market. Glaeser et al. (2001) and Djankov Environment and Lerner (1998) show that both indus- et al. (2003 and 2005) suggest that parties Black and Gilson (1998), Lee and Peterson trial and academic research and deve- in common-law countries have greater (2000), and Baughn and Neupert (2003) lopment (R&D) expenditure significantly ease in enforcing their rights from com- argue that national culture shapes both correlates with VC activity. Kortum and mercial contracts. Cumming et al. (2006) individual orientation and environmental Lerner (2000) highlight that the growth in find that the quality of a country’s legal conditions, which lead to different levels VC fundraising in the mid-1990s may be system is more closely connected to faci- of entrepreneurial activity in particular due to a surge of patents in the late 1980s litating VC/PE backed exits than the size countries. Megginson (2004) argues that, and 1990s. Schertler (2003) emphasizes of a country’s stock market. Cumming et in order to foster a growing risk capital that the number of both R&D employees al. (2009) extend this finding and show industry, research culture plays an impor- and patents, as an approximation of the that cross-country differences in lega- tant role, especially in universities or na- human capital endowment, has a positive lity, including legal origin and accoun- tional laboratories. and highly significant influence on VC ac-14 The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual
  13. 13. tivity. Furthermore, Romain and von Pot- For the index calculation, it would betelsberghe de la Potterie (2004) find that ideal to include all parameters. However,start-up activity interacts with the R&D some of the cited papers focus on parti-capital stock, with technological opportu- cular economies or regions, dependingnities, and the number of patents. Simi- on the data available, and their datasetslar to Djankov et al. (2002), Baughn and are difficult to compare. Therefore, we tryNeupert (2003) argue that bureaucracy in to find the best possible proxies for thethe form of excessive rules and procedural aforementioned drivers of VC/PE activity,requirements, multiple institutions from which are available for a large number ofwhich approvals are needed, and cumber- countries. From the foregoing review ofsome documentation requirements may prior research, we identified six main cri-severely constrain entrepreneurial activity. teria that ultimately determine the attrac-Lee and Peterson (2000) stress that the tiveness of an individual country for VC/time and money required to meet such PE investments: Economic Activity, Depthadministrative burdens may discourage of a Capital Market, Taxation, Investornew venture creations. Protection and Corporate Governance, Human and Social Environment, and En-Summary on the determinants of trepreneurial Culture and Opportunities.vibrant VC and PE markets We regard these criteria as “key drivers”,The research findings discussed emphasize confirm their choice via a survey amongthe difficulty of identifying the appro- institutional investors, reported in Grohpriate parameters for our index. There is and Liechtenstein (2009b) and (2009c),neither consensus about the most impor- and base the index structure upon them.tant parameters for VC/PE investment, Since none of the key drivers are di-nor any ranking. While some parameters rectly measurable, we regard them asare more comprehensively discussed, “constructs” and seek for data series thatand certainly of very high relevance, it adequately express their character.remains unclear how these interact. Forexample, it is debatable whether the VC/PE activity in a country with a high cor-porate governance level is more affectedby the liquidity of the national stockmarket or by labor regulations. While anIPO exit is, in principle, possible at manystock exchanges in the world, labor mar-ket frictions can hardly be evaded. The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 15
  14. 14. The Global VC/PE Country Attractiveness Index The 2009/2010 Index Assessing six latent key drivers How we disaggregate the six key Overall, we use 22 level 2 constructs for The basic and important principle of our in- drivers our index, and hence, “1 Economic Acti- dex is to make use of “latent drivers”. These According to the principle to assess latent vity” receives a weight of 3/22, which is are criteria that are not directly observable, drivers of VC and PE attractiveness with 0.136, while the weight of “3 Taxation” is but driven by others which can be measu- observable data we disaggregate the six 2/22 - 0.091. The advantage of this wei- red. For example, while we do not get data key drivers in sub-categories. These catego- ghting scheme is that the key drivers that on the number of investment banks, law ries are either actual data series or further consist of more level 2 constructs gain firms, accountants, or consultants to assess sub-constructs, and we call them “level 2 more weight. That way, we also smooth the infrastructure of the deal supporting constructs”. For example, in Table 1, we find, outliers in individual data series.3 institutions for the majority of our sample the key driver “2 Depth of a Capital Mar- countries, we can gather more general in- ket” split into five sub-categories: “2.1 Size Separate VC and PE indices formation on the level of debt provided by and Liquidity of the Stock Market”, “2.2 IPO To account for differences with respect the banking sector, or estimates about the Market Activity”, “2.3 M&A Market Activi- to the two market segments, VC vs. PE, we soundness of banks, the sophistication of ty”, “2.4 Debt and Credit Market”, and “2.5 propose three alternative indices. The first the financial system and the ease of access Financial Market Sophistication”. The last combines both segments. The second fo- to loans. We assume that the better these sub-category is a data series provided by the cuses on early stage VC and the third on criteria are developed, the more deal sup- World Economic Forum (WEF), all the others later stage PE only. For the VC and PE in- porting institutions will likewise exist to are constructs by themselves. For example, dices we simply discard data series that are facilitate VC and PE activity. This principle we assess “2.1 Size and Liquidity of the Stock less important for either market segment: is maintained at all individual stages for the Market” with three different data series (and for the VC index, we regard the level 2 index construction. An unobservable crite- call them “level 3 data”): the “2.1.1 Market construct “2.4 Debt and Credit Market” as rion is assessed with several proxy parame- Capitalization of Listed Companies", the relatively unimportant, and hence discard it. ters. In principle, we measure the attrac- “2.1.2 Total Trading Volume”, and “2.1.3 Lis- When calculating the PE index, we discard tiveness of a country by six main criteria. ted Domestic Companies”. This approach has “3.1.2 Entrepreneurship Incentive”, “3.1.3 The choice of these criteria is based on our two major advantages: first, individual data Labor and Tax Contributions”, and “3.2 Ad- own experience, the above review of aca- series do not gain too much weight when ministrative Tax Burdens”, and further, “5.1 demic literature and a survey we undertook they are grouped; second, the overall results Education and Human Capital”, “6.1 Inno- among limited partners.2 can be traced to more granulated levels and vation and R&D”, “6.2 Ease of Starting and We call them the “six key drivers” : hence, facilitate interpretations. Running a Business” and “6.4 ICT Infrastruc- 1. Economic Activity ture” from the criteria. The weights for the 2. Depth of a Capital Market The weighting scheme individual index items in the separate VC 3. Taxation We spent a great amount of time with and PE indices are calculated analogue to 4. Investor Protection and Corporate statistical analyses and optimization ap- the above explained procedure. Governance proaches to determine the weights for the Table 1 presents the structures and the 5. Human and Social Environment data aggregation. Finally, we came to the weights of the individual data series and 6. Entrepreneurial Culture and conclusion not to apply a statistically so- constructs for the combined VCPE, the VC Opportunities. phisticated approach that deserves docu- and the PE index. In the appendices, we As discussed before, these six key dri- mentation and discussion, but to choose provide detailed information on the data vers are not directly observable. For this a simple, plausible, and robust weighting series used to aggregate the index, and all reason, we disaggregate them, and use se- scheme. We apply equal weights for all data sources. There, we also explain the veral proxies for their assessment. data series, when we aggregate them to exact data aggregation technique. the level 2 constructs. Then again, we use 3. Details about the possible statistical approaches to 2. The results of this survey are described in two academic equal weights for the level 2 constructs determine weights for the data series are provided in the working papers : Groh, Alexander and Liechtenstein, to aggregate the six key drivers. Finally, academic paper Groh, Alexander, Liechtenstein, Heinrich Heinrich (2009b) : International Allocation Determinants and Lieser, Karsten (2009a) : The European Venture of Institutional Investments in Venture Capital and Private the weight of the key drivers depends Capital and Private Equity Country Attractiveness Indices, Equity Limited Partnerships, IESE Business School Working on the number of level 2 constructs in- forthcoming in the Journal of Corporate Finance. Available Paper No. 726, and in Groh, Alexander and Liechtenstein, at http://ssrn.com/author=330804. Heinrich (2009c) : How Attractive is Central Eastern Europe cluded. For example, “1 Economic Acti- for Risk Capital Investors ? Journal of International Money vity” consists of three level 2 constructs, and Finance (28), 4, p. 625 – 647. Available at http://ssrn. com/author=330804. while “3 Taxation” consists of only two.16 The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual
  15. 15. Table 1: Structure of the VCPE Index, the separate VC, and PE Indices, and the weighting schemes VCPE VC PE VCPE VC PE Index Index Index Index Index Index1 Economic Activity 0.14 0.14 0.18 4.2.3 Intellectual Property Protection 0.33 0.33 0.331.1 Gross Domestic Product 0.33 0.33 0.33 4.3 Quality of Legal Enforcement 0.25 0.25 0.251.1.1 Total Economic Size 0.33 0.33 0.33 4.3.1 Judicial Independence 0.25 0.25 0.251.1.2 GDP per Capita 0.33 0.33 0.33 4.3.2 Impartial Courts 0.25 0.25 0.251.1.3 Real GDP year-on-year Growth 0.33 0.33 0.33 4.3.3 Integrity of the Legal System 0.25 0.25 0.251.2 Inflation 0.33 0.33 0.33 4.3.4 Rule of Law 0.25 0.25 0.251.3 Unemployment 0.33 0.33 0.33 4.4 Regulatory Quality 0.25 0.25 0.252 Depth of a Capital Market 0.23 0.19 0.29 5 Human and Social Environment 0.18 0.19 0.182.1 Size and Liquidity of the Stock Market 0.20 0.25 0.20 5.1 Education and Human Capital 0.25 0.252.1.1 Market Capitalization of Listed Companies 0.33 0.33 0.33 5.1.1 Quality of the Educational System 0.50 0.502.1.2 Total Trading Volume 0.33 0.33 0.33 5.1.2 Quality of Scientific Research Institutions 0.50 0.502.1.3 Listed Domestic Companies 0.33 0.33 0.33 5.2 Labor Market Rigidities 0.25 0.25 0.332.2 IPO Market Activity 0.20 0.25 0.20 5.2.1 Difficulty of Hiring Index 0.25 0.25 0.252.2.1 Market Volume 0.50 0.50 0.50 5.2.2 Rigidity of Hours Index 0.25 0.25 0.252.2.2 Number of IPOs 0.50 0.50 0.50 5.2.3 Difficulty of Firing Index 0.25 0.25 0.252.3 M&A Market Activity 0.20 0.25 0.20 5.2.4 Firing Costs 0.25 0.25 0.252.3.1 Market Volume 0.50 0.50 0.50 5.3 Bribing and Corruption 0.25 0.25 0.332.3.2 Number of Deals 0.50 0.50 0.50 5.3.1 Bribing and Corruption Index 0.33 0.33 0.332.4 Debt and Credit Market 0.20 0.20 5.3.2 Control of Corruption 0.33 0.33 0.332.4.1 Domestic Credit provided by Banking Sector 0.17 0.17 5.3.3 Extra Payments/Bribes 0.33 0.33 0.332.4.2 Ease of Access to Loans 0.17 0.17 5.4 Costs of Crime 0.25 0.25 0.332.4.3 Credit Information Index 0.17 0.17 5.4.1 Business Costs of Crime and Violence 0.50 0.50 0.502.4.4 Soundness of Banks 0.17 0.17 5.4.2 Costs of Organized Crime 0.50 0.50 0.502.4.5 Interest Rate Spread 0.17 0.17 6 Entrepreneurial Culture and Opportunities 0.18 0.19 0.062.4.6 Bank Non-performing Loans to Total Gross Loans 0.17 0.17 6.1 Innovation and R&D 0.25 0.252.5 Financial Market Sophistication 0.20 0.25 0.20 6.1.1 General Innovativeness Index 0.20 0.203 Taxation 0.09 0.10 0.06 6.1.2 Capacity for Innovation 0.20 0.203.1 Tax Incentives 0.50 0.50 1.00 6.1.3 Company Spending on R&D 0.20 0.203.1.1 Marginal Corporate Tax Rate 0.25 0.25 0.50 6.1.4 Utility Patents 0.20 0.203.1.2 Entrepreneurship Incentive 0.25 0.25 6.1.5 Scientific and Technical Journal Articles 0.20 0.203.1.3 Labor Tax and Contributions 0.25 0.25 6.2 Ease of Starting and Running a Business 0.25 0.253.1.4 Profit and Capital Gains Tax 0.25 0.25 0.50 6.2.1 Number of Procedures to start of Business 0.20 0.203.2 Administrative Tax Burdens 0.50 0.50 6.2.2 Time needed to start a Business 0.20 0.203.2.1 Number of Payments 0.50 0.50 6.2.3 Costs of Business Start-Up Procedures 0.20 0.203.2.2 Time spent on Tax Issues 0.50 0.50 6.2.4 Minimum Capital 0.20 0.204 Investor Protection and Corporate Governance 0.18 0.19 0.24 6.2.5 Administrative Requirements 0.20 0.204.1 Corporate Governance 0.25 0.25 0.25 6.3 Simplicity of Closing a Business 0.25 0.25 1.004.1.1 Disclosure Index 0.20 0.20 0.20 6.3.1 Time 0.33 0.33 0.334.1.2 Director Liability Index 0.20 0.20 0.20 6.3.2 Costs 0.33 0.33 0.334.1.3 Shareholder Suits Index 0.20 0.20 0.20 6.3.3 Recovery Rate 0.33 0.33 0.334.1.4 Legal Rights Index 0.20 0.20 0.20 6.4 ICT Infrastructure 0.25 0.254.1.5 Efficacy of Corporate Boards 0.20 0.20 0.20 6.4.1 Broadband Subscribers 0.25 0.254.2 Security of Property Rights 0.25 0.25 0.25 6.4.2 Fixed Line and Mobile Phone Subscribers 0.25 0.254.2.1 Legal Enforcement of Contracts 0.33 0.33 0.33 6.4.3 Internet Users 0.25 0.254.2.2 Property Rights 0.33 0.33 0.33 6.4.4 Secure Internet Servers 0.25 0.25 The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 17
  16. 16. The Global VC/PE Country Attractiveness Index The countries we cover The VCPE country attractiveness The selection of our sample countries is ranking purely driven by the availability of data. We gathered the data from Table 1 for the We would like to include many more na- 66 countries as far back to the past, and as tions but the lack of data is the constraint. recent as possible. We calculated the in- At present, the African continent is un- dex scores for 2009/2010 and realized, not der-represented with only four countries, surprisingly, that the United States is the but we hope to expand the number of most attractive country for VC and PE al- countries in future editions of the index. locations, with some remarkable distance We consider the following 66 nations and to its followers. Therefore, we use the US assign them to eight different geographic as the world benchmark: we rescale the regions. index score for the US to 100. This enables us to directly compare all other countries on a percentage scale. We explain the res- caling procedure in the appendix to this Africa: Kenya, Morocco, Nigeria, South Africa index, and first present the ranking of the 2009/2010 VCPE Country Attractiveness Asia: China, Hong Kong, India, Indonesia, Japan, Index. Malaysia, Philippines, Russian Federation, Exhibit 1 shows the ranking of the Republic of Korea, Singapore, Taiwan, 2009/2010 VCPE Country Attractiveness Thailand, Vietnam Index. We know that this exhibit opens room for discussion. Some readers might Australasia: Australia, New Zealand think that particular countries are ran- ked too high, others too low. However, we Eastern Europe: Bulgaria, Croatia, Czech Republic, Estonia, want to stress that the index ranking is the Hungary, Latvia, Lithuania, Poland, Romania, result of commonly available, aggregated Slovak Republic, Slovenia, Turkey, Ukraine socio-economic data. The results can be traced to the level of the individual data Latin America: Argentina, Brazil, Chile, Colombia, Mexico, series, and hence, can be confirmed. We Paraguay, Peru, Uruguay, Venezuela want to remark that the underlying data is historical, and does not include future Middle East: Egypt, Israel, Kuwait, Oman, Saudi Arabia, estimates. Therefore, we show the attrac- United Arab Emirates tiveness ranking as of today and want to leave it to investors and advisers to en- North America: USA, Canada rich the information we prepared with own knowledge, and expectations to draw Western Europe: Austria, Belgium, Denmark, Finland, France, their conclusions. Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom18 The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual
  17. 17. Exhibit 1: 2009/2010 VCPE Country Attractiveness Index 0 10 20 30 40 50 60 70 80 90 100 United States (1.) 100,0 Canada (2.) 85,8 United Kingdom (3.) 84,3 Australia (4.) 81,9 Hong Kong (5.) 79,5 Singapore (6.) 78,5 Japan (7.) 76,5 Switzerland (8.) 76,3 Netherlands (9.) 70,1 Germany (10.) 69,1 Sweden (11.) 69,0 Denmark (12.) 67,7 Republic of Korea (13.) 67,5 Norway (14.) 66,3 Finland (15.) 65,9 France (16.) 65,2 Belgium (17.) 61,1 New Zealand (18.) 60,0 Austria (19.) 58,6 Spain (20.) 58,3 Ireland (21.) 58,3 Israel (22.) 55,8 Taiwan (23.) 55,3 Luxembourg (24.) 54,6 Malaysia (25.) 54,4United Arab Emirates (26.) 51,7 Portugal (27.) 49,5 China (28.) 48,5 Italy (29.) 47,5 Saudi Arabia (30.) 46,4 Poland (31.) 45,8 Chile (32.) 45,8 Slovenia (33.) 45,6 Czech Republic (34.) 45,5 Estonia (35.) 44,5 Thailand (36.) 41,4 Hungary (37.) 41,1 India (38.) 40,9 Greece (39.) 40,7 Lithuania (40.) 40,4 Slovakia (41.) 40,3 Kuwait (42.) 40,1 South Africa (43.) 39,5 Turkey (44.) 39,1 Croatia (45.) 38,6 Oman (46.) 38,1 Romania (47.) 38,1 Russian Federation (48.) 38,0 Mexico (49.) 35,8 Latvia (50.) 35,6 Brazil (51.) 34,6 Uruguay (52.) 33,4 Peru (53.) 32,4 Indonesia (54.) 30,7 Bulgaria (55.) 30,6 Morocco (56.) 30,3 Egypt (57.) 30,1 Colombia (58.) 29,4 Argentina (59.) 29,1 Vietnam (60.) 27,1 Philippines (61.) 26,1 Nigeria (62.) 24,4 Ukraine (63.) 23,6 Kenya (64.) 19,3 Paraguay (65.) 14,9 Venezuela (66.) 8,9 The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 19
  18. 18. The Global VC/PE Country Attractiveness Index Rankings according to the separate For the PE index, we discard all constructs VC and PE indices that are related to innovations, and foun- Exhibit 2 combines the prior results and ding or running a business in early stages. the ranking according to the separate VC We realize that Brazil, India, China, France, and PE indices. The red squares mark the Spain and Malaysia gain many ranks with VCPE index ranks. The white squares desi- respect to their attractiveness for PE in- gnate the VC index, and the grey squares vestments. The rationale is simple: the the PE index ranks. The VC index country aforementioned countries show relative ranking does not change greatly. The ran- liquid and developed capital markets. As king remains because we only discard the the measure for the depth of a capital level 2 construct to assess the “Debt and market gains a higher weight in the PE Credit Market” from the VC index. Howe- index, these countries rank on superior le- ver, we receive a stronger ranking varia- vels, consequently. tion if we focus on the PE segment only.20 The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual
  19. 19. Exhibit 2: Rankings of the three different indices United States (1.) Canada (2.) United Kingdom (3.) Australia (4.) Hong Kong (5.) Singapore (6.) Japan (7.) Switzerland (8.) Netherlands (9.) Germany (10.) Sweden (11.) Denmark (12.) Republic of Korea (13.) Norway (14.) Finland (15.) France (16.) Belgium (17.) New Zealand (18.) Austria (19.) Spain (20.) Ireland (21.) Israel (22.) Taiwan (23.) Luxembourg (24.) Malaysia (25.)United Arab Emirates (26.) Portugal (27.) China (28.) Italy (29.) Saudi Arabia (30.) Poland (31.) Chile (32.) Slovenia (33.) Czech Republic (34.) Estonia (35.) Thailand (36.) Hungary (37.) India (38.) Greece (39.) Lithuania (40.) Slovakia (41.) Kuwait (42.) South Africa (43.) Turkey (44.) Croatia (45.) Oman (46.) Romania (47.) Russian Federation (48.) Mexico (49.) Latvia (50.) Brazil (51.) Uruguay (52.) Peru (53.) Indonesia (54.) Bulgaria (55.) Morocco (56.) Egypt (57.) Colombia (58.) Argentina (59.) Vietnam (60.) Philippines (61.) Nigeria (62.) Ukraine (63.) Kenya (64.) Paraguay (65.) Venezuela (66.) PE 2009/10 VC 2009/10 VCPE 2009/10 The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 21
  20. 20. The Global VC/PE Country Attractiveness Index Comparisons of regions and countries The general pattern: What renders enforcement possibilities with respect to More details the US so attractive? investor protection and corporate gover- We can brake-down our analysis to the le- Next, we break down the index scores to nance. This pattern becomes even more vel 2 constructs and provide more details the level of the six key driving forces, and obvious in the analyses presented in the to support the general pattern we detect. further down to the level 2 constructs to appendix, where we benchmark every in- Exhibit 4 points to the remarkable dis- enhance the discussion about the ranking. dividual country with the US: there are tance between the scores of the US, Slo- We find a typical pattern with respect to many economically strong nations with venia and Venezuela with respect to the the dominating attractiveness of the US vibrant entrepreneurial cultures and op- level 2 constructs that assess the capital for VC and PE allocations. We can de- portunities, with excellent human capi- market, investor protection and corporate monstrate this pattern by comparing the tal and social environment. However, the governance. first ranked with the medial ranked, and finally decisive criteria are the financial the final ranked country, the US, Slovenia, markets, and investor protection and cor- and Venezuela. Exhibit 3 presents the key porate governance. That finding points to driver scores of Slovenia and Venezuela the discussion about the competition of relative to the scores of the US (which legal systems, and the relation between scores 100 for each key driver). law and finance: all strong countries show Exhibit 3 reveals that the US ranks high scores for the Investor Protection ahead of Slovenia and Venezuela with res- and Corporate Governance key drivers. pect to all key drivers but Taxation. Emer- This likewise spurs the development of a ging economies often attract investors national capital market, which is required with tax incentives. The criteria that really for the establishment of VC and PE deal make the difference are the depth of the supporting institutions. US capital market and its legislation and22 The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual
  21. 21. Exhibit 3: Six key driving forces. Comparison of the US, Slovenia and Venezuela 1. Economic Activity 125 100 6. Entrepreneurial 75 2. Depth of a Culture & Opportunities 50 Capital Market 25 5. Human & 3. Taxation Social Environment United States 4. Investor Protection & Slovenia Corporate Governance VenezuelaExhibit 4: Level 2 constructs - Comparison of the US, Slovenia and Venezuela 1.1 Gross Domestic Product 1.2 Inflation 1.3 Unemployment2.1 Size and Liquidity of the Stock Market 2.2 IPO Market Activity 2.3 M&A Market Activity 2.4 Debt & Credit Market 2.5 Financial Market Sophistication 3.1 Tax Incentives 3.2 Administrative Tax Burdens 4.1 Corporate Governance 4.2 Security of Property Rights 4.3 Quality of Legal Enforcement 4.4 Regulatory Quality 5.1 Education & Human Capital 5.2 Labor Market Rigidities 5.3 Bribing & Corruption 5.4 Costs of Crime 6.1 Innovation & R&D 6.2 Ease of Starting & Running a Business 6.3 Simplicity of Closing a Business United States Slovenia 6.4 ICT Infrastructure Venezuela 0 20 40 60 80 100 120 140 160 The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 23
  22. 22. The Global VC/PE Country Attractiveness Index Regional comparison included sample countries only. Hence, Beside the analyses for the individual especially for Africa, where we cover only countries, we can benchmark geographic four countries, the results should be inter- regions against each other. We are aware preted with caution. that we should interpret regional compa- Exhibit 5 presents the regional ranking. risons with special care and want to hi- Again, the score of the US is rescaled to 100. ghlight that many of our sample countries It is in line with the contemporary use of the already represent somehow geographic terms emerging regions and developed mar- regions. The point is that within large kets. Braking-down the index scores to the countries, such as the US, Russia, China, six key driving forces reveals the same pat- India, or Brazil the internal socio-econo- tern as described before. First, we compare mic differences might be larger than those the four leading regions North America, between e.g., some European countries. Australasia, Western Europe, and Asia. Therefore, the scores of these large Exhibit 6 highlights that only the countries represent averages. We know common-law Australasian countries can that California attracts more VC and PE compete with North America with res- than Montana, but we cannot control for pect to investor protection and corporate small clusters, and the US still receives one governance. It also shows that, compared single average country score. Hence, we to the North America, all other regional also keep our approach to calculate the capital markets can be considered minis- index scores for the different geographic cule. A closer look to the emerging regions regions rather simple: we calculate either confirms this. GDP-weighted, population-weighted, or Exhibit 7 compares the emerging re- arithmetic averages of the different data gions Middle East, Eastern Europe, Latin series, and aggregate the regional scores America, and Africa. It reveals weaknesses with these values. We use GDP-weighted especially with respect to entrepreneurial averages for the data series that are rela- cultures and opportunities. Attempts to ted to the size of the economy, we use po- attract investors simply by tax incentives pulation weighted averages for those that will probably not be fruitful as long as are related to people and we use arith- the obstacle of missing deal opportuni- metic averages for the rest. We highlight ties remains. that, of course, these averages base on the24 The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual
  23. 23. Exhibit 5: Ranking of geographic regions North America 97 Australasia 76Western Europe 67 World 55 Asia 54 Middle East 46 Eastern Europe 42 Latin America 35 Africa 33 0 20 40 60 80 100Exhibit 6: Key driver scores of geographic regions Exhibit 7: Key driver scores of geographic regions 1. Economic Activity 1. Economic Activity 125 125 100 1006. Entrepreneurial 6. Entrepreneurial 75 75 2. Depth of a 2. Depth of a Culture & Culture & Capital Market Capital Market Opportunities 50 Opportunities 50 25 25 5. Human & 3. Taxation 5. Human & 3. TaxationSocial Environment Social Environment North America (I.) Middle East (V.) 4. Investor Protection & 4. Investor Protection & Eastern Europe (VI.) Australasia (II.) Corporate Governance Corporate Governance Latin America (VII.) Western Europe (III.) Asia (IV.) Africa (VIII.) The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 25
  24. 24. The Global VC/PE Country Attractiveness Index Historic comparison – improvements Exhibit 8 underscores what we are used of VCPE investment conditions to learning from daily news about China, We can calculate back the index to the and India. Additionally, Poland impro- past, as far as 2005/2006. Thereby, we ved its attractiveness for limited partners should note that some of the data series quite substantially during the last four used (e.g., the General Innovation Index years. For details, we refer to the indivi- [GII]) do not date back to 2005. However, dual country analyses in the appendix of we assume that indicators like this one this index. On the left axis of Exhibit 8, we did not change to a large extent over the find the countries’ current ranks and the period of interest, and hence, keep them bars document the rank changes between constant. The calculation of the 2005/2006 the 2005/2006 and the 2009/2010 index index allows interesting insights, and re- versions. Kuwait, Latvia, and Oman are veals the development and rank changes the countries that decreased remarkably of particular countries. in their rankings. Kuwait lost many ranks because of a tax reform with increasing corporate tax rates and deteriorating conditions regarding the protection of in- vestors and corporate governance. Latvia and Oman were both exposed to worse- ning economic conditions with high in- flation during the observed period. Howe- ver, it should be stressed that the index scores are always calculated relative to the other countries. That means that all the countries that lost ranking positions did not necessarily deteriorate their in- vestment conditions in absolute terms. They might just have been outperformed by others in the international competition for capital resources.26 The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual
  25. 25. Exhibit 8: Rank changes between index version 2005/2006 and 2009/2010 -15 -10 -5 0 5 10 15 United States (1.) Canada (2.) United Kingdom (3.) Australia (4.) Hong Kong (5.) Singapore (6.) Japan (7.) Switzerland (8.) Netherlands (9.) Germany (10.) Sweden (11.) Denmark (12.) Republic of Korea (13.) Norway (14.) Finland (15.) France (16.) Belgium (17.) New Zealand (18.) Austria (19.) Spain (20.) Ireland (21.) Israel (22.) Taiwan (23.) Luxembourg (24.) Malaysia (25.) United Arab Emirates (26.) Portugal (27.) China (28.) Italy (29.) Saudi Arabia (30.) Poland (31.) Chile (32.) Slovenia (33.) Czech Republic (34.) Estonia (35.) Thailand (36.) Hungary (37.) India (38.) Greece (39.) Lithuania (40.) Slovakia (41.) Kuwait (42.) South Africa (43.) Turkey (44.) Croatia (45.) Oman (46.) Romania (47.) Russian Federation (48.) Mexico (49.) Latvia (50.) Brazil (51.) Uruguay (52.) Peru (53.) Indonesia (54.) Bulgaria (55.) Morocco (56.) Egypt (57.) Colombia (58.) Argentina (59.) Vietnam (60.) Philippines (61.) Nigeria (62.) Ukraine (63.) Kenya (64.) Paraguay (65.) Venezuela (66.) The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 27
  26. 26. The Global VC/PE Country Attractiveness Index Tracking power of our index The idea of our index is to assess the at- the actual VC and PE activity in the va- The statistical measure for such a com- tractiveness of a country to receive VC/ rious countries. We use data from Thom- parison is the Pearson Correlation Coeffi- PE allocations from institutional investors son Financial on VC and PE activity. Our cient. It ranges between 0 and 1, where 0 based on socio-economic parameters that activity measure is the natural logarithm signals “no” and 1 “perfect tracking”. The we regard relevant. The composite measure of an average of all VC and PE invest- coefficient for our index is 0.8104, signa- can deviate from the actual risk capital ments made by the general partners in a ling that the index excellently(!) tracks market activity, and deviations between certain country over the last three years. a country’s capacity to actually “absorb” our attractiveness score and actual acti- We use the natural logarithm to account the committed capital. If we compare the vity might either point to under- or over- for the large activity divergence (e.g., ac- results of our VC index with VC activity, funding of particular countries, or to the tivity in the US vs. Venezuela), and we use analogue to the above defined activity fact that our chosen criteria are not rele- an average over three years to smooth measure, the correlation is 0.8100. The vant for VC and PE investors. Experience fluctuations. Especially for some emer- correlation of our PE index with actual reveals that investors are often influenced ging countries, annual activity fluctuates PE activity is 0.7807. Both results are still by herding behavior and follow trends to strongly from peak levels to zero in sub- confirmative. However, the slightly de- invest in certain countries or regions. The sequent years. We chose the criterion lo- crease of the tracking power regarding the countries might not have the “infrastruc- cation of the general partners - and not two separate indices is partly due to inho- ture” to absorb the investments, leading of the investments - for the following mogeneous definitions of the two market to over-funding. The “infrastructure” is reason: some financial centers serve as segments in different parts of the world. exactly what we aim to measure: can we hubs and channel VC and PE investments In other words, in some cases, VC transac- expect sufficient deal opportunities resul- abroad. Investors allocate their capital in tions in emerging countries might rather ting from the entrepreneurial culture in a these hubs because they rely on the effi- be called infrastructure investments, or country, from its economic soundness, or ciency of the financial community there. project financing (but not VC transac- from innovations? Are potential transac- This is exactly what we measure with our tions) in more developed economies. tions sufficiently supported by the finan- index. In fact, we focus on the demand for cial community? Are the stock and M&A VC and PE in a particular economy, and Does the global financial crisis have markets sufficiently liquid to facilitate likewise on the state of the professional an impact on the robustness of our divestments? Are investors’ concerns le- financial community to support the supply index? gally taken care of? We do not claim that side. Therefore, investments, according to We have seen the biggest crisis since the our index provides the correct answers the location of the general partners, cor- great depression and the question remains to these questions. But, we claim that respond best with the idea of our index. whether this has an impact on the robus- our index is very helpful in this respect. Additionally, we use investments - and not tness of our index. The data for the last Therefore, we expect deviations between raised funds - because our index targets quarter of the year 2008 (where quar- our attractiveness measure and actual VC the “absorption-capacity” (either caused terly data is available) and later captures and PE activity in the particular countries. by direct local demand or by channeling the major consequences of the financial However, these deviations should not be funds abroad) of the particular econo- crisis. We realize that the impact on eco- great on average. If they are great we mies. Funds raised might deviate from this nomic activity and the depth of the ca- would doubt the reliability of our index. capacity due to herding behavior of inves- pital market is large for many countries, Hence, we compare our index scores with tors or negligence. especially for those that had high ran-28 The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual
  27. 27. kings with respect to these two key drivers we expect several emerging countries tobefore the financial crisis. IPO and M&A strongly improve their position over theactivity has come down significantly. The course of 2009/2010. However, we have tosize and liquidity of the stock markets wait for the following edition, to providemelted down. The access to loans deterio- evidence for our expectations.rated and interest rates increased to peaklevels. It became clear that the fraction How our index differs fromof non-performing loans is probably the other, more general indices onhighest seen in banking history, and the competitivenesssoundness of banks might be doubted in Some institutions provide competitivenessseveral countries. These are all data series indices or assess the general conditionswe use for our index construction, and we for making business in various countries.believe that the financial crisis will have These indices have a broader scope and doa strong impact on all of them. However, not focus on the particularities of the VCthe data series are not yet updated for all and PE capital market segment. Therefore,countries, and hence, we are not able to their rankings usually differ from ours anddraw conclusions for the quality of our their tracking power to explain VC andindex at that time. PE activity is lower. For example, the Glo- We assume that these effects will move bal Competitiveness Index from the WEFseveral emerging countries to higher ranks tracks VC and PE activity with 0.69, whilefor one simple reason. The rationale is the the IMD World Competitiveness Indextypical pattern we discussed above: the correlates with 0.57 only. This reveals thathigh ranked countries are particularly our index is the more precise indicatorstrong with respect to their capital mar- for VC and PE country attractiveness. Thekets. They will be affected most by the fi- reason for the superior tracking power ofnancial crisis because they lose dispropor- our index is simply that it is tailor-made,tionally their competitive advantage by according to the particular determinantsthe deteriorated capital market conditions. for vibrant VC and PE markets. There is noSeveral emerging countries with sound other indicator tracking the actual VC andgrowth opportunities, but negligible ca- PE activity over the 66 countries, and overpital markets will benefit (in terms of in- time as good as our index.dex scores) from the crisis. It is said thattheir economic growth will be affected toa minor extend, only. The crisis will har-dly impact their scores with respect to theother key drivers such as Taxation, Inves-tor Protection and Corporate Governance,the Human and Social Environment, ortheir Entrepreneurial Culture. Therefore, The Global Venture Capital and Private Equity Country Attractiveness Index - 2009/2010 annual 29

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