Iese vcpe index_annual_2011

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IESE venture capital and private equity index annual research 2011

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Iese vcpe index_annual_2011

  1. 1. The Global Venture Capitaland Private EquityCountry Attractiveness Index2011 annualAlexander Groh, Heinrich Liechtenstein and Karsten LieserSponsored by and in cooperation with
  2. 2. The Global Venture Capital and Private EquityCountry Attractiveness Index2011 annualAlexander Groh, Heinrich Liechtenstein and Karsten Lieser Sponsored by and in cooperation with
  3. 3. This publication contains information in summary form and istherefore intended for general guidance only. It is not intended tobe a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of theglobal Ernst & Young organization can accept any responsibilityfor loss occasioned to any person acting or refraining from actionas a result of any material in this publication. On any specificmatter, reference should be made to the appropriate advisor.
  4. 4. Contents Foreword from the research team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Sponsors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 About the editors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Research team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9I. The Global VCPE Country Attractiveness Index. . . . . . . . . . . . . . . . . . . . . . . 10 How to measure a country’s attractiveness for limited partners . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Building the 2011 index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 The VCPE country attractiveness ranking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Comparisons of countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Emerging countries, and exceptional opportunities in BRIC? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Tracking power of our index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Our index and historic VCPE returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Summary and outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34II. How are fund size and fund performance related? . . . . . . . . . . . . . . . . 36 Giants at the gate: diseconomies of scale in private equity investment returns. . . . . . . . . . 38 Fund size, limited attention and valuation of VC backed firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40III. An insight into different VC and PE markets . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Is the Eurozone still an attractive location for VC and PE investors? . . . . . . . . . . . . . . . . . . . . . . 44 Investing in Africa – challenges and opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50IV. Regional and country profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 How to read the country and regional profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Regional profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Country profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74V. Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234 Computation of the index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236 Statistical validation of the index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238 Table with sources and explanations of the data series . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248
  5. 5. Forewordfrom the research teamWe are pleased to present the second edition of our Global Venture Capitaland Private Equity Country Attractiveness Index. The index seeks to measurethe attractiveness of countries for investors in venture capital (VC) and privateequity (PE) limited partnerships.There are two notable changes with respect to the first index edition. First, wehave increased our coverage to 80 countries and include many more emergingeconomies. Second, we have optimized the index structure and excellentlytrack real VC and PE market activity. This optimization also allows a betterinterpretation of the VC and PE driving forces. However, we do not only presentevidence for a high explanatory power of our index with respect to investmentactivity. We also analyze how aggregate country performance matches our indexranking. This way, we demonstrate the quality of our composite measure andits value to investors.We invite your feedback to help us improve future index editions. In the future,selected data series may be substituted by newer or more appropriate data.Additional data could be added, while other series with poor explanatory powercan be deleted. The quality of data and the number of countries covered willincrease in future indices and as a result, our index remains a dynamicresearch product that always considers the most relevant and recent data.We believe this index is unique in providing information on the VC and PE capitalmarket segment with such a broad scope. We trust investors appreciate theinformation generated to aid their decision-making; politicians may utilizethe index to benchmark their countries and to make improvements to attractinternational risk capital.We would not have been able to realize this project without contributions fromour sponsors, and we greatly appreciate the support of Ernst & Young and IESEBusiness School, with their International Center for Financial Research (CIIF).Beside our own analyses, we invited other academic researchers to contributeto this annual. Therefore, you will find two guest articles discussing the linkbetween the size of VC and PE firms and their success. We hope that you findour our 2011 VCPE Country Attractiveness Index of value. Website Please visit our website http://blog.iese.edu/vcpeindex where you will find more information, links to literature, and several analytical tools for country benchmarking purposes. The Global Venture Capital and Private Equity Country Attractiveness Index - 2011 annual 7
  6. 6. Sponsors We are grateful to our sponsors Ernst & Young and IESE Business School/CIIF for their support, feedback and their direct and professional contributions to the index. IESE CIIF, International Center for Financial Research is an interdisciplinary center with an international outlook and a focus on teaching and finance research. It was created at the beginning of 1992 to channel the financial research interests held by a multidisciplinary group of professors at IESE Business School – University of Navarra. CIIFs main objectives are: • To find answers to the questions which confront both the owners and managers of finance companies, and the finance directors of all kinds of company within the performance of their duties • To develop new tools for financial management • To study in depth the changes that occur in the market, and their effects on the financial dimension of business activity IESE Business School – University of Navarra is one of the world´s top 10 business schools and has pioneered executive education in Europe since its establishment in Barcelona in 1958. With a truly global outlook, IESE currently runs executive-education programs in four continents. IESE is distinguished for its general- management approach, its extensive use of the case method, its international outreach, and its emphasis on placing people at the heart of managerial decision-making. Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 141,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Potential is a key word for equity capital management. Deal success doesn’t end when the deal closes. Acquirers know success and stakeholder value lie in portfolio companies’ continued growth under their watch and after their exits. Our private equity and venture capital practices therefore offer a holistic, tailored approach that encompasses the needs of funds, their M&A process and portfolio companies while addressing market, industry and regulatory concerns and opportunities. We hope that the Global VC/PE Country Attractiveness Index proves to be a valuable tool in helping funds navigate through this uncertain time. For more information please visit www.ey.com8 The Global Venture Capital and Private Equity Country Attractiveness Index - 2011 annual
  7. 7. About the editorsProf. Alexander Groh Research teamDr. Alexander Groh is Associate Professor and Accounting, the Journal of European Alexander Grohof Finance at EMLYON Business School, Financial Management, the Journal of Associate Professor,France. He held visiting positions at The Alternative Investments, and in Venture EMLYON Business School,University of New South Wales, Sydney, Capital. He is involved in training courses groh@em-lyon.comAustralia, IESE Business School, Barcelona, for the European Venture Capital and Pri-Spain, and INSEAD, Fontainebleau, France. vate Equity Association (EVCA), and has Heinrich LiechtensteinHis research activities focus on VC and PE, worked for Quadriga Capital, a Frankfurt Assistant Professor,and include valuation issues, performance based Private Equity fund, since 1996. IESE Business School Barcelona,measurement and socio-economic deter- Dr. Alexander Groh was born in Frank- hl@iese.eduminants for the development of vibrant furt, Germany. He received a joint Master’sVC and PE markets. His papers have been Degree of Mechanical Engineering and Karsten Lieserpublished in the Journal of Banking and Business Administration from Darmstadt Project Manager,Finance, the Journal of Corporate Finance, University of Technology, where he also IESE Business School Barcelona,the Journal of International Money and gained his Doctoral Degree in Finance. klieser@iese.eduFinance, the Quarterly Journal of Finance Thomas LangProf. Heinrich Liechtenstein Research Assistant, IESE Business School BarcelonaDr. Heinrich Liechtenstein is Assistant Pro- gies at Liechtenstein Global Trust, a familyfessor of Financial Management at IESE holding, and as a consultant at The Boston Markus BiesingerBusiness School, Barcelona – University Consulting Group. He has previously foun- Research Assistant,of Navarra, Spain. His areas of interest are ded and sold two companies. IESE Business School Barcelonaentrepreneurial finance, VC and PE, wealth Dr. Liechtenstein was born in Leoben,management and owners’ strategies. He is Austria, and received an MA in Business Moritz Huismannactive in several supervisory and advisory Administration from the University of Research Assistant,boards of family holdings and founda- Graz, an MBA from IESE Business School, IESE Business School Barcelonations, as well as a private equity firm. and a Doctoral Degree of Business and Dr. Liechtenstein has experience in Economic Sciences from the University of Florian Braunwealth management and owners’ strate- Vienna. Research Assistant, IESE Business School BarcelonaKarsten Lieser Sarp VardariziKarsten Lieser is a Project Manager at the in the asset and fund management de- Research Assistant,IESE International Center for Financial partments of REInvest, SCM Strategic Ca- IESE Business School BarcelonaResearch (IESE CIIF) in Barcelona. He cur- pital Management, and AXA – Real Estate.rently manages the Global VCPE Country Currently, Mr. Lieser is enrolled in aAttractiveness Index project and works Ph.D. program in Finance at Darmstadton strategy and research assignments in University of Technology, Germany withthe Alternative Investment sector for va- a full-time research position at IESE Bu-rious consultancy firms. The focus of his siness School Barcelona, Spain. He gra-research is the investigation of determi- duated as Master in Business Administra-nants of Venture Capital, Private Equity, tion and Civil Engineering from Darmstadtand Real Estate investments and the de- University of Technology, Germany andvelopment of tools to guide investors on also studied at EPFL and HEC Lausanne,their geographic asset allocation deci- Switzerland, and IESE Business Schoolsions. Prior to joining IESE CIIF, he worked Barcelona, Spain. The Global Venture Capital and Private Equity Country Attractiveness Index - 2011 annual 9
  8. 8. I. The Global VCPE Country Attractiveness Index Written by Alexander Groh, EMLYON Business School, groh@em-lyon.com, Heinrich Liechtenstein, hl@iese.edu, and Karsten Lieser, klieser@iese.edu, IESE Business School Barcelona.10 The Global Venture Capital and Private Equity Country Attractiveness Index - 2011 annual
  9. 9. The Global Venture Capital and Private Equity Country Attractiveness Index - 2011 annual 11
  10. 10. I. The Global VCPE Country Attractiveness Index How to measure a country’s attractiveness for limited partners If institutional investors are unfamiliar with the preparing and analyzing a large quantity of socio-economic environment of countries they socio-economic data. However, not only the cannot make rational international allocation financial community can benefit from our decisions. They try to overcome potential research, also politicians may conclude that information deficits and gather data and analyze vibrant risk capital markets increase innovation, the determinants they deem important before entrepreneurial activity, economic growth, investing in a particular country. However, employment, competitiveness and wealth and this process is time consuming and costly. hence, might be interested in increasing the Additionally, due to the current pace of economic supply of risk capital for their countries. development of many emerging countries, Currently, there is a major shift of focus from selecting those that support VC and PE activity “traditional” VC and PE countries towards becomes more and more cumbersome. Our index emerging regions. Emerging countries attract guides institutional investors solving the problem investors by exceptional growth opportunities where to allocate capital. We aggregate and that require substantial funding. This shift is provide the most important information they also supported by the aftermath of the financial require for their international VC and PE allocation crisis that strongly affected the established VC decisions. However, this information cannot and PE markets. It is sometimes argued that substitute investors’ own efforts to build up exceptional growth in emerging markets fuels country knowledge and experience. It can only future VC and PE activity, and that the whole facilitate this process. business model needs to be redesigned. However, as we discuss in this index, growth opportunities We propose a composite measure that benchmarks are not the only factor that renders countries the attractiveness of 80 countries to receive VC attractive for VC and PE investors, and it is these and PE allocations from limited partners. Our broader conditions that motivate our index. intention is to serve the investment community,12 The Global Venture Capital and Private Equity Country Attractiveness Index - 2011 annual
  11. 11. What are institutional investors’ one single composite measure. The de- (1979) argues that a situation of economicinternational VC and PE allocation cisive factors that render a country at- prosperity and development facilitates en-criteria? tractive and the determinants of vibrant trepreneurship, as it provides a greater ac-Our index addresses institutional investors’ VC and PE markets have been extensively cumulation of capital for investments. Theconcerns and evaluates countries with res- studied. In our index we give a brief over- ease of start-ups is expected to be relatedpect to their criteria for international VC view over the findings of these studies and to societal wealth, not solely due to theand PE allocations. These criteria include, group the articles into six sub-chapters. availability of start-up financing, but alsoin the first instance, the expected deal These sub-chapters reveal the structure of to higher income among potential cus-opportunities in a country or region from our index: each heading represents one of tomers in the domestic market. However,a macro perspective. Of course, they also six “key drivers” for the attractiveness of a GDP is measured in current market pricesinclude particular investment strategies of country for limited partners: that are affected by inflation. Therefore,fund management teams, the general par- 1. Economic activity only real growth rates signal quality dealtners’ competences, their track records and 2. Depth of the capital market opportunities arising from the economicother parameters.1 The limited partners 3. Taxation development.evaluate these determinants in their due 4. Investor protection and corporatediligence process before committing to a governance Importance of the depth of theparticular general partner. However, these 5. Human and social environment capital marketcriteria are beyond the scope of our index 6. Entrepreneurial culture and deal Black and Gilson (1998) discuss major dif-because they depend on individual cases opportunities ferences between bank-centered and stockand undisclosed data. market-centered capital markets. They Another concern investors commu- These key drivers name and define a subset argue that well-developed stock markets,nicated to us is the level of valuations in of criteria we need to assess for all of our which allow general partners to exit viavarious countries. But, unfortunately, a sample countries.2 IPOs, are crucial for the establishment ofcomparison of international transaction vibrant VC/PE markets. In general, bank-multiples is impossible for us for two rea- Importance of economic activity centered capital markets show less abilitysons. First, little information exists on tran- Intuitively, the state of a country’s eco- to produce an efficient infrastructure thatsaction multiples. Second, multiples reflect nomy affects its VC/PE market activity. An supports VC/PE deal-making. They affirmthe relationship between growth expecta- economy’s size and employment levels are that it is not merely the strong stock mar-tions and opportunity cost of capital. It is also proxies for prosperity, the number of ket that is missing in bank-centered capitalnot feasible for us to estimate these pa- its local corporations and entrepreneurial markets; it is also the secondary institu-rameters for all our sample countries and activity, and hence, also for expected VC tions, including the bankers’ conservativeto find a correct benchmarking approach. and PE deal flow. Capitalizing on economic approach to lending and investing, and theOur index follows a practical approach and growth requires investments and provides social and financial incentives that rewardpoints to the opportunities that should a rationale for institutional investors to entrepreneurs less richly (and penalize fai-arise from the current socio-economic enter into certain countries. Gompers and lure more severely), that compromise entre-environment in a country, and as a result, Lerner (1998) argue that more attractive preneurial activity. Jeng and Wells (2000)contribute to the macro perspective of the VC and PE investment opportunities exist stress that IPO activity is the main forcecapital allocation process. if an economy is growing quickly. Romain behind cyclical swings because it directly Our index provides valuable informa- and van Pottelsberghe de la Potterie (2004) reflects the returns to the VC/PE funds.tion to investors as it summarizes all the find that VC/PE activity is cyclical and si- Kaplan and Schoar (2005) confirm this.important socio-economic factors into gnificantly related to GDP growth. Wilken Similar to Black and Gilson (1998), Gom- pers and Lerner (2000) point out that risk 2. For a comprehensive review please refer to Groh, capital flourishes in countries with deep1. For more details please refer to Groh, Alexander and Alexander, Liechtenstein, Heinrich and Lieser, KarstenLiechtenstein, Heinrich (2011): The First Step of the Capital (2010): “The European Venture Capital and Private Equity and liquid stock markets. Likewise, Schert-Flow from Institutions to Entrepreneurs: “The Criteria Country Attractiveness Indices”, Journal of Corporate ler (2003) uses either the capitalizationfor Sorting Venture Capital Funds”, European Financial Finance, Volume 16, Issue 2, April 2010, pp. 205 – 224.Management Journal, forthcoming. Related working papers Related working papers are available at http://ssrn.com/ of stock markets or the number of listedare available at http://ssrn.com/author=330804 author=330804 The Global Venture Capital and Private Equity Country Attractiveness Index - 2011 annual 13
  12. 12. I. The Global VCPE Country Attractiveness Index companies as a measure for stock market tion to develop a vibrant capital market. Lazear (1990) and Blanchard (1997) dis- liquidity and finds that it has a significant Glaeser et al. (2001) and Djankov et al. cuss how protection of workers can reduce impact on VC and PE investments. (2003 and 2005) suggest that parties in employment and growth. It is especially Alongside the disadvantages of bank- common-law countries have greater ease important for start-up and medium-size centered capital markets, Greene (1998) in enforcing their rights from commercial corporations to respond quickly to chan- emphasizes that low availability of debt contracts. ging market conditions. Black and Gilson financing is an obstacle for start-ups Cumming et al. (2006) find that the (1998) argue that labor market restric- in many countries. Entrepreneurs need quality of a country’s legal system is tions influence VC/PE activity, though not to find backers — whether banks or VC/ more closely related to facilitating VC/PE to the same extent as the stock market. PE funds — who are willing to bear risk. backed exits than the size of a country’s Djankov et al. (2002) investigate the Cetorelli and Gambera (2001) provide stock market. Cumming et al. (2009) role of several societal burdens for start- evidence that bank concentration pro- extend this finding and show that cross- ups in different countries. They conclude motes the growth of those industrial sec- country differences in legality, inclu- that the highest barriers and costs are tors that have a higher need for external ding legal origin and accounting stan- associated with corruption, crime, a larger finance by facilitating credit access to dards have a significant impact on the unofficial economy and bureaucratic de- younger companies. governance of investments in the VC/PE lay. It should be noted that this argument industry. Desai et al. (2006) show, that is probably of particular importance in Importance of taxation fairness and property rights protection some emerging countries with perceived Bruce (2000 and 2002), and Cullen and largely determine the growth and emer- higher levels of corruption. Gordon (2002) prove that tax regimes gence of new enterprises. Cumming and matter for business entry and exit. Djan- Johan (2007) highlight the perceived Importance of entrepreneurial kov et al. (2008) show that direct and in- importance of regulatory harmonization culture and deal opportunities direct taxes affect entrepreneurial activi- with respect to increasing institutional The expectation about access to viable ty. Poterba (1989) builds a decision model investor commitments to the asset class. investments is probably the most impor- showing the advantages to becoming an La Porta et al. (2002) find a lower cost of tant factor for investors’ international entrepreneur, driven by taxation incen- capital for companies in countries with risk capital allocations. Especially for tives. Bruce and Gurley (2005) explain better investor protection, and Lerner the early stage segment, we expect that that increases in the personal income tax and Schoar (2005) confirm these fin- the number of potential investments can raise the probability of becoming an dings. Johnson et al. (1999) show that is related to the research output in an entrepreneur: large differences between weak property rights limit the reinvest- economy. Gompers and Lerner (1998) personal income tax rates and corporate ment of profits in start-up companies. show that both industrial and academic tax rates provide an incentive for self-em- Finally and more broadly, Knack and research and development (R&D) expen- ployment. Keefer (1995), Mauro (1995), and Svens- diture significantly correlates with VC son (1998) demonstrate that property activity. Kortum and Lerner (2000) Importance of investor protection rights significantly affect investments highlight that the growth in VC fundrai- and corporate governance and economic growth. sing in the mid-1990s may have been due Legal structures and the protection of to a surge of patents in the late 1980s property rights strongly influence the Importance of the human and social and 1990s. Schertler (2003) emphasizes attractiveness of a national VC/PE market. environment that the number of both R&D employees La Porta et al. (1997 and 1998) confirm Black and Gilson (1998), Lee and Peterson and patents, as an approximation of the that the legal environment determines (2000), and Baughn and Neupert (2003) human capital endowment, has a posi- the size and extent of a country’s capi- argue that cultures shape both individual tive and highly significant influence on tal market and local companies’ ability to orientation and environmental conditions, VC activity. Furthermore, Romain and receive outside financing. They emphasize which may lead to different levels of en- von Pottelsberghe de la Potterie (2004) the differences between statutory law and trepreneurial activity. Megginson (2004) find that start-up activity interacts with the quality of law enforcement in some argues that, in order to foster a growing the R&D capital stock, technological op- countries. Roe (2006) discusses and com- risk capital industry, the research culture portunities and the number of patents. pares the political determinants of corpo- with respect to universities and national However, innovations and R&D are not rate governance legislation for the major laboratories plays an important role. only important for early stage invest- economies and focuses on the importance Rigid labor market policies negatively ment activity. Without sufficient R&D of strong minority shareholder protec- affect the evolution of a VC/PE market. activity it will be impossible for esta-14 The Global Venture Capital and Private Equity Country Attractiveness Index - 2011 annual
  13. 13. blished businesses to create or maintain only competitive legal environments allow achieve a more comprehensive result andmarket positions with strong products the development of the societal require- to facilitate interpretations.and brands, which, once established, ments that support innovations, economic In a first step, we differentiate the sixattract private equity investors. growth, the capital market, and VC and key drivers from the foregoing review of Despite the innovative output of a PE activity. There is a fourth alternative, prior research: economic activity, depthsociety, Djankov (2002), and Baughn and which may be more relevant for emerging of the capital market, taxation, investorNeupert (2003) argue that bureaucracy in economies: low taxes attract investors protection and corporate governance,the form of excessive rules and procedural who provide financing for growth which human and social environment, and en-requirements, multiple institutions from leads to modern and educated societies. trepreneurial culture and deal opportuni-which approvals are needed and cumber- All lines of argument are reasonable ties. We confirm their choice via a surveysome documentation requirements, may and actually validated by the economic among institutional investors, reportedseverely constrain entrepreneurial activity. development of various selected countries in Groh and Liechtenstein (2009) andLee and Peterson (2000) stress that the in different historic periods. Nevertheless, (2011), and base our index structure upontime and money required to meet such it seems to be the combination of all these them. Unfortunately, none of these keyadministrative burdens may discourage factors which need to be improved in pa- drivers is directly measurable, so we seeknew venture creations. rallel to increase VC and PE attractiveness data series that adequately express their of countries and regions. For this reason, characters. Hence, we try to find the bestSummary on the determinants of we do not rely on a selection of a few possible proxies for the aforementionedvibrant VC and PE markets parameters: for a country to receive a drivers of VC/PE activity, which must beThe research findings discussed above high index rank, it needs to achieve a high available for a large number of countriesemphasize the difficulty of identifying score on all of the individual criteria. The- at the same time.the most appropriate parameters for our refore, we structure the determinants toindex. There is no consensus about a ran-king of the criteria. While some parame-ters are more comprehensively discussed,and certainly of high relevance, it remainsunclear how they interact with others. Forexample, it is arguable whether the VC/PEactivity in a country with a high corporategovernance level is affected more by theliquidity of the national stock market orby labor regulations. While an IPO exit is, in principle, pos-sible at any stock exchange in the world,the labor market frictions in a particularcountry can hardly be evaded. On theother side, many of the criteria are highlyinter-correlated. Black and Gilson (1998)call it a “chicken and egg” problem: it isimpossible to detect which factor causesthe other. One line of argumentation isthat modern, open and educated socie-ties develop a legislation that protectsinvestors and property rights, which favorthe output of innovation and the deve-lopment of a capital market. This leads toeconomic growth and to demand for VCand PE. However, the causality might bereverse: economic growth spurs innova-tion and the development of modern edu-cated societies. There is a third suggestion: The Global Venture Capital and Private Equity Country Attractiveness Index - 2011 annual 15
  14. 14. I. The Global VCPE Country Attractiveness Index Building the 2011 index Assessing six latent key drivers How we disaggregate the six key Finally, the individual weights for the An important principle of our index is to as- drivers six key drivers depend on the number sess the latent drivers of VC/PE attractiveness. According to the principal to assess latent of their level-2 constructs. For example, These are criteria that are not directly ob- key drivers with observable data, we di- “1. Economic activity” consists of three servable, but driven by others which can saggregate each one into sub-categories. level-2 constructs, “2. Depth of the capi- be measured. For example, we assume in These sub-categories are either indivi- tal market” of seven, while “3. Taxation” a first step that the VC/PE attractiveness of dual data series or constructs of seve- consists of only one. Overall, we use 22 le- a country is determined by the six key dri- ral determinants that we name “level-2 vel-2 constructs for our index, and hence, vers. However, as pointed out, the key drivers constructs.” For example, as documented “1. Economic activity” receives a weight of themselves are not measurable but need to in Table 1, we split the key driver “2. Depth 3/22, which is 0.136, while the weight of be estimated with sub-criteria. For example, of the capital market” into seven sub-ca- “2. Depth of the capital market” is 7/22, it would be ideal to express the quality of tegories: which is 0.318, and for “3. Taxation” it is the deal-making environment in a country 2.1. Size of the stock market 1/22 = 0.046, respectively. by the number of investment banks, M&A 2.2. Stock market liquidity The advantage of this weighting scheme boutiques, law firms, accountants and 2.3. IPO market activity is that the key drivers which include more consultants. But, unfortunately, such data 2.4. M&A market activity level-2 constructs and hence, data series, does not exist on a global scale. Our only 2.5. Debt and credit market gain more weight. That way, once again, alternative is to gather more general infor- 2.6. Bank non-performing loans to total we diminish the effect of potential outliers mation on the level of debt provided by the gross loans in our data.3 banking sector, or estimates about the per- 2.7. Financial market sophistication The final index structure results from ceived sophistication of the financial system substantial optimization efforts. We find and the ease of access to loans. We assume Data series 2.2 and 2.6 are provided by that any statistically “more advanced” that these criteria affect the key driver, the Worldbank and data series 2.7 results techniques do not improve the index qua- depth of the capital market. Even if they are from a survey initiated by the World Eco- lity. The weighting scheme assigns appro- not perfect proxies, we claim that the better nomic Forum (WEF). However, the other priate emphasis according to the explana- these criteria are developed, the more deal- indicators are constructs themselves. For tory power of the individual key drivers. supporting institutions will exist to facilitate instance, we assess “2.3. IPO market ac- We will return to this topic in a later sec- VC and PE activity. Hence, we assess a driver tivity” by the issued volume and by the tion of this index. with observable data. This principle is main- number of issues. This approach has two tained at all individual levels for the index major advantages. First, individual data Separate VC and PE indices construction. An unobservable criterion series do not gain too much weight when To account for differences with respect to is assessed with several proxy parameters. they are grouped, and this limits the im- the two market segments, VC vs. PE, we In principle, we measure the attractiveness pact of outliers. Second, the overall results propose three related indices. The first of a country by the six key drivers and use can be traced to more granulated levels one combines both segments (VCPE). The several proxies for their assessment. and hence, allow better interpretation and second one focuses on early stage VC and confirmation of the findings. the third index on later stage PE. When calculating the individual VC and PE in- The six key drivers The weighting scheme dices we discard data series that are less 1. Economic activity We spent a great deal of time refining the important for either market segment. 2. Depth of the capital market statistical analyses and optimizing the 3. Taxation structure of the index. In this new opti- 4. Investor protection and corporate mized structure, we apply equal weights 3. Details about the possible statistical approaches governance for all data series, when we aggregate to determine weights for the data series are provided in 5. Human and social environment them to the level-2 constructs. We use the academic paper Groh, Alexander, Liechtenstein, Heinrich and Lieser, Karsten (2010): "The European 6. Entrepreneurial culture and deal equal weights for the level-2 constructs to Venture Capital and Private Equity Country Attractiveness opportunities aggregate them on the next higher level Indices," Journal of Corporate Finance, Volume 16, Issue 2, April 2010, pp. 205 – 224. Related working papers are of the six key drivers. available at http://ssrn.com/author=330804.16 The Global Venture Capital and Private Equity Country Attractiveness Index - 2011 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 0.16 0.19 5 Human and social environment 0.14 0.16 0.121.1 Gross Domestic Product 0.33 0.33 0.33 5.1 Education and human capital 0.33 0.331.1 Size of the economy (GDP) 0.33 0.33 0.33 5.1.1 Quality of the educational system 0.50 0.501.2 Medium-term real GDP growth 0.33 0.33 0.33 5.1.2 Quality of scientific research institutions 0.50 0.501.3 Unemployment 0.33 0.33 0.33 5.2 Labor market rigidities 0.33 0.33 0.502 Depth of the capital market 0.32 0.21 0.44 5.2.1 Difficulty of hiring index 0.25 0.25 0.252.1 Size of the stock market 0.14 0.25 0.14 5.2.2 Rigidity of hours index 0.25 0.25 0.252.1.1 Market capitalization of listed companies 0.50 0.50 0.50 5.2.3 Difficulty of firing index 0.25 0.25 0.252.1.2 Number of listed domestic companies 0.50 0.50 0.50 5.2.4 Firing costs 0.25 0.25 0.252.2 Stock market liquidity (trading volume) 0.14 0.25 0.14 5.3 Bribery and corruption 0.33 0.33 0.502.3 IPO market activity 0.14 0.25 0.14 5.3.1 Bribery and corruption Index 0.33 0.33 0.332.3.1 Market volume 0.50 0.50 0.50 5.3.2 Control of corruption 0.33 0.33 0.332.3.2 Number of IPOs 0.50 0.50 0.50 5.3.3 Extra payments/bribes 0.33 0.33 0.332.4 M&A market activity 0.14 0.25 0.14 6 Entrepreneurial culture and deal opportunities 0.22 0.26 0.062.4.1 Market volume 0.50 0.50 0.50 6.1 Innovation 0.20 0.202.4.2 Number of deals 0.50 0.50 0.50 6.1.1 General innovativeness index 0.50 0.502.5 Debt and credit market 0.14 0.14 6.1.2 Capacity for innovation 0.50 0.502.5.1 Domestic credit provided by banking sector 0.25 0.25 6.2 Scientific and technical journal articles 0.20 0.202.5.2 Ease of access to loans 0.25 0.25 6.3 Ease of starting and running a business 0.20 0.202.5.3 Credit information index 0.25 0.25 6.3.1 Number of procedures to start of business 0.20 0.202.5.4 Interest rate spread 0.25 0.25 6.3.2 Time needed to start a business 0.20 0.202.6 Bank non-performing loans to total gross loans 0.14 0.14 6.3.3 Costs of business start-up procedures 0.20 0.202.7 Financial market sophistication 0.14 0.14 6.3.4 Minimum capital requirements 0.20 0.203 Taxation 0.05 0.05 6.3.5 Administrative requirements 0.20 0.203.1 Tax incentives and administrative burdens 1.00 1.00 6.4 Simplicity of closing a business 0.20 0.203.1.1 Entrepreneurship incentive 0.33 0.33 6.4.1 Time for closing a business 0.33 0.333.1.2 Number of tax payments 0.33 0.33 6.4.2 Costs for closing a business 0.33 0.333.1.3 Time spent on tax issues 0.33 0.33 6.4.3 Recovery rate 0.33 0.334 Investor protection and corporate governance 0.14 0.16 0.19 6.5 Corporate R&D 0.20 0.20 1.004.1 Corporate governance 0.33 0.33 0.33 6.5.1 Company spending on R&D 0.50 0.50 0.504.1.1 Disclosure index 0.20 0.20 0.20 6.5.2 Utility patents 0.50 0.50 0.504.1.2 Director liability index 0.20 0.20 0.204.1.3 Shareholder suits index 0.20 0.20 0.204.1.4 Legal rights index 0.20 0.20 0.204.1.5 Efficacy of corporate boards 0.20 0.20 0.204.2 Security of property rights 0.33 0.33 0.334.2.1 Legal enforcement of contracts 0.33 0.33 0.334.2.2 Property rights 0.33 0.33 0.334.2.3 Intellectual property protection 0.33 0.33 0.334.3 Quality of legal enforcement 0.33 0.33 0.334.3.1 Judicial independence 0.20 0.20 0.204.3.2 Impartial courts 0.20 0.20 0.204.3.3 Integrity of the legal system 0.20 0.20 0.204.3.4 Rule of law 0.20 0.20 0.204.3.5 Regulatory quality 0.20 0.20 0.20 The Global Venture Capital and Private Equity Country Attractiveness Index - 2011 annual 17
  16. 16. I. The Global VCPE Country Attractiveness Index For the VC index, we regard the level-2 We find that several key drivers have VC and the combined VCPE index) because construct “2.5. Debt and credit market” as a high importance for the state of a they are relevant on the level of the target having minor importance and hence, dis- country’s VC and PE market while others firms. Similarly, we also discard the level-2 card it. We further delete “2.6. Bank non- are less important. Depth of the capital construct, measuring internet and com- performing loans to total gross loans,” market has the highest explanatory power puter technology infrastructure, from our and “2.7. Financial market sophistication” for cross-sectional VC and PE activity. This 2011 index. from the VC index. key driver is followed by entrepreneu- Furthermore, again due to a lack of For the PE index, we discard key driver rial culture and deal opportunities. Next correlation, we discarded GDP per capi- “3. Taxation,” because the criteria consi- comes economic activity, investor pro- ta from our list of data series. If we fo- dered are hardly relevant for the later tection and corporate governance on an cused on developed countries, individual stage segment. Similarly, we drop “5.1. equal level, followed by human and social wealth would be an important indicator Education and human capital” from the environment, then finally by taxation. This for VC and PE activity. However, including human and social environment key driver decrease in importance is mirrored by the emerging economies, this data series is and only keep “6.5. Corporate R&D” to as- weights we assign to the key drivers. The- contradictory as it has a strong negative sess the deal opportunities related to cor- refore, the chosen index structure assures correlation with economic growth. The porate proprietary research output. a weighting scheme that corresponds with fastest-growing VC and PE markets still The weights for the individual index the actual impact of the six key drivers. have low GDP per capita ratios, and hence, items in the separate VC and PE indices We did not follow this rigorous approach only one of the two drivers can be valid on are determined in the same way. in the 2009/10 edition of the index, where a broad cross-sectional scope. Table 1 presents the structures and we kept the weights of the six key drivers Finally, we discard the inflation rate the weights of the individual data series, balanced. from our list of data series because using as well as constructs for the combined Following the same rationale to im- real GDP growth we already control for VCPE, and the separate VC and PE indices. prove the quality of the 2011 index, we inflation. We provide more detailed information on discarded several data series we used in Beside the criteria that we need to ex- the data series in the appendix. There, we the 2009/10 index. Notably, we deleted clude for their missing explanatory power also explain the exact data aggregation some data series describing the tax envi- with respect to VC and PE activity, we technique. ronment from the index. Surprisingly, we have discarded other data series with a detected no correlation between margi- predominantly lower quality in their latest Changes with respect to the prior nal corporate tax rates, profit and capital update. A few of the ready-made indices index version gains taxes, and VC/PE activity across our and survey results we included in 2009/10 The proposed data series, the index struc- sample countries. First, tax rules depend on edition no longer qualified for their in- ture and the applied weights result from the will of governments and are somehow clusion due to perplexing rankings and a comprehensive analyses on the drivers of arbitrary, hardly correlating with other so- doubtful index quality. VC and PE activity. Our goal is to provide cio-economic characteristics. Second, we As a consequence, we present a much a framework for measuring a country’s interpret this as the consequence of gene- leaner index, based on 54 data series attractiveness with respect to the VC and ral partners’ efforts to create transparent (compared to 66 data series in our 2009/10 PE asset classes. Not much prior academic deal and fund structures, so that national edition). The structure of the 2011 index research has elaborated on this issue to such tax regimes do not affect the success of is more comprehensive and its statistical a broad scope. Usually, the country samples VC/PE investments. The tax regimes are quality has increased. of other researchers are not as large as in probably more important with respect to our index, and our data also tracks many the location of limited partners’ head- of the countries for a longer time period. quarters instead of the investee firms’. For Therefore, we benefit from a remarkable this reason, we only rely on the data series data collection allowing us to contribute to that evaluate entrepreneurial tax incen- academic research on the topic. tives and administrative burdens (for the18 The Global Venture Capital and Private Equity Country Attractiveness Index - 2011 annual
  17. 17. Africa (8): Algeria, Egypt, Kenya, Morocco, Namibia, The countries covered Nigeria, South Africa, Tunisia We aim to cover as many countries as pos- sible. The selection of the sample countriesAsia (16): Armenia, China, Hong Kong, India, is purely driven by data availability. We are Indonesia, Japan, Kazakhstan, South Korea, able to increase our coverage from 66 in Kyrgyzstan, Malaysia, Philippines, Russia, the 2009/10 edition to 80 countries for Singapore, Taiwan, Thailand, Vietnam 2011. Unfortunately, the African conti- nent is still under-represented with onlyAustralasia (2): Australia, New Zealand eight nations, but we hope to expand the number in future index editions whenEastern Europe (18): Albania, Bosnia-Herzegovina, Bulgaria, more data becomes available. We consider Croatia, Czech Republic, Estonia, Georgia, the following 80 nations and assign them Hungary, Latvia, Lithuania, Macedonia, to eight different geographic regions as Moldova, Poland, Romania, Slovakia, they are defined by the International Mo- Slovenia, Turkey, Ukraine netary Fund (IMF). The 14 “new entrants” are highlighted.Latin America (10): Argentina, Brazil, Chile, Columbia, Ecuador, Mexico, Paraguay, Peru, Uruguay, VenezuelaMiddle East (7): Bahrain, Israel, Jordan, Kuwait, Oman, Saudi Arabia, United Arab EmiratesNorth America (2): USA, CanadaWestern Europe (17): Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom The Global Venture Capital and Private Equity Country Attractiveness Index - 2011 annual 19
  18. 18. I. The Global VCPE Country Attractiveness Index The VCPE country attractiveness ranking We gathered the individual data series Exhibit 1 presents the ranking of The Glo- from Table 1 for our sample countries from bal VCPE Country Attractiveness Index 2011. 2000 onwards to most recent data retrie- The exhibit is open to debate. Some readers ved by the end of 2010. We calculated the might argue that particular countries are 2011 index scores and realized that the US ranked too high, others too low. However, we remains the most attractive for VC and PE note that the index ranking is the result of allocations, retaining its ranking from the commonly available, transparent, aggrega- 2009/10 index. However, the distance to its ted socio-economic data, which is relevant followers has decreased compared to last for investors in VC and PE assets. The results year. This can be mainly attributed to the can be traced to the level of the individual (economic) consequences of the financial data series, and hence, can be confirmed. crisis. We rescale the US score to 100,4 and Please note, the underlying data is its two followers, the United Kingdom and most the recent data available, but does Canada catch up to a level of 93.3%, com- not include future projections. Therefore, pared to 85.8% in 2010. we show the current attractiveness ran- king and leave it to investors and advi- sers to enrich the information we prepare with their own knowledge, experience and expectations upon which to draw their conclusions. 4. We explain the rescaling procedure in more details in the appendices.20 The Global Venture Capital and Private Equity Country Attractiveness Index - 2011 annual
  19. 19. Exhibit 1: 2011 VCPE Country Attractiveness Index VCPE Country Attractiveness Score 2011 0 10 20 30 40 50 60 70 80 90 100 United States (1.) 100.0 United Kingdom (2.) 93.3 Canada (3.) 93.3 Singapore (4.) 92.4 Switzerland (5.) 91.8 Japan (6.) 90.9 Australia (7.) 90.2 Sweden (8.) 85.0 Netherlands (9.) 84.3 Germany (10.) 82.8 Finland (11.) 82.3 Denmark (12.) 81.8 Norway (13.) 81.0 France (14.) 79.6 Belgium (15.) 76.8 Hong Kong (16.) 76.5 Korea, South (17.) 75.7 Malaysia (18.) 72.5 New Zealand (19.) 72.5 China (20.) 72.3 Israel (21.) 72.2 Austria (22.) 71.7 Spain (23.) 69.1 Ireland (24.) 67.7 Saudi Arabia (25.) 67.5 South Africa (26.) 66.9 Taiwan (27.) 62.4United Arab Ermiates (28.) 61.6 Chile (29.) 61.5 India (30.) 61.4 Portugal (31.) 60.4 Italy (32.) 59.6 Luxembourg (33.) 59.3 Thailand (34.) 59.3 Kuwait (35.) 57.9 Poland (36.) 57.4 Czech Republic (37.) 55.0 Jordan (38.) 53.2 Turkey (39.) 52.8 Hungary (40.) 52.0 Russian Federation (41.) 51.1 Mexico (42.) 48.7 Brazil (43.) 48.7 Greece (44.) 47.9 Slovenia (45.) 46.8 Oman (46.) 45.6 Colombia (47.) 45.3 Indonesia (48.) 45.2 Estonia (49.) 44.8 Bahrain (50.) 44.3 Bulgaria (51.) 44.1 Croatia (52.) 43.4 Vietnam (53.) 42.2 Morocco (54.) 41.8 Egypt (55.) 41.8 Tunisia (56.) 41.5 Lithuania (57.) 41.3 Philippines (58.) 41.2 Peru (59.) 41.1 Romania (60.) 41.0 Kazakhstan (61.) 39.1 Slovakia (62.) 39.1 Kenya (63.) 38.3 Nigeria (64.) 37.1 Uruguay (65.) 36.8 Argentina (66.) 36.4 Latvia (67.) 29.4 Ukraine (68.) 27.8 Georgia (69.) 27.2 Namibia (70.) 26.4 Armenia (71.) 25.3 Moldova (72.) 22.0 Macedonia (73.) 19.3 Ecuador (74.) 17.9 Albania (75.) 17.8 Bosnia-Herzegovina (76.) 17.3 Algeria (77.) 17.1 Paraguay (78.) 15.7 Venezuela (79.) 15.2 Kyrgyzstan (80.) 14.4 0 10 20 30 40 50 60 70 80 90 100 The Global Venture Capital and Private Equity Country Attractiveness Index - 2011 annual 21
  20. 20. I. The Global VCPE Country Attractiveness Index Exhibit 2: rankings according to the three different indices VCPE Country Attractiveness Ranking 80 70 60 50 40 30 20 10 0 United States United Kingdom Canada Singapore Switzerland Japan Australia Sweden Netherlands Germany Finland Denmark Norway France Belgium Hong Kong Korea, South Malaysia New Zealand China Israel Austria Spain Ireland Saudi Arabia South Africa Taiwan United Arab Emirates Chile India Portugal Italy Luxembourg Thailand Kuwait Poland Czech Republic Jordan Turkey Hungary Russian Federation Mexico Brazil Greece Slovenia Oman Colombia Indonesia Estonia Bahrain Bulgaria Croatia Vietnam Morocco Egypt Tunisia Lithuania Philippines Peru Romania Kazakhstan Slovakia Kenya Nigeria Uruguay Argentina Latvia Ukraine Georgia Namibia Armenia Moldova Macedonia Ecuador VCPE 2011 Albania Bosnia-Herzegovina VC 2011 Algeria PE 2011 Paraguay Venezuela Kyrgyzstan 80 70 60 50 40 30 20 10 022 The Global Venture Capital and Private Equity Country Attractiveness Index - 2011 annual
  21. 21. Rankings according to the separate creasing its rank by several places. The ra-VC and PE indices tionale for these improvements is simple:Exhibit 2 combines the VCPE index with competitive disadvantages with respectthe rankings according to the separate to education and innovation are no lon-VC and PE indices. The triangles mark the ger considered, but the weight of the ca-VCPE index ranks. The diamonds designate pital market key driver has increased atthe VC index and the squares represent the same time. As these countries havethe PE index ranks. (meanwhile) relatively deep capital mar- The VC index country ranking does kets, their attractiveness for later stagenot change remarkably compared to the investment increases.combined VCPE index ranking. It remains In contrast, we find that New Zealand,stable because we do not alter the index Ireland, Slovenia, the Baltics and Tu-structure to a great extent between the nisia lose several ranks focusing on PE2009/10 and 2011 editions. However, we attractiveness. This can be mainly attri-receive a much stronger ranking variation buted to two factors: a strong impact ofif we exclusively focus on the PE segment. the recent financial crisis and, resulting For the PE index, we discard taxation from discarding competitive advantagesas well as constructs and data series that of these countries in the PE index, in par-are related to education, high-tech inno- ticular with respect to taxation.vation and starting or running businessesin early stages. This results in Hong Kong,China, South Africa, Taiwan, India, Bra-zil, Bahrain, the Philippines and Peru in- The Global Venture Capital and Private Equity Country Attractiveness Index - 2011 annual 23
  22. 22. I. The Global VCPE Country Attractiveness Index Comparisons of countries The general pattern: what renders Exhibit 3 reveals four important im- Focusing on the developed countries the US so attractive? plications. First, the United States (US) we find many economically strong na- We broke down the index scores to the le- generally ranks ahead of other developed tions with vibrant entrepreneurial cultures vel of the six key driving forces, and then economies (e.g., Germany) with respect to and deal opportunities, with an excellent further down to the level-2 constructs in most of the six key drivers of VC and PE human capital and social environment. order to enhance the discussion about the attractiveness, but especially to its capi- However, the finally decisive criteria for ranking. We found a typical pattern with tal market. Second, emerging countries the lower score compared with the US are respect to the attractiveness of countries (e.g., China) strongly attracts venture ca- the financial markets, and investor pro- for VC and PE allocations. We demonstrate pital and private equity investors by their tection and corporate governance rules. this pattern by comparing the first ranked economic growth. Third, many countries These findings point to the discussion with the 10th and 20th ranked country, provide tax incentives that support en- about the competition of legal systems namely the US, Germany and China. Ex- trepreneurial activity. Fourth, emerging and the relation between law and finance, hibit 3 presents the key driver scores of countries score sometimes notably below as all strong countries score highly for the Germany and China compared to the US the developed economies in terms of in- investor protection and corporate gover- (which scores 100 for each key driver by vestor protection and corporate gover- nance key driver. Strong investor protec- definition). nance, human and social environment, tion and corporate governance legislation and entrepreneurial culture and deal op- spurs the development of a national ca- portunities. This pattern becomes evident pital market, which is required for the es- by further analyses which are presented tablishment of VC and PE deal supporting in the appendix of this annual where institutions. we benchmark every individual country against the US. Exhibit 3: six key driving forces – comparison of the United States, Germany and China 1. Economic Activity 150 125 6. Entrepreneurial 100 2. Depth of Capital Culture and Deal 75 Market Opportunities 50 25 0 5. Human and Social Environment 3. Taxation United States (1.) 4. Investor Protection and Germany (10.) Corporate Governance China (20.)24 The Global Venture Capital and Private Equity Country Attractiveness Index - 2011 annual
  23. 23. We brake-down our analysis on the le- ver scores between the US and Germany by its liberal labor market, while per-vel-2 constructs and provide more details results from a higher appreciation of the ceived bribery and corruption remains anthat support the detected general pattern. US’ corporate governance rules. On the investment obstacle in China. Finally, the Exhibit 4 points to the distance between other side, Germany leads with respect to excellent score of the US for the entre-the scores of the US, Germany and China several other criteria, in particular with an preneurial culture and deal opportunitieswith respect to the level-2 constructs that advanced protection of property rights, a key driver is mainly related to academicasses the capital market and corporate higher quality of the legal system, a lower research output and to the administrativegovernance. It also reveals the extraor- perception of bribery and corruption, and simplicity and cost of starting, runningdinary state and growth of the Chinese regarding its general innovation capacity. and closing businesses.economy, and its well developed capital In addition, the exhibit shows that the VC/market. The difference of the investor pro- PE attractiveness of the human and socialtection and corporate governance key dri- environment in the US is mainly drivenExhibit 4: level-2 constructs – comparison of the United States, Germany and China VCPE Country Attractiveness Score 2011 0 20 40 60 80 100 120 140 160 180 200 1.1 Size of the Economy (GDP) 1.2 Medium-Term Real GDP Growth 1.3 Unemployment 2.1 Size of the Stock Market 2.2 Stock Market Liquidity (Trading Volume) 2.3 IPO Market Activity 2.4 M&A Market Activity2.6 Bank Non-Performing Loans to Total Gross Loans 2.7 Financial Market Sophistication 3.1 Tax Incentives and Administrative Burdens 4.1 Corporate Governance 4.2 Security of Property Rights 4.3 Quality of Legal Enforcement 5.1 Education and Human Capital 5.2 Labor Market Rigidities 5.3 Bribing and Corruption 6.1 Innovation 6.2 Scientific and Technical Journal Articles 6.3 Ease of Starting and Running a Business 6.4 Simplicity of Closing a Business United States (1.) 6.5 Corporate R&D Germany (10.) China (20.) 0 20 40 60 80 100 120 140 160 180 200 The Global Venture Capital and Private Equity Country Attractiveness Index - 2011 annual 25
  24. 24. I. The Global VCPE Country Attractiveness Index Historic comparison — improvements sively due to its tremendous economic vestment environment, economic growth of VCPE investment conditions and growth. Although this is a remarkable in- rates can be responsible for volatile ranks. financial crisis impact crease of VC/PE attractiveness it should be At the other end of the exhibit, we In order to demonstrate shifts in VCPE interpreted with some caution as, despite find those countries that lost ranking country attractiveness, we compare the its growth, Brazil is only ranked number positions in the global competition. The ranking for 2011 with 2007. It should be 43 in our index. For a further increase of Baltics, Turkey, Ireland, Romania, and Slo- noted that some data series, e.g., the Ge- Brazil’s attractiveness, other key drivers vakia conclude the list of countries that neral Innovation Index (GII) do not date need to be strengthened. This is equally decreased their ranks. For Turkey, the de- back as far. However, we assume that valid for Indonesia. The country scores gradation results from a lack of economic this and similar indicators did not change particularly low with respect to investor growth and from a deterioration with res- substantially between 2007 and their protection and corporate governance (for pect to its human and social environment first publication, and hence, keep them this key driver, Indonesia only ranks num- (relative to the other sample countries). constant. ber 75), and the gain of ranking positions For Ireland, the Baltics, Romania and Slo- The comparison presented in Exhi- is dominantly caused by its economic vakia, the downgrade is a direct conse- bit 5 shows the rank changes (positive to growth. For Saudi Arabia, the rationale quence of the financial/economic crisis. the right and negative to the left) of our is different. Not only economic growth Lacking economic growth is superimposed sample countries between the 2007 and contributes to its more favorable ranking, by frozen debt markets and low capital the 2011 index. It provides interesting in- Saudi Arabia substantially improved in all market activity. This result should alert in- sights and reveals a strong increase of VC other important key drivers. vestors as these countries were highly ap- and PE attractiveness for several countries, We continue with the interpretation preciated target countries for VC and PE and the impact of the financial and econo- of Exhibit 5 and note that the increase investors in the past. However, the once mic crisis on others. It should be stressed of ranking positions of Vietnam is caused expected economic growth did not mate- that the index scores are calculated relative by the initiation of capital market acti- rialize on a sufficient scope; respectively, to all other countries of the sample. That vity: stock market trading volume, M&A it was not sustainable without improving means those countries that gained or lost and banking activity increased from very the general socio-economic environment ranking positions did not necessarily im- low levels. This is also similar for Bahrain. as measured by the other key drivers. For prove/deteriorate their investment condi- Exhibit 5 further reveals that all the this reason, a VC/PE bet on growth in a tions in absolute terms. They might just Middle East countries substantially im- particular country is risky as the country have outperformed/been outperformed by proved their rankings. In addition, the might fail to develop the appropriate in- others in the international competition to North African countries, Tunisia and Mo- vestment environment at the same pace. attract capital resources. rocco, experienced remarkable econo- We find that Brazil, Saudi Arabia, and mic growth; this is equally valid for the Indonesia are the “winners.” For an inter- Western European countries, Portugal and pretation of this finding, we refer to the Germany. Taking Germany as an example, detailed country analyses in the appendix the importance of the economic activity of this annual and note that Brazil gains key driver should be noted. For countries these 14 ranking positions almost exclu- with a general very favorable VC/PE in-26 The Global Venture Capital and Private Equity Country Attractiveness Index - 2011 annual

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