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The Financing of Innovation and the Venture Capital, the National --PDF


									Sectoral Systems in Europe - Innovation, Competitiveness and Growth

      Under the Fourth Research and Technological Framework Programme,
                  Targeted Socio-Economic Research, TSER
                [Contract no: SOE1-CT 98-1116 (DG 12-SOLS)]

   Work Package 3: National institutional frameworks and sectorals systems
                      RP10 The financing of innovation


                           Working Paper ESSY

                        Dorothée Rivaud-Danset
                     CREII, Université de Paris 13
                                     ESSY - SECTOR SYSTEMS IN EUROPE:
                                       Innovation, Competitiveness and Growth


                              The financing of innovation and the venture capital,
                                      the national financial and sectoral systems

                                                      Brighton, march 2001

                                                    Dorothée Rivaud-Danset
                                                CREII, Université de Paris 13

Part 1 The financing of innovation in manufacturing and services sectors
Introduction : the study of the financing of innovation merges with the study of the innovative
Section 1 Do the financial actors have a bias against innovative firms ?..................................4
Section 2 More about the financial constraint ..........................................................................13
   2.1 What are the main obstacles met by the European innovative firms ? ...........................13
   2.2 What are the main obstacles met by the French manufacturing firms ?.........................20
   2.3 What kind of firms are more financially constraint? ......................................................22
Section 3 At the sector level, the innovation financing pattern changes according to the firms
which characterise the sector. ...................................................................................................27
   3.1 The third generation mobile phone.................................................................................27
      What is UMTS? ................................................................................................................27
      Who are the manufacturers? .............................................................................................27
      How do the manufacturers finance the 3G? .....................................................................28
      Nokia financial sources :Bank debt, divestment, share issues and cash-flow ..................29
   3.2 The financing pattern of enterprises of new knowledge-based sectors: an illustration by
   French SMEs of the software and biotechnology sectors.....................................................34
      3.2.1. The software industry: financial constraints correlate with of a lack of physical
      3.2.2 The French biotechnology SMEs: who are the equity suppliers?............................40
Conclusion ................................................................................................................................43

Part 2 deals with the venture capital.

Introduction : the study of the financing of innovation merges with the study of the
innovative firms

The launching of a software designed to navigate on Internet, in the first step, requires only
around EUR 10 millions. The launching of a new kind of motor-car may require EUR 1
billion. As the scale of cost is ranking from 1 to 100, it may be assumed that financial
obstacles would have a much bigger weight in the second case than in the first one. It seems
that financing would be more problematic in a mature sector where the scale of activity is so
high that only a few firms can compete and perform, like in the motor-car industry. In fact,
this hypothesis is too simple. However, it is not easy to test it. In the first case, it is highly
probable that the firm which seeks to launch a software is still in its infancy and, if this
innovative project is be the only activity of the start-up, therefore the study of the project
financial pattern is possible, as it merges into the study of the corporate financial pattern. In
the second case, it is realistic to assume that the motor-car project comes from an incumbent
firm, hence, as it has been well investigated, innovation does not come only from the R-D
activity. It is not the consequence of an isolated activity. On the contrary, sources of
innovation are numerous and not so easy to identify. An innovative project can be born
outside of the R-D laboratory, even if it will be developed inside it. A wide spectrum of
knowledge, both tacit and codified, gives shape to an innovative project. To sum up human
resources supporting an innovative project do not come only from the R-D laboratory of the
key company. On the other hand, the lack of autonomy of the R-D activity is obvious in the
financing field. Even an innovative project entirely designed in a R-D laboratory would not
have been financed in an autonomous way. R-D is not organised as a small firm. Its budget is
decided by the board of managers, therefore the study of the project financial pattern overlaps
with the study of the firm. Anyhow, in both cases - the start-up in a new sector and the
incumbent firm in a mature sector -, the study of the financing of innovation has to start by the
study of the financing of the key firm.

Coming to this point, the issue becomes the following: does the financial pattern of an
innovative firm differ from the financial pattern of a non-innovative firm? does the first one
suffer from a bias against innovation, as it is more or less assumed by the theoretical
literature? or is it involved in a virtuous circle? Section 1 aims to answer these questions by
using an appropriate database (SESSI-CIS 2) which allows to compare innovative and not-
innovative firms. Section 2 focuses on the impact of the financial obstacle, as one of the

various obstacles met by innovative firms; this field is explored by using CIS 2 database. Two
innovative sectors - mobile phone and software industry - have been selected in section 3 to
illustrate how the financing issue is solved by quite distinct ways.

Section 1 Do the financial actors have a bias against innovative firms ?

Two polar cases can be conceived and tested.

The virtuous case can be depicted, by comparing the innovative firm to the not-innovative
firm, both having the same turnover :
In the case of innovative firm,
(1) innovative projects have been successful in the past,
(2) cash-flow capacity and profitability, measured by the return on assets are higher,
(3) internal resources (per unit of turnover) are higher, but needed financial resources are
higher too,
(4) access to external financial debt, provided by the market or by the bank is easier, financial
actors are more ready to lend because of the past performances and the low probability of firm
(5) financial markets are more ready to invest in the case of a stock issue, because of the
higher expected profitability,
(6) to sum up, the innovative firm is in a better position to access to any kind of financial
resources: either internal, coming from its activity, or external coming from the bank or the

These three sources of funds are complementary: a higher rate of received cash-flow generates
a higher flow of internal financial source and attracts external funds, as anticipations are built
on the basis of past results; a high level of expected cash-flow means that, for a given amount,
lending to an innovative firm is less risky than lending to a not-innovative one, while the
return on equity which measures the financial profitability is assumed to be higher.

An exhaustive list of appropriate financial sources should include capital coming from the
group, either the holding, the parent company or the financial subsidiary, this source of fund
has become not insignificant. It is also a complementary source of financial resources, but, in
some cases, it may be analysed as a subsidiary source; for instance, the parent company may
be able to borrow from banks in better terms than its affiliate, hence loans from the parent
company becomes a substitute to loans from banks.
The composition of financial resources does not matter so much as long as the innovative firm
generates revenue and as long as actual results follow expected results. However, there is one
regularity. The spectrum of choice among the financial sources grows up with the size of firm.
Larger firms, financially sound, can access to any kind of financial source and reach a high
level of indebtedness, because bankruptcy is seen as very unlikely, such firm being too big to
fail. The regularity in the financial sources hierarchy is the following: self-financing is always
preferred, financial debt is the second best, the issue of stock being the last one, because of the
risk of firm undervaluation.

The vicious circle shares with the opposite case the first three arguments, but the other
features are opposed:
(4) because of its innovative project, the firm is seen as highly risky by banks, and banks will
ration loan, offering lower amount and/or asking a risk premium, the first behaviour being
more widespread,
(5) if the innovative project is not profitable during the first years of its design, because of the
short-termism which characterises investors on the financial market, new shares issued on the
market will be undervalued, hence managers would prefer not to use this source of financing,
(6) to sum up, the innovative firm is in a worst position to get external financial resources.
Innovation is constraint by the financial actors

It is possible to test which of these two cases is more realistic, by comparing two sets, one
including only innovative firms and the other one only not-innovative firms. Such a
comparison has been made for French manufacturing firms, using two database, the CIS 2 (the
second European survey on innovation) and Dun&Bradstreet, a database which provides
individual financial corporate data (sources : Mamar, under Miotti’s governance,
Commissariat General au Plan and Paris 13, 2000). The total sample contains 3926 selected
firms, which employ more than 20 employees and were in activity during at least three years

(from 1994 to 1996), as the survey was conducted in 1997, and 1994-1996 was the period
under review. This total sample allows to compare the financial pattern of firms, classified as
innovative (2257 innovative firms), and those classified as not-innovative (1669 firms) by the
CIS 2 (see box 1 and appendix 1).

                                                        Box 1
The CIS 2 includes questions about the obstacles met by firms, either innovative or not, which seek to introduce
an innovation leading to a new or an improved product, and/or to an innovation process. This survey was
conducted in 1997-1998, in the fifteen European countries, 1996 being the year of reference. The nine obstacles
which have been listed can be grouped in the following way:
. the economic and technologic obstacle of innovation is grasped via the questions untitled : ‘excessive economic
risk’, ‘too high innovation cost’, and ‘lack of information on technology’,
. the market risk is grasped via ‘lack of consumer responsiveness to new product’ and ‘lack of information on
. the obstacle due to a lack of financial resources is grasped via the question untitled ‘lack of appropriate source
of finance’,
. the obstacle due to a lack of human resources via ‘lack of qualified personnel’
. the organisational obstacle via ‘organisational rigidity’
. the regulatory obstacle via ‘problems of regulation fulfilling’.

Firms which aim to innovate use to meet obstacles, the consequences of which are classified into three groups:
the innovation project (1) faces serious delays; (2) was abolished; (3) has not even started. The percentage of
innovative firms which accumulate delays, abolish innovative projects or cannot start an innovation project,
changes from one country to another, but is always significant, ranking from :
. 27.4 % in the U. K. to 54.8 % in France, when the innovation project faces serious delays,
. 12.1 % in the U. K. to 22.0 % in the Netherlands, when the innovation project is abolished,
. 20.3 % in the Netherlands to 50.3 % in Finland, when the innovation project has not even started.

Data for European countries are available at an aggregate level, by sector and by size, and not an individual level,
hence capacity of data processing is limited. Although the sample of innovative firms is always large, even when
the country is small (the number of firms ranks from 81,750 in Germany to 1,864 in Finland), sector analysis
meets difficulties, due to the limited number of firms, as it is, for instance, the case of telecommunication sector,
and due to the chosen classification which only allows to identify a few sectors. Italy is a special case as data only
cover the manufacturing firms and the quality of answers to the list of obstacles is subject to reservation.
A methodological note is displayed in Appendix 1.

This report also refers to two studies, which use individual data collected for the CIS 2 by SESSI, the statistical
department of the French Minister of Industry, but these two studies only cover the manufacturing industry. The
French database, available to researchers, is more detailed than the publicly available European database. For
instance, the French database takes into account a sub-sample of not-innovative firms, the study at the European
level does not. Firms, qualified as not-innovative, have undertaken innovative projects but none of them has been
completed during the period 1994-1996.

This study compares the financial pattern of innovative and not-innovative firms, using the
ratio debt over turnover and the median which is estimated from the total sample. Table 1.1
displays the percentage of firms with a long-term debt ratio higher than the median (long-term
includes all debt which term exceeds one year). 52.2 % of innovative firms have a debt ratio
higher than the median, while it is the case for only 41.1 % of not-innovative firms.
Innovative firms are more long-term indebted than not-innovative ones, whatever the size.

Table 1.1 Debt level: total long-term debt over turnover, % of firms over the median of
total sample

innovative firms                               52.15 %
not-innovative firms                           41.14 %

Sources : Mamar using CSI 2 and Dan&Bradstreet

Table 1.2 Debt level: total long-term debt over turnover by size of firm, % of firms over
the median of total sample

                    20-49           50-99         100-199         200-499          > 500
innovative          46.95           55.19           57.40          59.49           57.21
not-                37.97           46.74           46.70          52.72           53.92

Sources : Mamar using CSI 2 and Dan&Bradstreet

Table 1.2 indicates that small firms are always less indebted than larger ones. Empirical data
has been tested econometrically, using a LOGIT equation. Long-term debt does discriminate

between innovative firms and the other firms of total sample (the probability that coefficient
on long-term debt equals 0 is 0). Econometric tests also demonstrate that:
. regarding short-term debt level, observed differences between these two groups are not
significant, but it does not testify of a certain credit rationing towards innovative firms,
because, as explained below, short-term debt merges various items,
. self-financing capacity and market power (measured by market shares) are significantly
higher for innovative firms.

The main conclusions of this study testify in favour of the virtuous case and Schumpeter mark
1. Higher performances linked with innovation improve the corporate capacity to access long-
term credit. In spite of a higher self-financing capacity, innovative firms need a higher level of
external fund (per unit of turnover) and prefer borrowing for a long period, as it gives
independency (short-term bank debt is less easily available and often more costly than long-
term one, in France).

Numerous econometric tests have been undertaken to examine the behaviour of financial
actors on the market. Whatever the regression, results are never significant. In other words,
investors on the financial market do not prefer or do not ration the French innovative firms
having raised capital on the Stock Exchange during the period under review 1. It is necessary
to recall that issuing additional shares to raise money on the market is rather infrequent.

It is possible to explore the way in which innovative firms are financed by breaking down debt
into various items, in a way which allows to discriminate between the financial debt and the
not-financial debt. This criteria is more relevant than the usual ratio debt over equity, the
denominator of this ratio merging internal and external resources, while the numerator merges
various sources of debt, which are not comparable 2. The debt structure, broken down into
financial and not-financial items, highlights the financial actors behaviour. Indeed, the
financial debt is contractual and provides interest; it includes debt contracted with bankers,
investors on the financial market in the case of marketable bonds, and the financial director of
the parent company... The not-financial debt includes trade creditors granted by the supplier

  Lack of results is not mentioned in Mamar’s study. This information was given by Miotti.
  As innovation requires long term capital, Mamar’s study puts emphasis on the ratio long-term debt over short-
term; conclusions are similar, the long-term debt being mostly financial, while the short-term debt is on the
average mostly not-financial.

and de facto debt like unpaid tax; hence a high rate of not-financial debt, with the exception of
a few specific sectors, mainly gross trade, shows a corporate lack of liquidity, due to a lack of
internal resources and to a capital rationing by the financial external actors. On the opposite,
the ratio of financial debt over total debt is a proxy of the corporate capacity to access
financial external resources. The comparison of financial patterns indicates clearly that
innovative French firms do not suffer from a specific rationing.

Table 1.3 Debt structure by type of firms

                                Innovative firms                not-innovative firms
medium       and    long   term 10.68 %                         10.53 %
banking debt
bonds                            0.53 %                          0.19 %
other financial and other long- 12.80 %                          9.12 %
term debt
short-term banking debt          7.00 %                          6.21 %
other financial short-term debt 6.03 %                           4.81 %
TOTAL              FINANCIAL 37.04 %                            30.86 %
TOTAL DEBT                      100.0 %                         100.0 %

Sources: own calculations, data processed by Mamar using CSI 2 and Dan&Bradstreet

Table 1.4 Debt structure: total financial debt over total debt (%) by size of firm

                     20-49          50-99          100-199          200-499          > 500
innovative           32.81          33.43            38.00           40.25           39.88
not-                 28.05          30.58            34.21           36.93           42.46

Sources : own calculations, data processed by Mamar using CSI 2 and Dan&Bradstreet

The debt structure clearly favours the innovative firm. Table 1.3 shows that, for each item of
financial debt, on the average, innovative firms display a rate of debt (over total debt) higher
than not-innovative ones. Table 1.4 displays an additional interesting point: for each size of
firms, the rate of financial debt (over total debt) is higher for the group of innovative firms.

The case of large innovative firms (> 500 employees) is distinct, as such firms benefit from a
specific source of fund which correlates with innovation: they receive relatively more
advances on order than the large not-innovative firms (respectively 6.00 % and 2.46 % of total

Mamar’s study on French manufacturing firms provides additional argument supporting the
view that innovative firms do not suffer specific financial pressures. CIS 2 has selected 9
explanatory factors which may have hampered innovation, one of them referring to finance
(see box 1 and appendix 1). Firms are broken down according to their answer about the
financial obstacle. The probability for an innovative firm to come up against a ‘lack of
appropriate sources of finance’:
. increases if short-term debt is higher (than the median),
. decreases if gross profit is higher,
. decreases if market share is higher,
. is not related with the level of long-term debt.

In other words, it is not because a company is more long-term indebted that its probability to
mention the financial obstacle increases. Financial obstacles increase for economic reasons,
and low performance is the factor that get the vicious circle started. The financial manager of
a firm with low performance during the last three years would hardly convince investors and
bankers to allocate resources to his (her) firm, even if there is a good innovative project to
promote. On the other hand, the financial manager of a firm with high performance during the
last three years would easily convince financial investors to offer capital and credit to his (her)
firm, even if there is no innovative project to be financed in the near future.

To sum up this section, there is no evidence of a bias against innovative firms. On the
opposite, this set of data provides evidence in favour of the virtuous circle. Although these
results testify clearly that the assumed financial bias against innovation is not empirically
grounded, it cannot be concluded that money-men are long-termist. Evidence only indicates
that among manufacturing firms, producing mostly in mature sectors, the capacity of
innovative firms to have access to various sources of funds is higher than the capacity of their
not-innovative counterparts. Indeed, the scope of validity is limited, not only because the
sample is limited to French firms, but above all because it only covers manufacturing

industries and firms in activity during at least three years with more than 20 employees. It
does not take into account the case quoted in introduction to this study of the start-up seeking
to innovate in software dedicated to Internet, which is not introduced on a financial market,
with no previous results, no cash-flow capacity, no balance sheet which would testify to the
bankers that it is financially sound, no tangible assets which would give guarantee, and so on.
For such a kind of innovative firm, the financial obstacle is not directly related to the
magnitude and cost of the project but is due to the lack of financial resources by itself,
independently of the required amount, because none of the classic resources is available.

Section 2 aims to highlight this idea, what is done by referring to the second European inquiry
on innovation.

Section 2 More about the financial constraint

Section 2 focuses on the obstacles listed in the European inquiry CIS 2, among which ‘the
lack of appropriate source of finance’ can be selected (box 1). It is divided into three parts.
The first one presents own results3 using the CIS 2 data for six countries, namely Finland,
France, Germany, Italy, the Netherlands, and the U. K. which cover the manufacturing and
services industries. The second one presents more detailed outcomes, coming from a study
realised by Reignier for SESSI, the statistical department of the French Ministry of Industry,
using CIS 2 database (box 1). The third one tries to select what kind of firms is more sensitive
to the financial obstacle.

2.1 What are the main obstacles met by the European innovative firms ?

Firstly, the main results are displayed by country, then the sector effect is investigated.

With the exception of the U. K., the financial obstacle is never mentioned as the first one and
the main obstacles change according to the state of progress of the innovation project.

  Data has been processed with V. Revest’s help. Countries have been selected so that the sub-sample includes
the larger European countries (Spain is not in the database), and two small countries orientated towards
innovation, with distinct financial institutions.

Table 2.1.1 The rank of the financial factor among the hampering factors for innovating enterprises,
   with not even started projects and by activity sector

                             United-Kingdom       France    Germany        Netherlands      Finland        Italy

    Total manufacturing              1               3          3               5              3             3

    Intermediate goods               2               5          3               5             n.a.           5
     equipments goods                3               3          1               5              3*            2

       Total services                1               3          1*              3              3

         Transports                 n.a.             4          2*             6*             n.a.
   Telecommunications               n.a.             2*        n.a.            n.a.            5*
  Financial intermediation           5*             n.a.        3*              9             n.a.
         Computer                    1*              3          1*             2*             n.a.

            Total                    1               3          2               5              3
* indicates that for 1 or 2 factors, there is no answer
n. a. indicates the number of factors without answer is superior to 2, so that the rank of the financial obstacle
cannot be well determined
sources: Own calculations, CIS 2

. if a project has not even started, obstacles are above all economic: excessive economic risk
and too high innovation costs are quoted as the two first obstacles by four countries, among
the six selected (table 2.1.1); for these four countries, the financial obstacle comes in the third
position and is mentioned by a lower percentage of firms. In Germany, it comes in the second
position and in the U. K. in the first one. Generally speaking, the financial obstacle is less
determining than the economic one, and in all cases is directly linked with the couple risk and
cost. A too high cost project may be not funded because it meets the financial Director 's
opposition; in such a case, the person who fills the questionnaire may mention the financial
obstacle as one among the obstacles which prevent the starting of the project.

Table 2.1.2
The rank of the financial factor among the hampering factors for innovating enterprises,
with seriously delayed projects and by activity sector
                             United-Kingdom      France    Germany      Netherlands      Finland        Italy

    Total manufacturing             1               9         7              9              7             2

    Intermediate goods              1               9         6              6              8             5
     Equipment goods                1               9         3              8              7             1

       Total services               7               5         3*             8              6

      Transportation               n.a.             5         1*             8              7*
    Telecommunication              n.a.            1*        n.a.           n.a.            6
  Financial intermediation          3               9        n.a.            7             n.a;
        Computer                    3*              6         5*             7              3

           Total                    1               7         3              8              7

* indicates that for 1 or 2 factors, there is no answer
n. a. indicates the number of factors without answer is superior to 2, so that the rank of the financial obstacle
cannot be well determined

sources: Own calculations, CIS 2

. if the innovative project comes up against obstacles which entail serious delays, new
obstacles, due to human resources and organisation, become determining (table 2.1.2). In
Finland, France and the Netherlands, the lack of qualified personnel, which has no direct
monetary effect, becomes the first obstacle and as a consequence, the financial obstacle
becomes secondary, coming in the seventh position, in these three countries. In Germany, the
financial obstacle comes in the third position after the organisational rigidity and the lack of
skills. In the U. K., the financial obstacle is always determining while it stands at the second
position for the Italian manufacturing firms.

Table 2 1 3
The rank of the financial factor among the hampering factors for innovating enterprises,
          with abolished projects and by activity sector

                                  United-Kingdom          France   Germany   Netherlands        Italy

      Total manufacturing                2                  4         6           7               3

      Intermediate goods                 1                  4         3           8               5
       Equipment goods                   1                  5         4           7               2

         Total services                  3                  3        1*           9

         Transportation                 n.a.                2        n.a.        n.a.
      Telecommunication                 n.a.               n.a.      n.a.         5
    Financial intermediation            n.a.                4         8           5
           Computer                     n.a.                3         8           6

              Total                      2                  3         4           7
* indicates that for 1 or 2 factors, there is no answer
n. a. indicates the number of factors without answer is superior to 2, so that the rank of the financial obstacle
cannot be well determined

sources: Own calculations, CIS 2

. two kinds of risks lead to abolish a project: the economic risk, which has been undervalued
at the beginning, and the market risk, grasped by the question ‘lack of consumer responsivness
to new product’ (table 2.1.3). The economic risk is quoted as the first one in France, Germany
and the Netherlands while the market risk is quoted as the first one in Finland and the U. K. In
Italy the hierarchy of obstacles is rather stable, whatever the state of progress of project. The
financial obstacle rank in the hierarchy of obstacles ranges from one country to another, from
the second position in the U. K. to the seventh one in the Netherlands. In this latter country,
the financial obstacle is underlying. In every country, it correlates with the economic and the
market risks. As previously said, the economic risk, i. e. the difficulties to realise the project,
to transform an idea into a product or a new process, has an impact on the cost and, as a
consequence, the company may come up against financial difficulties. Where the market risk
is perceived as higher than expected at the beginning, managers and investors reappraise their
expectations about profitability, financial difficulties then become a kind of ultimate obstacle.
In some particular sectors of activity, like shipbuilding and some business services, or for
small firms, the market risk is amplified by the small number of customers. Link between

market risk and lack of funds is obvious, when the withdrawal of a big customer entails
immediately financial difficulties and both obstacles may lead to the abolishment of the

To sum up, with the exception of the U. K. where the perception of the financial obstacle is
always very high, the finance motive is not analysed as an isolated factor, but as a factor
which correlates with costs, economic risk and market risk. In the continental European
countries under review, it is as if perceived difficulties come from the innovation process
itself, economic risk and innovation cost being always on the forefront to explain why a
project has not even started, and often quoted to explain project abolishment, the other motive
- lack of consumer responsivness - being also linked to the risks of the innovative project
itself and not to the environment. The idea that in these countries, financial obstacle is not
perceived as an autonomous obstacle, even if it is quoted by many firms as one of the main
factors which explain innovation difficulties, can be highlighted by the German case. In
Germany, as previously said, when a project has not even started, financial obstacle comes as
the second rank and correlates with economic risk. A more detailed analysis adds the
following arguments. Financial obstacle becomes less important for German firms with an
innovative project which suffers serious delay (respectively 25.5 % and 21.6 %, the first
obstacle, organisational rigidity, being quoted by 48.3 % and 63.5 % of the firms); finally,
financial obstacle is minor when a project is abolished (9.4 % for the good equipment firms
and 5.1 % for the computer services firms).

The U. K. gives a distinct picture: lack of finance source is perceived as an obstacle per se,
mentioned at the first or the second position, whatever the state of project. In the U. K. the
difficulties to undertake innovative projects are mainly due to lack of means, i. e. the lack of
appropriate financial sources and appropriate human resources. This latter obstacle appears
more determining than in the other countries; indeed, in the continental European selected
countries, the human resources are the determining explanation for project delay, whilst they
are seen as a secondary motive, in the two other cases. Other studies suggest that the British
economy suffers from specific problems of coordination between financial investors and
entrepreneurs. The U. K. is the only country where managers of venture-capital organisation
complain of a shortage of quality in investment opportunities. This point is well documented
by R. Harding (3i, 2000) and is also dealt with by E. Dubocage (ESSI, 2001).

The sector study at the European level does not provide many clear-cut results, mainly for
statistical reasons (see box 1). The manufacturing industry is broken down into two large
items, roughly speaking, one item groups intermediate goods and the other one groups
equipment goods (appendix 1); for each country, hierarchy by sector is roughly similar to the
hierarchy by total activity, the unique notable difference comes from intermediate goods
sector: when a project has not even started, the financial obstacle moves down, as comparison
with its rank calculated for the total firms; indeed, large and well-established companies, with
a sound financial reputation, are more represented in this sector than in others. Services sector
can be broken down into some specific sectors (telecommunication, computer and related
activities, financial services), but data is often missing, for instance data on computer services
is not available for Finland. Nevertheless, in the four countries under review, the hierarchy of
obstacles listed by computer services firms, provides interesting evidence. If the project has
not even started, the financial obstacle is on the forefront (table 2.1.4), which testifies to the
difficulties of this new knowledge-based sector to reach financial sources. If the innovative
project comes up against serious delay, then the financial obstacle goes behind the scenes, the
lack of human resources being the determining obstacle. In other words, the financial obstacle
dominates at the beginning, but, where project has started, it becomes secondary. Answers
from managers of computer services firms do not invalidate the idea of a certain financial
actor short-termism but they do not support the view of financial men and women as the
leader actors pushing to abolish an innovation project. Section 3 will deal with software firms.

Table 2.1.4 The main obstacles listed by firms having a not even started innovation
project (% of firms having quoted the obstacle and rank in the hierarchy of obstacles)
                                   Computer services               Total activity

France                             %                 Rank          %                    rank
Financial obstacle                 28.0              3             24.8                 3
Economic risk                      28.4              2             35.1                 1
Innovation cost                    33.8              1             32.1                 2
lack of qualified personnel        12.5              7             19.4                 4
gap between the financial obstacle 5.8                             10.3
and the first listed obstacle

Germany                            %             rank              %                rank
Financial obstacle                 62.6          1                 38.9             2
Economic risk                      54.4          2                 46.5             1
Innovation cost                    n. a.         n. a.             33.1             3
lack of qualified personnel        23.8          3                 18.0             5
gap between the financial obstacle 0                               7.6
and the first listed obstacle

The Netherlands                    %                     rank *    %                        rank **
Financial obstacle                 36.8                  2         31.5                     3
Economic risk                      28.1                  4         47.0                     1
Innovation cost                    32.5                  3         44.4                     2
lack of qualified personnel        42.1                  1         30.5                     4
gap between the financial obstacle 5.3                             15.5
and the first listed obstacle

The U. K.                          %                     rank **   %                        rank **
Financial obstacle                 85.7                  1         58.5                     1
Economic risk                      12.6                  2         37.5                     2
Innovation cost                    2.7                   6         27.3                     6
lack of qualified personnel        12.6                  2         36.5                     3

* data is not available for one question
** data is not available for two questions
Sources; Own calculations, CIS 2

2.2 What are the main obstacles met by the French manufacturing firms ?

The database coming from SESSI - the statistical department of the French minister of
Industry - as a contribution to the European survey on innovation helps to make some points
clearer. This database allows to discriminate between innovative and not-innovative firms
(box 1), to group firms in sub-sample, as in table 2.2.1, and to study sector specificity at a less
aggregated level than the database publicly available for the European countries, however the
two studies which use Sessi-CSI2 database focus only on manufacturing industries.

Table 2. 2. 1 Average number of obstacles, by state of project, met by:
. total innovative firms, with innovative project
suffering serious delay          Abolished                        not even started
2.5                              1.9                              2.3

. the sub-sample of innovative firms, having met a financial obstacle
suffering serious delay          Abolished                        not even started
3.9                              3.1                              4.2

. total not-innovative firms
suffering serious delay          Abolished                        not even started
2.7                              2.9                              4.8

. the sub-sample of not-innovative, firms having met a financial obstacle
suffering serious delay          Abolished                        not even started
4.9                              5.0                              8.2

Sources: SESSI 1997-CIS 2; manufacturing firms with 20 employees and more

According to table 2.2.1, when a firm meets a financial obstacle, the average number of
obstacles nearly doubles, whatever the step of difficulties met by innovative project. For
instance, for the total set of innovative firms with a not even started project (2 689 individual

observations), 2.3 is the average number of listed obstacles, for the sub-set of firms having
met financial obstacle (704 observations), then 4.2 is the average number of listed obstacles.
Evidence is more impressive for the set of not-innovative firms. If a project has not even
started (2 920 individual observations), then the average number of obstacles approximates
4.8, whilst for the sub-set of not-innovative firms having met a financial obstacle (1 375
observations), the average number of obstacles reaches 8.2 over a total of ten obstacles
(SESSI-CIS 2 database includes a tenth motive untitled ‘cooperation failure’ which does not
figure in the aggregate CIS 2 database). In other words, in a not-innovative firm, a not even
started project which meets financial obstacle can be depicted as a bad project which will
never be undertaken, and the financial obstacle is analysed rather as the ultimate obstacle
which puts an end to the bad innovative project than as the obstacle number one which would
impede good projects. At the other steps of the project, the average number of obstacles
measured from the sub-sample of firms having met a financial obstacle, either innovative or
not, is also nearly multiplied by 2, economic risk and high cost being the other main obstacles,
specially for not-innovative ones. To sum up, when the number of obstacles are high and/or
when the project is perceived as too costly and too risky, managers can hardly convince
financial investors to allocate resources, were they members of the same corporate group.

This evidence supports the previously mentioned view that in the European continental
countries, financial obstacle is not perceived as an autonomous factor, which would impede
even a good project, because of financial bias (short-termism, lack of information from
investors, excessive cautiousness); lack of skills is an obstacle per se, lack of financial
resources correlates with risk and cost. The sector analysis validates this point.

Data from the SESSI-CIS 2 database can be broken down into 15 manufacturing sectors, food
and agricultural industry being excluded. For half of the sectors, namely electric equipment
goods, mecanical equipment goods, chemical industry and metal works industry, the main
feature is the following: (1) the project has not even started due to a plurality of obstacles,
among which innovation risk and cost dominate; (2) the financial obstacle is quoted as the
third one; (3) the gap with the first obstacle is always large, at least 10 points; (4) other
obstacles like the lack of skills, of information about the market or the technology are nearly
as frequently quoted. For the bulk of consumer good sectors, the main feature is distinct:
finance is a minor obstacle.

Two sectors deserve special care, because the financial obstacle is perceived as the first
motive which explains why an innovative project has not even started ; they are the twofold:
motor vehicle (61 % of innovative and not-innovative firms of the sector) and shipbuilding
and railway industry (72 % of concerned firms). When a project comes up against serious
delay, the financial obstacle remains as the number one, only for the shipbuilding and railway
industry. This exceptional case is explained by two specific factors: (1) in this sector, because
of the magnitude of cost, running assets use to be covered by customer advances; (2) this
sector is characterised by a little number of customers, often under State control, and, hence,
its activity depends upon budgetary choice.

Whatever the sector, the sector analysis using SESSI-CIS 2 database shows that the financial
obstacle is never on the forefront to explain why an innovative project is abolished.

2.3 What kind of firms are more financially constraint?

Rivaud-Danset cross-country study (1998) provides evidence that financial pattern differs
from one country to the other, differences being more important for SMEs than for their larger
counterpart. With financial globalisation, the approach by national financial system has lost its
explanative power for largest firms but remains important for SMEs. With two exceptions, in
the selected European countries, financial obstacle is always more important for the small
firms (< 50 employees) than for the larger ones (> 250 employees), whatever the state of
innovative project. This regularity is observed for manufacturing firms and for services. The
gap between small and large firms is particularly large for firms offering services in the U.K.,
with abolished project, as it is the obstacle number 1 for the small firms and the obstacle
number 5 for the large ones (table 2.3.1); the same gap is observed for the British firms which
provide services, with a not even started project. The manufacturing Italian and French firms
with a not even started project are the exceptions. When an innovative project had not even
started in 1997, the small Italian and French manufacturing firms meeting more obstacles than
the large ones, financial obstacle is quoted by a higher number of firms but its rank in the
hierarchy is lower than for large firms.

Table 2.3.1 The rank of the financial factor among the hampering factors for innovating
enterprises, with abolished projects and by size class

                             United-Kingdom       France    Germany        Netherlands      Finland        Italy

    Total manufacturing              2               4          6               6              6             3

     Small enterprises               2               3          6               6             n.a.           3
    Medium enterprises               2               4          7               9              5*            4
     Large enterprises               3               5          6               7              6*            3

       Total services                3               3          1*              9

     Small enterprises               1*              2          1*              7
    Medium enterprises               5*              3          5*              9
     Large enterprises               5*              4          4*              8
            Total                    2               3          4               7

* indicates that for 1 or 2 factors, there is no answer
n. a. indicates the number of factors without answer is superior to 2, so that the rank of the financial obstacle
cannot be well determined

sources: Own calculations, CIS 2

In most countries, if an innovative project is seriously delayed, the rank of the financial factor
among the hampering factors is higher for small firms than for large ones (respectively
number 1 versus 3 in the U.K., 3 versus 8 in Germany, 5 versus 9 in France, 6versus 9 in
Finland) (Table 2.3.2). Table 2.3.2 also indicates that the gap between the financial factor and
the first obstacle is more extended in the case of large companies.

Table 2.3.2     The weight of the financial factor among the hampering factors for
innovating firms in services sector, with seriously delayed project, by size

  Small firms (10-49          U. K.      France      Germany      Netherlands      Finland
. rank of the financial         1           5             3               8            6
. gap with the first            0         17.7          26.9             34.4        20.9
. average number of            1.8         2.4           2.0             2.2          2.6

 Large firms (> 250)          U. K.      France      Germany      Netherlands      Finland
. rank of the financial         3           9            8*               6            9
. gap with the first          33.4        18.3          60.5             53.0        60.0
. average number of            1.7         1.7           2.0             2.1          2.6

Sources: Own calculations, CSI 2

To sum up, at the European level, the most financially constraint firms are, especially in the
services sector, the smallest ones.

Once again, SESSI-CIS 2 database allows to go further on, firms being broken down
according not only to size but also to status (The SESSI study breaks down firms into three
size groups; small firms with less than 250 employees, medium-size (250 to 500 employees)
and large ones). By discriminating between firms which belong to a corporate group and
independent firms, this database shows that independent small firms are the less innovative
cluster. Only 41 % of these firms succeeded in innovative project in 1994-1996, while, on the
opposite, 89 % of large firms linked with a corporate group succeeded.

Status adds something to the study of financial constraint, as this obstacle is more important
for independent firms than for not-independent. Therefore, it is possible to conclude that
French small and independent firms are in the most uncomfortable position to get external
funds, an obstacle which limits the capacity of innovation of this cluster. However such firms
meet various obstacles and lack of appropriate source of finance is not quoted as the leading
obstacle, but only as one among the various hampering factors.

Another survey, done by MENRT, the French Minister of Research and technology, provides
interesting data as regard the specific involvement in R&D of small and medium-size firms
which are affiliate or subsidiary of a large group. The survey covers 5 539 enterprises located
in France which have invested in R&D in 1997. Data is broken down by size and status. As
expected, the contribution of SMEs, as a whole, in the total investment in R&D is minor, with
20.7 % of total R&D expenses in the year and 26.9 % of total staff, these percentages being
more or less comparable to their contribution in total turnover, as this latter represents 20.0 %
. However, SMEs which have a large group as shareholder (some 60 multinational companies
specialised in R&D have been selected for this survey) display distinct features. The level of
R&D expenses and staff is much higher than the average level (Table 2.3.3)

Table 2.3.3 The level of R&D in French SMEs having a group as shareholder

                            Small affiliates      Medium-size affiliates        Total firms
                                <200                   200-499
R&D expenses over                8.5                     5.2                         3.3
R&D staff over total          17.0                   11.6                            6.2
Sources: Own calculations, MENRT (1999) and Hass (2000, p.405)

This data illustrates the tendency of large firms to develop R&D in small firms, as small size
favours the development of innovative projects which do not belong to the core of activity of
the parent company (Hass, 2000).

To conclude this section, the understanding of financial obstacles improves when finance is
not analysed as an autonomous factor which would constraint long-term innovative strategy.

Answers to ‘lack of appropriate sources of funds’ correlate with ‘excessive perceived
economic risk’ and with ‘innovation costs too high’. With the exception of the U. K., financial
obstacle is never the obstacle number one and becomes minor when a project is seriously
delayed. Empirical evidence coming from CIS 2 supports the idea that bankers and other
lenders do not have a bias against innovation, because they finance firms and prefer
innovative firms due to higher performance.

A more detailed analysis allows to conclude that the financial obstacle is more often perceived
by the software firms, and the small firms, particularly if independent ones. Although this last
feature is only illustrated by French firms, it can be extended to other countries. Therefore, to
study the way in which innovation is financed at the sector level depends both upon the sector
main characteristics - economic risk, innovation cost - and the firms which typifie the sector.
Indeed, if large and incumbent firms dominate, financial obstacles are not on the forefront, as
financial resources are easily available for such kind of firm. On the opposite, if small,
independent firms which are new-comers dominate, financial resources are not easily
available, whatever the cost of the innovative project.

Section 3 explores the way in which innovation is financed, by examining two sectors within
the sectors selected by ESSY.

Section 3 At the sector level, the innovation financing pattern changes according to
the firms which characterise the sector.

This section is divided into two: (1) the financing of the design of UMTS, the 3 generation of
mobile phone; (2) the financial patterns of French software firms. The mobile phone industry
is dominated by a few large firms, the software industry includes a few incumbent large firms
and many small new comers. Although both sectors are new, the way in which innovation is
financed is quite distinct.

3.1 The third generation mobile phone4

What is UMTS?

UMTS (Universal Mobile Telecommunications System) is a Third Generation (3G) Mobile
system. It has been developed within the framework defined by the ITU (International
Telecommunication             Union)       and      known       as     IMT-2000   (International   Mobile
Telecommunications 2000 standards). UMTS orientates towards to tomorrow’s “Information
Society”. It is a European system which is attempting to combine cellular, cordless, low-end
wireless, local area network, private mobile radio, and paging system. It will deliver picture,
graphic, video communication and other wide-band information as well as voice and data.
Third generation phones will allow data transmission speeds of 2M bit/sec, compared to the
current speed of 9.6 K bit/sec. As it combines voice and picture, UMTS is built on various
technologies and extends the capacity of today’s mobile technologies, like digital cellular and
cordless technologies.

Who are the manufacturers?
As UMTS is built on today’s significant investments in second generation mobile systems, the
main manufacturers are incumbent firms, namely Nokia, Ericsson, Alcatel, Motorola and
Siemens , Lucent and Nortel can also be mentioned. The arrival of a new comer is unlikely.
Nokia is the leading mobile phone supplier and a leading supplier of mobile, fixed and I.P.
networks, related services as well as multimedia terminals.

    This inquiry has been realised with the collaboration of Valérie Revest.

Ericsson is a supplier in telecommunications. It provides all solutions from systems and
applications to mobile phones and other communication tools.
Alcatel is a world leader in the high speed access and optical transport market. It is a major
player in the area of telecommunications and the internet. It is an important leader in ADSL
equipment, land-line and submarine optical networks, public switching, fixed wireless access.
Motorola is a global leader in integrated communication solutions and embedded electronic
Siemens designs, develops, and manufactures electrical and electronic systems for the most
technologically advanced industries in the world, from telecommunication to health care.

How do the manufacturers finance the 3G?

Answering to this question is not simple for the following reasons: Firstly, the technology of
3G mobile is built upon the 2G and uses other technologies. In other words, there is a
continuity in the research about the mobile phone. 3 G project did not start on at a precise day,
as its design is inspired by the previous generation of mobile. It does not make sense to
analyse this project as a plan perfectly carried out in a defined period which would have
received a given amount of funds. The design of this new product does not fit into a small
box, with its total cost written on it. It includes relationships with suppliers, competitors, start-
ups and so on. This is illustrated by the twofold strategies: In 1999, Ericsson bought small and
medium enterprises with high technology level, to compete with Nokia. In the same year,
Alcatel and Motorola extended their previous agreement in the 3G mobile phone, which deals
with manufacturing and research issues. Motorola has accepted to buy in priority the
commutation equipment of Alcatel. The two groups have agreed to join their research for the
mobile phone, as a way to reduce R&D cost; according to T. del Jesus from Alcatel “Thanks
to this alliance, we should save FF 250 million per year for 3 years”. Evaluating accurately the
total cost of 3 G design for one of these five companies would require a specific investigation
and, in a sense, the idea that all expenses might be estimated conflicts with the complex view
of innovation sources, which includes tacit knowledge and takes networks into account. A
strictly accounting and financial approach does not grasp these features which make
consensus among the specialists of innovation.

Secondly, as mentioned before, Siemens and Motorola have other activities than
telecommunication, like health care or transportation. Hence, the mode of financing the 3G

mobile cannot be isolated because the 3G innovative project overlaps with other projects
which constitute the manufacturer whole activity.

Thirdly, the way R&D is financed cannot be analysed per se, because R&D financial pattern
merges with the financial pattern of the whole company. Therefore, the problem of financing
R&D for mobile phone is highly idiosyncratic. Each firm has its own unwritten story
regarding the way 3 G mobile phone has been financed. This point can be illustrated by Nokia.
The Finnish firm provides the best example, because it is the less diversified mobile phone
manufacturer and the best documented on that topic (data comes mainly from Nokia web site).

Nokia financial sources :Bank debt, divestment, share issues and cash-flow

In 1996, Nokia managers accelerated the corporate transformation to become a global
communication company by divesting of some non-core affiliates. Indeed, Nokia sold its
remaining 55% shareholding in a Dutch cable firm, announced the sale of its television
production and related technology units in Finland and agreed to sell its shareholding in a
Finnish chemical firm. Nokia researchers became involved in the development of
UMTS/FPLMTS (Future Public Land Mobile Telecommunication System) and, according to
the annual report, they focused on longer-range research projects, including development of
data services in cellular networks, and ways to increase cellular data transmission rate. In
1998, were created Nokia Ventures Organisation, this organisation being responsible for
Nokia’s new start-up business and technologies, and Nokia Research Centre which manages
corporate R&D. During the last five years, to expand its knowledge in new emerging business
areas, Nokia has carried out several acquisitions to develop its activity in Internet
communication and in mobile phone, while divestments by selling shares in non-core firms
were numerous (see tables 3.1.1 and 3.2.1 below). Nokia is organised into three business
groups: Nokia Networks, Nokia Mobile Phones and Nokia Other Operations, this latter
including Nokia Telecommunication, Communication Products…

Table 3.1.1 Nokia acquisitions

        Date                  Acquisition target         Current Nokia Business division

  December 7, 2000              Ramp Networks             Nokia Internet Communications
    August 8, 2000               DiscoveryCom                    Nokia Networks
   February 1, 2000           Network Alchemy             Nokia Internet Communications
  December 13, 1999        Security software business     Nokia Internet Communications
                             (TeamWARE Group)
   October 22, 1999              Telekol Group            Nokia Internet Communications
  September 2, 1999     Rooftop Communications Corp.             Nokia Networks
    June 30, 1999            Aircom International                Nokia Networks
    May 14, 1999       R&D units from TeamWARE Group      Nokia Internet Communications
  February 18, 1999               InTalk Corp             Nokia Internet Communications
  February 16, 1999     Diamond Lane Communications              Nokia Networks
  December 18, 1998          Vienna Systems Corp          Nokia Internet Communications
  September 16, 1998           NE-Products Oy                 Nokia Mobile Phones
   August 20, 1998           User Interface Design       Nokia Communications Products
    June 25, 1998           Matra GSM R&D unit                Nokia Mobile Phones
  December 9, 1997           Ipsilon Networks Inc         Nokia Internet Communications


Table 3. 1. 2. Nokia Divestment

        Date                  Divestment target              Nokia Business division

   January 10, 2000      Monitor manufacturing unit in   Nokia Communications Products
  November 1, 1999          SHD/DWDM business                    Nokia networks
   October 1, 1999                Salcomp Oy             Nokia Communications Products
    August 7, 1998             LK-Products Oy                 Nokia Mobile Phones
    March 3, 1998             Autoliv Nokia AB           Nokia Communications Products
  December 23, 1997        Loudspeaker Operations        Nokia Communications Products
   February 7, 1997            Tuner Operations          Nokia Communications Products
   March 18, 1996      Cable Business, NKF Holding NV    Nokia Communications Products
    July 17, 1996            Television production       Nokia Communications Products


Nokia financial story from 1995 to 1999 can be explored by looking at its financial
statements. This material shows very clearly that the 3 G mobile phone research has been
financed mainly by current revenues coming mainly from sales on the global mobile phone
market. Net profit increases from EUR 375 million in 1995 to EUR 2 577 million in 1999;
retained earnings have followed the same trend and have been the main source of fund,
reaching EUR 5 801 million on December 31, 1999 (representing 40.6 % of total assets and
78 % of total shareholder’s equity). Another data provides a good illustration of the magnitude
of internal resource: in 1999, cash generated by operating activity, after tax, amounted EUR 3
102 million, while capital expenditures were EUR 1 302 million and investments in R&D
were 1 755 million; as indicated by table 3.1.3, the dramatic growth of R&D expenses (Nokia
had 52 R&D centres at year-end) has followed the growth of sales and, as a consequence,
R&D expenses have been covered by sales.

Table 3.1.3 Nokia 1995-1999: key ratios and economic indicators, EURm and %

                                  1999           1998           1997           1996           1995
Net sales                            19 772         13 326             8 849          6 613          6 191
Profit       from    continuing          2 577          1680           1009            512            687
    % of net sales                        13.0           12.6           11.4            7.7           11.1
R&D expenditure                          1 755          1 150           767            591            426
    % of net sales                         8.9            8.6            8.7            8.9            6.9
Return on capital employed                55.7           50.2           38.3           22.7           29.1

sources: Nokia’s financial statements, 1999, consolidated accounts, IAS, p. 35

Table 3.1.4 Nokia 1995-1999, balance sheet main items, EURm

                                         1999           1998           1997           1996           1995
Fixed assets                                    3 487          2 220          1 589          1 414          1 522
Current assets                              10 792             7 814          5 431          4 182          3 988
   Inventories                                  1 772          1 292          1 230          1 080          1 679
   accounts receivable and other                4 861          3 631          2 141          1 833          1 601
   cash and short-term investments              4 159          2 891          2 060          1 269           708
Shareholders’equity                             7 378          5 109          3 620          2 678          2 322
Long-term interest bearing liabilities           269            257            226            356            357
Short-term borrowing                             792            699            506            573            729
Accounts payable                                2 202          1 357           818            599            686
Accrued expenses                                3 377          2 336          1 719          1 242           959
Total assets                                14 279         10 034         7 2020             5 596          5510

sources: Nokia’s financial statements, 1999, consolidated accounts, IAS, p. 36

Liabilities are mostly current ones (credit granted by suppliers and accrued expenses). The
level of interest-bearing liabilities has continuously decreased (from 19.7% of total equity and
liabilities in 1995 to 7.4 % in 1999), becoming low at the end of the period under review
(Table 3.1.4). External financial resources have been reduced because Nokia had a substitute
with retained earnings. Table 3.1.4 also shows another interesting point: the magnitude of
liquidity. As mentioned in Nokia annual report, liquidity correlates with the dynamic nature of
the business. The Finnish firm keeps a large amount of retained earning under a liquid form
(cash and short-term investment), nevertheless the financial strategy of this group allows it to
access external funds, via options. Indeed, the board of the group treasury has contracted
funding programmes (revolving credit facility granted by banks and commercial paper raised
on the market) which guarantee Nokia capacity to borrow at short-term at a pre-determined
rate. The most significant programs available in 1999 amounted to a total higher than USD 2
billion, but none of these programs had been used to a significant degree in 1999 (annual
report, p. 21).

Nokia has also the possibility to raise equity form the market. This source of fund has been
minor during the period under review, for instance total amounts raised by share issue in 1998
and 1999 represented less than 1 % of total additional retained earnings. Nevertheless, at the
Annual General Meeting held in March 1999, the Board of Directors got the authorisation to
decide an increase of the share capital by a maximum of EUR 28 800 billion, in one or more
issues. Things happened like in the previous case, this capacity has been let nearly
unemployed in 1999.

This exploration leads to the three-fold conclusions:
. because of the high growth of the global mobile phone market and Nokia leading position ,
the Finnish firm has been highly profitable - with a return on capital employed exceeding 50
% in 1999, a rare performance - and, therefore, could self-finance R&D and innovative
projects, namely the 3 G mobile phone,
. innovative skills have also been enhanced by an intensive strategy of acquisition and
divestment, which contributes to focus the firm on its core business,
. Nokia financial strategy is typical of an innovative firm, concerned by financial flexibility;
financial flexibility means that the company has the capacity to finance unexpected expenses,
due to unexpected events which can be good or not; financial flexibility is got by ‘cash’, and
short-term financial programs, in the case of Nokia.

To sum up, Nokia provides an example of an innovative company without financial constraint,
because of rare performances. As previously said, means required by 3 G project are more
extended than R&D means and include acquisitions of SMEs, and financial resources are
allocated to the corporate global activity and not to the R&D laboratory. For all these reasons,
it is not possible to tell accurately what are the main financial resources invested in 3 G
project. It has been tried with Nokia, because of its specialisation in mobile phone and, as we
have seen, although the Finnish multinational has the capacity to combine many financial
sources, UMTS innovation has been mostly self-financed by retained earnings and partly by
selling shares (divestment), and, hence, by concentrating Nokia on the mobile sector.

Even if the performances of the other manufacturers of mobile phone are not so rare, they are
multinational enterprises involved in various activities, with good performances, and as a
consequence, their creditworthiness is out of question. The largest enterprises operating on

global market with high performances, whatever the business sector, can access the three
kinds of usual financial external resources: equity raised on the financial market, bonds and
short-term loans, also called commercial papers, raised on the financial market, and bank debt.
For such companies, financial resources are either domestic or international ones, so that
financial domestic institutions cannot constrain them and have no impact. Nevertheless, easy
access to distinct modes of financing does not mean that such firms use them, most of them
being actually self financed. Because of the volatility of share prices on the Stock Exchange,
to raise capital by issuing share is not the best solution. Ericson is a good virtual example.
Because of the dramatic decrease of its share price (- 70 % from March 2000 to March 2001),
Ericson would have to issue a number of shares multiplied by 3.3 to get more or less the same
amount of capital. Such a watering of capital would disadvantage the old shareholders. The
mix of internal resources, coming from cash-flow and divestment of subsidiaries, on the one
hand, and, on the other hand, of external resources, coming from the bank and the market,
which is specific to one firm, at one year, is partly due to contingent factors, for instance, an
opportunity to borrow at a good rate of interest or to raise capital on the market at a good

3.2 The financing pattern of enterprises of new knowledge-based sectors: an
illustration by French SMEs of the software and biotechnology sectors.

As an introduction to the following paragraphs, it is necessary to recall that manufacturing
SMEs are the core of a national financial system. In the case of machine-tools firms, for
instance, financial pattern displays significant differences from one country to the other, this
sector grouping mostly enterprises which remain for a long time at a small or medium size,
national institutions affect strongly its financial structure. This effect is demonstrated by the
level of bank indebtedness. Although well-established SMEs, whatever the country, share two
common features - self-financing is the most important resource and financial market does not
fit them -, the role of bank, as supplier of external funds, differs according to the country.

To understand how financial institutions can affect firms’ sources of funds, the German case
provides a good example. Better access to short-term and long-term bank debt, which is
supported by the pro-creditor German bankruptcy law, allows well established SMEs to reach
a high level of bank indebtedness, compared with other similar countries. For instance, in

1994, the rate of total bank debt over total assets measured by the average value, for the small
firms of machine-tools sector (from 20 to 99 employees), was 13.3 %, in France, while it
reached 22.5 % in Germany (own calculations, database: Banque de France and Bundesbank).
This specific feature has one sizeable effect: it helps them to stay independent and to maintain
a governance structure characterised by family ownership and by family management. To sum
up, Mittelstand and Hausbank are linked. So, it can be assumed that the couple - easy access
to bank debt and independence - affects the way steadily small and medium-sized firms
innovate and compete. But to test such an hypothesis is not easy. From an analytical point of
view, it is difficult to isolate the impact of good relationships between firms and banks on
innovative trajectories, as such firms mainly rely on self-financed resources through retained

The case of young innovative firms in knowledge-based sectors to which the end of this draft
is devoted is a distinct one. It displays strong cross country regularities. By definition, new
comers suffer from a lack of financial resources, whatever innovative or not, because self-
financing is not possible. This issue becomes crucial when it is an innovative one, as its
financial requirement is relatively high and classical sources of funds are insufficient, if not
. self-financing is unavailable, if the firm is not yet profitable,
. short-term debt bank is always very limited, whatever the country, if the start-up cannot
provide guarantee,
. long- term debt is available only to finance physical assets, as this kind of assets provides
guarantees by itself,
. the financial market will, perhaps, provide equity in the future but not at the beginning.

The following paragraphs are divided into two parts. The first one examines the patterns of
sources of funds of software French enterprises, using balance-sheet data base. The second
one examines the sources of equity in the case of French biotechnology SMEs, using a ready-
made survey.

3.2.1. The software industry: financial constraints correlate with of a lack of physical

This sub-section examines the patterns of sources of funds in software enterprise in France,
using balance-sheet data. The database is the Balance Sheet Office database (fichier Centrale
des Bilans) which, in the case of software firms, is far from being exhaustive, as it only
includes 27 companies, but the information provided goes far beyond the standard tax balance
sheet, as several forms have to be filled in by the enterprises included in this sample. The
comprehensiveness of the information available in the ‘fichier CdB’ makes that base
particularly attractive for research purposes. This is not the case of the Dun&Bradstreet
database used by Mamar as a complement of the CIS 2 database, therefore comparison with
results displayed in section 1 does not make sense. The same is true for Nokia case.
Comparison with the Finnish firm balance sheet does not make sense, the latter financial
statements being consolidated and prepared in accordance with International Account
Standards, while the Banque de France database provides not-consolidated data and are
presented in accordance with the 4th European Directive. If it is not mentioned especially,
comments are deduced from tables 3.1 to 3.4, which use the weighted average. If it is
mentioned, then comments relate to the median, which gives a better illustration of a
representative firm than the weighted average, as this latter is influenced by larger firms which
can be atypical, even when data is broken down by size. Data is available from 1993 to 1998,
but comments are limited to 1997 and 1998.

SOFTWARE FRENCH FIRMS                          1997       balance sheet-assets

size                                           < 20         20 to 99     100 to 499 500 to 1999    > 2000

fixed assets                                       22.3           19.8         20.3         48.3       26.1
. tangible fixed assets                             6.1            5.3          5.7          3.5        5.2
. intangible fixed assets                           8.5            9.4          6.1          2.8        3.0
. financial fixed assets                            7.8            5.1          8.6         42,0       17.9
current assets                                     37.6           42.0         48.1         29.2       73.5
. stocks                                            5.8            4.4          2.8          1.1        0.3
. trade debtors                                    15.0           20.0         30.7         11.3       66.5
. payments on account                               1.3            0.4          0.5          0.1        0.0
. liquidity                                        16.5           17.2         14.1         16.7        6.7
    - cash at bank and in hand                      7.6            8.1          8.3          2.8        4.3
    - current investments                           8.8            9.2          5.8         13.9        2.5
other items                                        40.1           38.2         31.6         22.5        0.4
total                                             100.0          100.0        100.0        100.0      100.0

Sources: Own calculations , Banque de France

SOFTWARE FRENCH FIRMS                                 1998        balance sheet-assets

size                                                   < 20         20 to 99     100 to 499 500 to 1999           > 2000

fixed assets                                               22.1           19.7          23.3          21.7            23.2
. tangible fixed assets                                     5.6            4.6           5.7           4.7             5.0
. intangible fixed assets                                  10.5            8.3           8.8           8.3             3.1
. financial fixed assets                                    6.0            6.8           8.9           8.7            15.2
current assets                                             36.0           39.1          30.5          14.2            76.6
. stocks                                                    5.0            4.1           1.6           2,0             0.1
. trade debtors                                             7.1           15.7          10.8           2.6            61.3
. payments on account                                       0.4            0.4           0.3           0.3             0.0
. liquidity                                                20.5           18.9          17.8           9.3            15.2
    - cash at bank and in hand                             10.1            8.4           9.3           7.3             2.3
    - current investments                                  10.5           10.4           8.5           2.1            12.9
other items                                                41.9           41.2          46.2          64.1             0.2
total                                                     100.0          100.0         100.0         100.0           100.0

Sources: Own calculations , Banque de France

As illustrated by table 3.1 and 3.2, the pattern of assets of software firms is atypical:
. the weight of the item ‘other assets’ for firms with less than 2000 employees, is impressive
and infrequent, it testifies to the difficulties to measure assets in this new sector and
contributes to the opacity of account,
. intangible fixed assets are often higher than tangible fixed assets for firms with less than
2000 employees, in 1998,
. the total contribution of tangible fixed assets and stocks represent a very small proportion of
total assets (<6 % for firms with more than 2000 employees),
. liquidity is high, by comparison with other sectors, for instance, for the small and medium-
size firms (less than 2000 employees), cash and current investments range from 9 % to 20.5 %
of total balance sheet, in 1997 and 1998, versus an average ratio ranging from 8% to 12 % for
the French manufacturing firms5; the contribution of gross liquidity to total assets testifies to
the need of maintaining financial flexibility due to the nature of business and, for these firms,
to the difficulties to get short-term financial resources.

Although the contribution of fixed intangible assets is higher than in other sectors, ranging, in
1998, from 10.5 for the smallest to 3.1 for the largest, level is not so impressive. Using the
median, it is much lower, the maximum value being 3.5. Indeed, there are only a few firms
which show their intangible investments in their accounts, as most of them prefer to limit the

  This latter ratio has been estimated for 1996 by the Banque de France (Bulletin de la Banque de France, n°85,
janv. 2001, p. 93).

size of intangible investments to display a less opaque balance sheet, and to disclose data
according to the Anglo-Saxon requirements.

To conclude, assets pattern shows that this sector is not based on physical assets but on human
assets, but skills are not grasped by corporate accounting. Hence, a banker looking at such a
balance-sheet will get confused and incited to ration credit.

SOFTWARE FRENCH FIRMS                             1997                       balance sheet-liabilities

size                                          < 20             20 to 99       100 to 499 500 to 1999          > 2000

capital and reserve                               29.5               30.5            30.8           56.1             27.4
provisions                                          2.1                2.6             3.9            3.2              0.4
total debt                                        68.4               66.8            65.3           71.4             69.4
. bank debt                                         5.3                5.7             3.8            3.1              4.6
. amounts owed to group                             0.8                1.8             0.7            0.4              4.5
. trade creditors*                                  2.4                5.1             8.6            1.8            24.6
. other non-financial creditors                   16.6               21.6            22.9           14,0             29.3
. other financial creditors                       43.3               32.6            29.3           52.1               6.4
(short-term bank debt)                            (2.4)              (2.7)           (2.6)          (1.9)            (2.6)
total                                            100.0              100.0           100.0          100.0            100.0

* payments received on account of orders are included

Sources: Own calculations and Banque de France

SOFTWARE FRENCH FIRMS                                   1998                   balance sheet-liabilities

size                                             < 20            20 to 99       100 to 499 500 to 1999            > 2000

capital and reserve                                   33.7             32.8            37.3          22.5             28.9
provisions                                              1.8              2.2             3,0           6.1              1.7
total debt                                            64.5             64.9            59.6          71.4             69.4
. bank debt                                             4.9              5.1             2.6           3.7              0.3
. amounts owed to group                                 1.6              2.1             0.5           0,0            11.5
. trade creditors*                                      1.3              3.3             1.6           0,0            15.6
. other non-financial creditors                       17.6             20.1            24.8          27.8             36.0
. other financial creditors                           43.3             32.6            29.3          52.1               6.4
(short-term bank debt)                                (2.0)            (2.5)           (1.6)         (0.9)            (0.3)
total                                                100.0            100.0           100.0         100.0            100.0

* payments received on account of orders are included
Sources: Own calculations and Banque de France

Tables 3.3 and 3.4 indicate that the pattern of liabilities is also atypical. The lack of classical
sources of finance is illustrated by the following features:

(1) the high contribution of other financial creditors or ‘sundry' creditors, an item which
groups loans bearing interest which come neither from the bank, the market or the parent
company; it includes loans contracted through leasing and amounts due to members of staff,
because wages have not been paid or because the entrepreneur granted credit to the firm, as a
way to escape to bank rationing,
(2) the very small role of banks, the proportion of bank loans in the total liabilities being
lower than 6 %, whatever the size; as bank indebtedness only relates to a limited number of
firms, the median gives an even smaller figure, ranging from 0.3 to 1.3 % of total liabilities; as
previously said, this ratio cannot be compared with debt ratios displayed in section 1, but it
can be mentioned that the contribution of bank loans to the total sources of funds for the
French manufacturing firms, in 1996, approximates to 9 % for all sizes, measured by the
median value (Bulletin de la Banque de France, n°70, oct. 1999).

Once again, ratios which can be used as a proxy of financial obstacles tend to display higher
value for small firms. For instance, a high level of debt coming from 'other financial creditors'
testifies to the bulk of financial obstacles. As expected, the average value of this item is higher
for the small and medium-size firms than for their larger counterpart. It is necessary to recall
that a low proportion of bank loans in the total liabilities is not a good proxy of rationing. As
exemplified by Nokia, many large firms do not borrow from banks because current expenses
and investments are self-financed, and/or because marketable sources of funds, less costly or
more in adequacy with their financial needs, are available.

Data from other countries are not available, because of a lack of interest of the Statistic
Department of Central Bank for non-manufacturing firms 6. Were they available, they might
display a higher involvement of banks as suppliers of loans, because in France reforms have
resulted in a sharp decrease in bank financing, but we can expect the differences between the
new knowledge-based firms and the others to remain considerable.

To conclude, the relationship between the structure of assets and the structure of liabilities has
to be underlined. Asset structure is clearly atypical for a banker, as it gives little guarantee and

 The corporate balance sheet statistics of the Deutsche Bundesbank (Bbk) also constitute a highly
comprehensive evaluation of accounts of corporate enterprises in Germany, but the total number of German firms
specialised in software being very low, the Statistics Department at the Bundesbank Central Office could not
send me data.

little information about the quality of the firm. Indicators of the firm value are not grasped by
the accounting, because the value of the firm relates to human assets. Therefore, the corporate
capital structure of software industry displays a specific feature with quasi nil bank
involvement and a high contribution of ‘sundry creditors’. These two items illustrate the
inadequacy of the classical sources of funds for this kind of firms. In the software industry,
many firms combine the following features: new-comer in an unstable sector, no track record,
no benefit, no tangible assets, independent (without relationship with a parent company). In
other words, a new independent firm producing software is a nightmare for a banker.

3.2.2 The French biotechnology SMEs: who are the equity suppliers?

The young innovative and independent firm suffers from a lack of usual financial resources to
cover its current expenses in R&D which are mainly wages expenses. The lack of earning can
be mitigated when a firm adds an ordinary and profitable activity to the innovative one; wages
expenses can be reduced by giving stock-options to the managers and the other employees.
Nevertheless, the typical innovative start-up needs equity or permanent funds coming from
long term loans. These permanent resources give the managerial team insurance that they can
implement an innovative project which will not be profitable for a few years. In the case of an
independent start-up, the main specific sources of equity are the following:
1). venture-capital is the most famous source of equity although its access is limited to start-
ups which are expected to grow very quickly,
2). the so-called Business Angels investment is an increasing source of private equity,
particularly in the Anglo-Saxon countries,
3). private money also comes from the managerial entrepreneurial team and from their family,
this third source being called « love money »,
4). among the other private investors that may provide funds, it is not infrequent that firms
which have a strong interest in the innovative project, either as supplier or user, participate to
its financing either through equity or through medium-term trade loans, or any other option.

All these sources of funds can be combined, and sometimes must be combined. Indeed, capital
coming from the entrepreneur is a sine qua non condition to have access to the two first
sources. If the start-up is linked with a parent company, then venture capital funds and

Business Angels should not invest capital, but in such a case the financial problem is no more

A survey conducted by the French Minister of Research (MENRT) among SMEs (less than
500 employees) operating in the biotechnology, in 1999, provides data concerning the identity
of shareholders. The database includes 194 firms, and covers roughly half of the French firms
operating in this sector.

Table 3.2.5 Who are the shareholders of French SMEs operating in biotechnology?

Shareholders                as a % of total average turnover             average number of
                            firms*                            EURm       employees
Venture-capital fund                 28                       6,38                  35
Parent company                       24                       8,24                  46
Other company                        41                       6,93                  54
Public **                            3                        8,49                 139
Only individuals                     38                       2,54                  15

*the total is higher than 100%, as more than one answer is possible
**the investigated firm is quoted on Stock Exchange
sources: Lemarié and Mangematin, using MENRT inquiry, 1999.

Table 3.2.5 shows that size and sources of funds correlate. Indeed, the following features can
be observed:
. as expected, when an enterprise is only financed by individuals, if individuals are mostly the
entrepreneur(s), as it is the case, its size remains small.
. largest firms are financed by parent company or by the financial market, in this latter case,
they have previously been supported by venture capital funds; however the average number of
employees is three times higher for public firms than for firms owned by another company,
although the average turnover is roughly identical, this difference indicates that the three
French start-ups are more involved in R&D intensive and long-term prospects, and testifies to
the euphoria on financial markets at the end of the last decade, while the set of firms linked to

a parent company is, as a whole, more involved in innovative business which delivers
revenues and, very likely, profitability;
. venture capital funds are assumed to gravitate towards centres of entrepreneurial excellence,
with high potentiality of growth; actually, this survey does not bear out this view: firms with
venture capital funds as shareholders, on the average, have the same size than firms with
‘other company’ as shareholder; this unexpected feature can be explained by the failure of the
investment strategy of venture capital in the 1970s, as investment was allocated to start-ups
which never succeeded but have not gone to bankruptcy, so venture capital funds still have
never succeeded to sale their shares in permanently small enterprises (Lemarié and
Mangematin, 1999, p. 59);

For the software and the biotechnology sectors, both being knowledge-based sectors, not only
the size of firm but also some characteristics of innovative trajectories are related with the
main source of fund. An innovative project dedicated to a small number of users will be
backed by other companies, while a project orientated towards the global market, with high
growth potentiality, will be backed by the parent company or will attract venture capital funds
and investors on financial markets. If a firm is only financed by individuals, financial
constraint is permanently strong and the financial obstacle is expected to be the first factor
which impedes innovation.

To conclude, this section has explored the financial patterns of three sectors, using
quantitative data. Mobile Phone is dominated by a few multinational firms, while software
and biotechnology sectors group many small new comers. Therefore, the issue of financing
innovation is solved by very distinct ways. Nokia financial story illustrates the lack of
financial constraint. None of the five firms which dominate the mobile phone industry is
financially constraint, as long as their creditworthiness based on their performances allow
them to borrow from banks and to issue stocks or bonds on the market, and as long as their
whole activity, innovative and non-innovative, either in new or mature markets, generate
regular flow of funds. On the opposite, for the small and medium-size software French firms,
assets are human and not physical, external funds are rather temporary means, although
permanent funds are necessary. Hence, the financial factor is determining to implement an
innovative project.


Evidence coming from section 3 supports the key arguments of this study: the financing
innovation issue is problematic for a set of firms - small, new-comers in services and
knowledge-based sectors-, but not for the total set of innovative firms. Banks do not finance
R&D, they do not finance innovation, but they do finance innovative, large and incumbent
firms, as long as they perform as expected. Banks do favour innovative firms because higher
performances have been observed and are expected (section 1). Banks do not finance small
knowledge-based firms which are new comers operating in an unstable environment. In most
cases, finance is not a hampering factor per se but correlates with economic risk and cost, and
an innovative project, selected as a priority by managers, will be financed. Hence the financial
power is located inside the firm (section 2). However, in computer services and more
generally in the knowledge-based economy, an innovative project, even if its viability appears
highly probable, is expected to lack of appropriate forms of finance, and if it is financed by
equity, shareholders have a power on the entrepreneur. Since venture capital is a new financial
institution, which is the first one to be orientated towards innovative firms, it is reasonable to
single out venture capital in the next part.

Part 2 Venture capital : the birth of a new financial institution orientated towards
innovative start-ups

Section 1 : Why and how much venture capital is associated with the financing of innovation?
   I.1 The financing of High tech Start-ups has become a specific issue because of the
   inadequacy of classical financing modes, mainly bank loans...............................................45
   1.2 Venture capital is a new financial intermediary, between bank and market...................46
   1.3 Is venture capital role over-estimated? Evidence from US data.....................................48

Section 2 : Venture capital: a new financial institution becoming an international activity ....50
  2. 1 In Europe, venture capital is becoming an international activity...................................50
  2.2 In Europe, Venture capital selects start-ups which are global market orientated ...........52

Section 3 Three issues raised by venture capital: a new mode of governance, and a new
division of R&D investment, an equity gap?............................................................................54
  3.1 A new corporate governance ? .......................................................................................54
     What are the main universal criteria? ...............................................................................55
  3.2 A new division of labour and R&D investment ? ..........................................................56
  3.3 Is there an equity gap? ....................................................................................................58
Conclusion ................................................................................................................................60

Among the many reasons for studying the role of venture capital, the following ones deserve
special care:
1) venture capital is the first institution orientated towards innovative firms and, precisely,
towards the set of firms for which the lack of appropriate fund is the first factor which limits
innovative projects,
2) venture capital supplies not only equity but also non-financial support, venture capitalists
having scientific skills which allow them to practice a new corporate governance, which is
unique in the history of finance and industry,
3) the availability of venture capital is undoubtly much higher in the US than in Europe.

The first point has been highlighted by part 1. This second part aims to explore the second
point, mostly with qualitative data coming from interviews (see the list of interviews, in
appendix 2). The third point is documented by Emmanuelle Dubocage’s (E. D.) survey. As,
Dubocage’s survey for ESSY, which is part of her in progress thesis on venture capital, is
backed by an important quantitative work, references to this survey are frequent in this part.

Section 1 is an attempt to define, very briefly, venture capital. Section 2 shows that the
behaviour of venture capitalists follows international rules. Section 3 points three issues: the
new corporate governance with strong relationships between investors and entrepreneurs, the
new division of R&D expenses between large and small firms, and the ‘equity gap’.

Section 1 : Why and how much venture capital is associated with the financing of

In this part, the financing of innovation has a specific meaning, as it focuses on the financing
of young innovative firms or, more precisely, on High technology Start-ups, i. e. those new
innovative firms which are high technology based and, therefore, may have great potential for

I.1 The financing of High tech Start-ups has become a specific issue because
of the inadequacy of classical financing modes, mainly bank loans.

This inadequacy is due to numerous factors which can be summed up by saying that
uncertainty is too high and too idiosyncratic to be treated as a risk, as banks do. The main
reasons for the inadequacy of bank loans are threefold:

- a new innovative firm will not be profitable from the beginning and, in some High tech
sectors, especially in biotechnology, the fine tuning of a discovery which can be licensed may
require at least ten years. Such an activity needs long-term capital and - as it cannot generate
income - during the early stage, bank loans do not fit the bill, from the corporate point of

- high tech Start-ups are described as very ‘risky’ firms and banks prefer to allocate loans to
innovative firms which implement profitable and not too risky projects. Indeed, bank does not
benefit directly from a high profitable project, return being contractual. In the knowledge-
based sectors, additional arguments explain the bank lack of interest for these start-ups.
Banks, like financial institutions which practise leasing, favour manufacturing firms with
tangible and fungible assets because this kind of asset carries a guarantee by itself and because
bankers know how to evaluate these assets and, therefore, are in a better position to evaluate
the creditworthiness of the corporate borrower. New high technology firms who are based on
knowledge are characterised by intangible assets, largely consisting of patent rights,
intellectual property rights, contracts and rights of various kinds, typically opaque. Many of
them draw or will draw revenue from selling services rather than goods. Money is mainly
spent in wages and in the banking culture, loans cannot be used to finance wages. This
intangible and opaque world is not in the realm of the traditional competencies of banks and
requires new skills to understand it. Data from the French software industry (part 1, 3.2.1)
shows that asset structure is clearly atypical for a banker, as it gives little guarantee and little
information about the quality of the firm.

1.2 Venture capital is a new financial intermediary, between bank and market

Venture capital main features can be depicted as a mix of characteristics borrowing from bank
and market (see also E. D., part 1).

As a financial device, the main features of venture capital are those of shares (i. e. stocks).
Venture capital funds are shareholders, supply equity, as do investors on the market when a
company does a public capital offering. Therefore, revenues are not contractual and capital
gains depend upon the profits got by the ‘investee’. Hence, expectations about the return of
capital employed in the future are quite important to decide an investment, while for the
banks, past results are a good guide. However, shares owned by venture capital funds are not
liquid as long as the start-up is not quoted on stock exchange and investment life is long-term
(from 3 years to decades, in case of failure).

As a mode of co-ordination, the main features of venture capitalist are not market-based.
Relationship between investor and entrepreneur are not at all anonymous, not at all at arm’s
length and rather look like the German ‘hausbank’ relationship which requires trust, time,
proximity and so on. However, relationship is closed ended. It has to be terminated, like a
long-term loan has to be reimbursed. It is the reason why the ways of exit are important for
venture capitalists, the most favoured solution being the listing of start-up on stock exchange.

To sum up, venture capital can be depicted as a hybrid solution which needs financial market,
displays some similarities with the bank relationship and has its own characteristics. This
short presentation suggests that the traditional distinction, in the theoretical literature, between
the market-orientated system (non-financial firms having a high percentage of equity) and the
bank-orientated system (with a high percentage of bank loans) is not relevant (E. D. part 3). A
parallel can be drawn between the inadequacy of the classic sources of funds for this kind of
enterprise and the inadequacy of the usual economic concepts associated to the problematic of
information asymmetries between investors and managers (Rivaud-Danset (1999) and
Christensen (1997, p. 8)). The financing of innovation issue suffers from a lack of adequate
concepts. The main academic references are the product lifecycle coming from management
science, on the one hand and, on the other hand, the problematic of asymmetry of information
coming from financial science which assumes that uncertainty comes from the manager’s
opportunistic behaviour. The relevance of the first reference is limited, life cycle being quite
distinct from one new sector to another, it exceeds ten years in biotech, while three years are
needed to implement an innovative project in software industry. The financial paradigm is
inadequate. Indeed, investors and entrepreneurs share more or less the same information, none
of them is better informed about the future return of the innovative project than the other

contractor, and both anticipations are roughly similar, at least they are based on the same
model. To sum up, uncertainty comes mostly from the technology and the market, so that
investors and entrepreneurs are embedded in the same uncertain world.

Part 1 has provided evidence that bank, this traditional financial agency important for SMEs,
is unable to be a reliable source of funds. As a result, venture capital appears as the key
financial agency for independent high technology start ups. The following paragraphs do not
aim to compare the venture capital role in the US and in Europe, but only to evaluate its role
in promoting innovation, therefore US data which is more easily available is relevant.

1.3 Is venture capital role over-estimated? Evidence from US data

Venture capital role is over-estimated if the number of venture capital backed new firms is
related to the total of new firms created each year. It certainly remains very small if it is
related to the total of new technology-based firms, but such data is hardly available. However,
it is not overestimated if we look at IPO (initial public offering) data, which is available for
the U.S. Stock Exchanges. An empirical evaluation of the role of Venture capital in innovative
firms can rely on data from IPOs, as investors are interested in high technology start-ups with
high potential of growth with the intention of eventually going public (or being privately
bought by large companies) 7.

  With Start-up IPOs, the financial market is developing new functions. The traditional function of the financial
market is, of course, to raise equity funds publicly. Other functions are associated with the basic one. Evaluation
by the public marketplace contributes to the building of a reputation which can help to get other sources of funds,
like bank loans. With start-ups, IPO appears as a way to obtain a commercial reputation which helps to sell. This
tendency has come to such a point in the U.S. that NASDAQ is acting as a commercial barrier. Being quoted on
NASDAQ is becoming a necessity to penetrate the American commercial market. See for instance Financial
Times, 10 05 2000. My thanks to Morriss Teubal who emphasised this point.

                               graph 1


                               All IPOs          Venture Backed IPOs          Venture Backed Technology Based IPOs

                       Sources : Securities Data Company
                       Source : Brophy (1999)

Detailed data from IPOs is available for U. S. firms, especially for the two innovative SME
areas, Silicon Valley (California) and route 128 (Massachusetts)8. For the Silicon Valley firms
which made IPOs during the last decade (1990-1998), the percentage of technology based
firms which were venture backed ranges from 35 % to 70 %, and the percentage of non-
venture backed goes from 1 % to 20 %, according to the year, the balance being due to non-
technology IPOs, some of which were backed by venture capital. For instance, in 1998, 66 %
of Silicon Valley IPOs were both venture capital backed and technology firms, 30 % being
venture capital backed and non-technology firms (this latter set may group firms which supply
services on Internet) . Data about route 128 IPOs shows that among the technology IPOs firms

 sources: Securities Data Company, quoted in ‘Le financement des entreprises’, Conseil national du Crédit et du
Titre, 1999, pp. 261-293.

which are venture backed are again the majority. Graph I, which covers IPOs in the U. S.,
displays the important role - but not an exclusive one - of venture capital for supporting
technology based IPOs since 1976, while the percentage of venture-backed non-technology
based IPOs is not inconsiderable.

Similar data is not available for the European countries, but it is realistic to assume that
conclusions would be similar : the bulk of high growth and technology based firms going
public is venture capital backed.

Section 2 : Venture capital: a new financial institution becoming an international

2. 1 In Europe, venture capital is becoming an international activity

This point of view is supported by arguments from various origins:

. many rules and practices are standardised at an international level, with a strong influence of
US rules and practices. For instance, the founder of a future start-up must codify the project,
the required document being called ‘a Business Plan’ or a Business Model, which plans the
business for the three future years. This pre-condition to be selected by venture capital is an
international convention. Indeed, anticipated financial statements allow to test the viability of
the project and the Business model is the key document to evaluate the innovative project in
progress. In each country, relationships between venture-capitalists and the managers of young
firms are not at all at « arms’ length ». They do require a face-to-face interaction with frequent
and repeated contacts. At the beginning, close relationships are necessary to assess the quality
of the project, the possibility of both teams collaborating over several years, and of creating a
climate of trust. When the contract is signed, regular contacts are necessary for the monitoring
of the start-up and the evaluation of changes in prospects. A venture capital fund manager
uses to monitor ten firms (while, on the average, a banker takes care of more tah one hundred
SMEs) and to call by phone each entrepreneur once a week. Although knowledge is partly
tacit, venture capital is a standardised industry on a world scale, conventional rules and
practices displaying strong regularities whatever the locality, the country and the sector.

A typical venture capitalist has double competencies: he is graduate in science and in financial
management. He does not work alone and the team who prepares the Business model
includes, besides the entrepreneur, another scientist, with law skills in patent and intellectual
property rights, particularly in biotechnology. This trio, roughly speaking, belongs to the same
scientific world. The venture capitalist is backed by a network. To evaluate the quality of an
entrepreneurial project, the venture capitalist gets advice from his own network of experts
(entrepreneurs who have got funds from the venture capital, independent scientists...). The VC
fund manager also needs financial competencies, as he (or she) manages funds owned by
others (E.D. part 1). As VC fund often acts as a financial intermediary, investing for others,
venture capital funds often are backed by banks. In France, for instance, up to July 2000, the
agreement of the COB (Commission des Opérations de Bourse), which is the equivalent of the
U.S. SEC, was required to create a venture capital fund and it was tacitly admitted that the
partners team should include a specialist in finance.

The international rule is the following: venture capitalists have skills, which banks do not
have, in dealing with the young technology-based firms; the managerial team is composed of
finance experts and sector experts who have not only scientific and technical skills but who
also know the competitors. At least in the U.S., they are seen as highly qualified and very
careful in scrutinising investment projects. Our inquiry suggests that, in France, some well
established venture capital funds have developed comparable skills, while others have not. In
the UK, financial culture might prevail over scientific culture, while it would be the opposite
in the European continental countries (E. D. part 3). Indeed, at least in France, criticism
coming from entrepreneurs against venture capital are rather infrequent, while, in the UK,
reluctance from entrepreneurs has been observed (Harding, 2000).

. during the second part of the 1990s there has been a significant degree of public policy
international emulation. European and Asian public policy makers have been guided by the
U.S. system and by other non-domestic initiatives. During the middle of the 1990s, in
Germany and in France, each government undertook new measures in favour of venture-
capital. It did so in France through a set of measures, among them one which is a ‘fund of
funds’ and is co-financed by the French government and the E I B (European Investment
Bank). This initiative is directly inspired by YOZMA, in Israel. In 1993, the Israeli
government created YOZMA, a public agency, which aimed to trigger the venture-capital

industry by providing capital to the first venture-capital funds (indeed, YOZMA helped to
create a very active High technology industry with more than 100 companies quoted on
NASDAQ in 1999). In Germany, the Kreditanstalt für Wiederaufbau (KfW) started an
impressive programme called BTU to refinance private equity investments in small
technology-based firms in 1996. BTU programme is inspired by the U.S. programme SBIC
(Euro 650 million was supplied through the BTU programme in 1999). Generally speaking, in
several European countries, the public policy makers have learned lessons from elsewhere and
moved towards an active policy aimed at promoting innovative and independent enterprises,
in supporting venture capital industry. The public policy makers share the same assumptions:
the private sector provides insufficient capital to new high technology-based entreprises; these
firms need equity and the bulk of equity should come from venture capitalists. As the venture
capital industry is very selective, these assumptions mean that public programmes are
orientated to support a limited number of start-ups, those which may operate, in some years,
on a large scale.

. Dubocage’s survey on venture capital gives various evidence which supports the view that
venture capital is an international activity, notably for the U.K. and France, the two European
countries with the oldest experience in that field (Dubocage, 2001). Trans-national
syndication is becoming the rule for venture capital funds who invest in start-up located
abroad. For instance, Sofinnova, a French VC fund has invested in the US in several start-ups,
within a syndicate leaded by a US VC fund. Venture capital internationalisation has economic
positive consequences 9. The implication is that a probable Success story firm can attract large
amounts of money from venture capital, even if such a firm is located in a country with a
poorly developed financial market; it gives the possibility for a ‘happy few’ to escape from
domestic financial constraints. It also has its down side which is studied below.

2.2 In Europe, Venture capital selects start-ups which are global market

  If it is necessary to invest on a large scale, venture-capitalists prefer syndication, as it allows them to reduce the
risk by the diversification of the investment. To prevent a worsening of the knowledge of the start-up and of its
monitoring, there is generally a venture-capital fund leader. In Europe, syndication means that the pooling of
funds includes North-American venture-capitalists. Relationships are not always synchronic; for instance, a

As venture capital fund needs to sell its shares invested in a start-up after some years of
investment, the success of the investee company is turned into an increase in value of the
share which becomes tangible by selling the equity position, the most profitable exit avenue
being IPO. For the staff, too, this mode of exit allows the delay in paying a part of the
remuneration, stock-options being substituted for high wages. Stock options not only reduce
the cash cost of employees but give them the same interest in going public. In most cases,
investors and entrepreneurs estimate that to be bought by a large company is equally a good
solution. Exit conditions have consequences on the screening of enterprises. By assuming that
eventually the firm will go public or will be purchased, owner-managers, employees and
investors share the same incentives. To share the idea that an IPO, a merger or an acquisition
are the best avenue is a necessary condition to build the same framework of anticipations and,
thus, to establish stable relationships between venture capital and the start-up managers. For
that reason, venture capital is highly selective, looking only at future success stories, i. e. firms
with an innovative project which may lead to a large commercial market and/or to be in the
scope of business of large firms operating in the same industry.

According to interviews, in France, venture capitalists select candidates on the capacity their
future goods or services have of being sold on the international market, the domestic market
being too small to allow high rates of growth. Selling on the international commercial market
is assumed to be the sine qua non of success. Linkages with already established large
domestic companies are not seen as an important criterion of success because such companies
are often multinational, with headquarter located in a foreign country, most often in the U.S.
Although previous contract with large company is a criterion of selection, used by venture
capitalists particularly in biotechnology, it may be assumed that relationship with large firms
plays a less important role than in the U.S. In the European countries, agglomeration effects
due to the relationships between venture capital funds, start-ups, large companies,
Universities, and Public research centres are much less obvious. It is well known that in the
US venture capital is a highly concentrated industry and favours regional and sectoral
‘clustering’. Silicon Valley is the archetype with strong relationships between the start-ups,
the venture-capitalists and the large enterprises, the latter often being the key actors. Large
companies dominate the ‘local electronic cluster’ and guide the activity of the young high-

former Start-up like Genset, a French firm specialised in biotechnology, was at the beginning backed by French
venture-capital agencies which sold their shares to US ones to work on a bigger scale.

technology enterprises, so that many of them are specialised in market niches, producing
components for large companies in an evolving industrial frame. Following Aoki, limiting the
scope of analysis merely to the bilateral relationships between the venture capitalist and an
individual entrepreneurial firm may lead to a misplaced emphasis on the governing power of
the venture capitalist. The scope of analysis must include dominant firms and industry
standard-setting organisations (Aoki, 1999, pp. XI-6 and XI-7). As regards the new
technology of information and communication (NTIC) industry, Dubocage’s survey supports
this view (E. D., part 4).

In the European countries, particularly in France, in spite of the public policy initiatives to
concentrate young high-technology firms on a sectoral and a local basis, we hardly find such
regional ‘clusters’, including all the key actors of the Silicon Valley, so that ‘Silicon Valley’
looks rather like a text book case study10. Policy makers aim at promoting agglomeration
effects in Germany with Bio-Regio, this program being quite successful in some ‘valleys’ (see
ESSY study of Steven Casper and Hannah Kettler). In France, Genopôle, located at Evry,
groups several start-ups specialised in genomics, but locating a few start-ups belonging to the
same sector in an area close to a University is not enough to obtain a High tech Valley. The
best French example of agglomeration and sectoral effects might be the Grenoble valley,
where corporate venture capital fund (Emertec) and start-ups are located near two large
scientific laboratories of public research, that case being a-typical as the large company who
plays an important role is CEA (Centre d’Energie Atomique), a Research Centre financed by
public funds.

Section 3 Three issues raised by venture capital: a new mode of governance, and a
new division of R&D investment, an equity gap?

3.1 A new corporate governance ?

Although venture capitalists and entrepreneurs belong to the same scientific small world, with
repeated contacts, they are not mere colleagues. Venture capitalists have a power over the

  The Israeli case offers an interesting example, with venture capital funds, start-ups, University and incubator as
the four basic pilars of high technology industry growth. Incubator organisations give potential entrepreneurs
infrastructure and skills. Ideal incubator organisations help new entrepreneurs to become cognisant of the state-
of-the-art technology in their field and to become aware of market opportunities.

enterprise. They influence the strategy of the start-up. For instance, in biotech., they can
decide which project has to be guaranteed by intellectual property rights and which needs no
protection. In some critical cases, they can even appoint a new manager at the head of the
start-up. In ordinary life, the tacit and soft influence of venture capital is effective through the
conventional norms of investment. Indeed, criteria used by venture capitalists to decide
investment are highly important in shaping the start-up. As previously explained, most start-
ups which need a high level of equity are unable to have access to various appropriate
financial sources, therefore to fit the venture capital criteria is a necessity. The tendency to cut
the total investment into sequences, investing each year or each couple of years, intensifies the
power of venture capitalists over the selected start-ups. At each round of investment, venture
capitalists, acting as shareholders, can influence the corporate strategy.

What are the main universal criteria?

1. the quality of the entrepreneurial team is a key criterion. A good team groups scientists,
with a high level of skills. The wealth of the start-up depends upon human capital. In other
words, people make the value and, for that reason, a strategy of ‘hiring and firing’ would be
highly counterproductive. The so-called star system which prevails in the US, particularly in
the biotech companies, can be observed in the case of listed companies in Europe. For
instance, the share price of Genset, a biotech enterprise listed on the French new market and
on NASDAQ, decreased by approximately 40 %, in Paris, after the resignation of one famous
researcher (Le Monde, 2 March 2001).

. legal barriers protecting innovation is a sine qua non condition in several sectors,
particularly in biotech. It can be remembered that the Bayh-Dole Act, voted in 1980, aimed at
promoting entrepreneurship, through IPR, in order to intensify technological transfer between
academia and industry. Interviews indicate that patents and other rights is a criterion which
makes consensus among venture capitalists.

. a probable competitive advantage is required. The start-up is expected to be the leader on
its niche market or to be able to destabilise the commercial environment, because of its
technological advantage.

. as previously mentioned, a marketable output with high growth potentiality is required.

. the innovative project(s) has or have to be costly. Indeed, the size of the investment has to be
large, EUR 1 million is often quoted as being the minimum, and, for instance, 3i, the largest
British company specialised in private equity, does not make investment smaller than EUR 2
million, without upper limit. As unit fixed co-ordination costs, which include the screening
and mentoring of the start-up, are high, small investments cannot be profitable.

The scientific quality of the team is evaluated through various indicators: contract with large
firm, track record of the staff (scientific publications…), level of R&D expenses and staff…
are indicators of the scientific and technological quality of the team. These indicators are not
the same from one sector to the other. In biotechnology as the life of investment is longer and
technological risk is high, scientific norms are more selective than in other industries, while in
NTIC, notably in the telecommunication equipment industry, technological barriers are
required (Les Echos, 15 11 2000).

3.2 A new division of labour and R&D investment ?

Venture capital plays an important role in the new division of labour in some industries. This
can be illustrated by genomics (graph II) and, generally speaking, by biotech.

                         Venture capitalist bets on a virtual Success Story → highly educated
                                                                                   staff (stock option)
                                          which sales patents [royalties]
                                                 to the Pharmaceutical industry

    Research                                                                                          All the actors anticipate

     Start-up                                                                                                 mass market
    Firms and                                                                                             consumption products
     a start-up                                                                                              and futur high
private knowledge      « Winner takes all »                                                                    cash-flows
                       Short-term and
                       Intensive competition
 Large incubent        Within a few                                Intellectual
 Pharmaceutical        Start-ups                                 Property Rights
     Firms                                                         Regulation

   Division of                                 Rules of competition
   and R & D                                                                                                 [anticipations]

In the biotechnology industry, firms backed by venture capital are highly involved in R&D,
while firms funded by the financial market invest more in R&D. In the biotechnology
industry, in 1997, the rate of R&D expenses over revenues (sales) reaches 82 % for public
company in Europe and 40 % in the US, ratios being rather lower for venture backed
enterprises (sources: Ernst and Young, E. D. part 4 ). This data testifies to a level of research
which is considerable and much higher than the level of R&D expenses of US pharmaceutical
firms: this latter has regularly increased during the last two decades, from 11.9 % in 1980 to
20.3 % in 1999. Independent start-ups allow pharmaceutical firms to limit the impressive
growth of their investment, however the specialisation in R&D generates an unusual level of
losses, especially in Europe, which is not sustainable. In microelectronics, labour division
concerns mostly new components, each start-up being specialised in a few marketable goods,
dedicated to the large incumbent firms. The start-ups specialised in R&D can be compared to
pilot-fish (Guellec, 1999, p. 39), as they explore new and highly uncertain fields, provide new
knowledge which may lead to new product able to be developed at large scale by large firms -
already establish or new -. Large firms take charge of R&D expenses if SME is affiliate
(part1, 2.3) and let this charge to other if it is backed by venture capital or if it is public. At the
end of the last decade, many start-ups have gone public at an early stage of development,
although not profitable, so the financial market has financed firms with a considerable level of
R&D expenses, particularly in Europe, due to the euphoria on the new European financial
market. This transfer of risk and R&D investment to the financial market correlates with the
tendency of venture capitalists to reduce the term of investment. It is very probable that many
start-ups, particularly in the biotechnology industry, will have to redefine their strategy and to
reduce the level of R&D, to be profitable.

3.3 Is there an equity gap?

In Europe, from 1970 which can be considered as the birth of venture capital, to 1995, venture
capital remained under-utilised as a financial mean, while, innovative SMEs themselves were
failing to achieve their innovative potential. The resultant imbalance is often termed the
'equity gap', i. e. an excess of demand with under-utilised supply. It makes consensus within
venture capitalists, operating in France, that in 2000, this equity gap disappeared. A cross-

country study done by Harding gives the following conclusions: The U.K. is unique in the
nature of its equity gap. In countries where a venture capital industry has effectively been
created through policy …, the equity gap is catered for by structures within the risk capital
system (Harding, 2000, p. 29). Dubocage's survey provides evidence which supports this

Nevertheless, other problems have to be mentioned, very briefly:
. as previously said, venture capitalist are highly selective, and aim to finance a limited
percentage of innovative SMEs, as a consequence, there are entrepreneurs who consider that
they are constrained by a shortage of capital, even if investors do not meet any more a lack of
good projects, in the continental European countries. Not all the innovative projects may lead
to outcomes linked to large markets or to an emerging industry and where private equity funds
are not available, it indubitably limits the growth of the high-technology firms.

. venture capital fund managers, like other investors, have a tendency to over-accumulate in
some industries. Indeed, financial investors’ tendency to concentrate investment in the same
industries is well-known. Cyclical behaviour is more likely if the venture capitalists lack skill
and, therefore, are more sensitive to the dominant opinion. They do so because of a “fashion
effect” and because each thinks that the investee-firm may perform better than the other
newcomers. Venture capitalists tendency to invest on the same market segments favours over-
investment. Although they are aware of this tendency, each wants to participate because he or
she thinks that he or she can pick the first comer who will be the to-morrow’s winner. Excess
of funds generates an excess of new comers and amplifies the level of competition in this
market segment. Examples are numerous in the computer industry in the U.S. (Aoki, 1999, p.
XI-5), whereas in the European countries, start-ups specialised in B to C (trade on Internet)
are often quoted as an example of over-investment. Where this market segment a cluster with
large technology-based companies which, from their own sides, develop competition among
their sub-contractors, the venture-backed start-up high failure rate is becoming less surprising.
Between the lack of funds which slows down the innovation process and the excess of funds,
producing a highly competitive environment with a high rate of failure, the frontier is not so
large, especially for new activities.


To sum up, for high technology firms with high potential of growth, venture capital is a key
factor, both because of the inadequacy of traditional financial intermediaries, and because of
the mode of governance promoted by this new financial institution. Venture capital
participates in the shaping of new relationships within the non-financial actors and has a
power which is unique in the relationship between finance and industry. It is a key factor in
the new labour division between innovative large and small enterprises and it favours the
development of new knowledge-based industries which need IPR to be profitable. Venture-
capital is an active member contributing to the development of an uncertain and competitive
market environment.

To conclude, a good understanding of the venture capital industry non-financial rules and
norms is important for public policy makers, as, in several western countries, they have
undertaken public programmes to bolster innovative start-ups through venture capital


Aoki , 1999, "Information and Governance in the Silicon Valley Model ", doc. mimeo, June.

Brophy D. J., 1999, The financing of small and medium-sized enterprises: some observations
on the American Experience, in Conseil National du Credit, Le financement de l’entreprise,

Casper S. et H. Kettler, 2000, The road to sustainability in the UK and German biotechnology
industries, doc. mimeo., ESSY, Berlin, june.

Christensen J. L., 1997, « Financing innovation » in C. Edquist co-ordinator, Innovation
Systems and European Integration, Doc. mimeo.

Guellec D., 1999, L'économie de l'innovation, Paris, La Découverte.

Haas S., 2000, création d’entreprises et innovation en France, in Les PME face à l’innovation,
12th Annual Conference « Organizations, Innovation and International », Compiègne
University of Technology, pp. 401-420.

Harding R., 2000, Venturing forward. The role of venture capital policy in enabling
entrepreneurship, London, IPPR.

Lemarié L. and V. Mangematin, 1999, "Les entreprises de biotechnologie en France",
Biofutur, n° 194, nov. Pp. 56-59.

Mamar H. 2000, "Le financement des firmes innovantes: une étude sur l'industrie
manufacturière française", sous la direction de L. Miotti, Rapport au Commissariat Général du
Plan, doc. miméo., nov., 45 pages.

Reigner E. (1998) "L'obstacle financier dans la conduite des projets innovants", SESSI-
Ministère de l'industrie, Paris, doc. miméo, 17 mars, 15 pages.

Rivaud-Danset D., 1999, "Le financement de l’innovation, les pratiques du capital risque entre
le risque et l’incertitude", CREI-CEPREMAP workshop, 3-4 dec.

Rivaud-Danset D., E. Dubocage et R. Salais, 1998, Comparison between the financial
structure of SME versus large enterprise using the BACH databank, Report for the European
Commission (DG II), June (available on


                            Appendix 1:Methodological note about CIS 2

The second Community Innovation Survey (CIS2) was launched in the EEA members states in 1997/1998. The
first Community Innovation Survey collected information for the year 1992. As a whole, results from the two
surveys are not directly comparable. All the participants countries have agreed on a common set of methodology
and a core questionnaire aimed at providing comparable, harmonised and representative data on a pan-European
scale. The survey is based on the Oslo-Manual. The reference year for the survey is 1996 for most countries.
In this work, we have been studying the following countries: Germany, France, Italy, United-Kingdom, Finland,

The target population
The statistical unit is the enterprise, defined as the smallest combination of legal units that is an organisational
unit producing goods or services. . The following activities have been included in the target population:
- all manufacturing industries
- services sectors
In Italy, the survey was only done for manufacturing industry.
The threshold is 20 employees in the manufacturing sector and 10 employees in the service sector.

The factors hampering innovation
The following list of explanatory factors has been given:
- Excessive perceived economic risks
- Innovation costs too high
- Lack of appropriate sources of finance
- Organisational rigidities within the enterprise
- Lack of qualified personnel
- Lack of information on technology
- Lack of information on markets
- Insufficient flexibility of regulations or standards
- Lack of customer responsiveness to new goods or services
The Italian answers to the question about factors hampering innovation are substantially lower than in any other

Classification of economic activities
Manufacturing Industry

                     - Intermediate goods : manufacture of coke, refined petroleum products and nuclear fuel,
                                     manufacture of chemicals, chemical products and man-made fibres.

                     - Equipment goods: manufacture of machinery and equipment


                     - Transports: land transport; transport via pipelines; water transport; air transport

                     - Telecommunications

                     - Financial intermediation

                     -    Computer and related activities

Classification of size class

Total manufacturing

                      Small enterprises: 20-49

                      Medium-sized enterprises: 50-249

                      Large enterprises: 250-more

Total services

                      Small enterprises: 10-49

                      Medium-sized enterprises: 50-249

                      Large enterprises: 250-more

                                                                           APPENDIX 2

                                                  List of interviews conducted within ESSY research


NOM                   Prénom            FONCTION
Brandys               Pascal            Genset Financial Director (Genomics)
Cohen                                   Sanimat Director (Medical appliances)
De Rougé              Bonabes-Olivier   Cellpep Director (Biotechnolgy)
Gurs                  Olivier           Hybrigenics Director (Genomics)
Lefort                Damien            Netline Director (Software)
Tran                  Khanh Vien        TK Medica Director (Medical appliances)

Venture Capitalists

NOM                   Prénom            FONCTION
de Fréminville        Paul              CDC, manager of fonds de garantie capital PME, Paris
de Giovanni           Patrick           AFIC (Association française du Capital risque) Director and Partner at Apax Partners
Gaudon                Anne-Sophie       Consultant, biotechnology, A. Andersen
Le Prince Ringuet     Antoine           Netcre@tion Director
Méré                  Philippe          Banexi Ventures Partner, specialised in NTIC
Mizandjian            Bernard           3i France Partner, specialised in biotechnology
Saulnier              Monique           Sofinnova, Partner


NOM                   Prénom            FONCTION
Battini               Pierre            Director of Fonds Public pour le Capital Risque
Casper                Steve             Judge Institute for Management, Cambridge (U.K.)
Cassier               Maurice           Researcher CERMES - CNRS, Paris (France)
Harding               Rebecca           Researcher, SPRU and IPPR (U.K.)
Philippe              Chantal           Vice-Director of Fonds Public pour le Capital Risque
Teubal                Moriss            Professor, University of Jesuralem (Israel)
Vitols                Sig               Researcher, WZB, Berlin (Germany)

Only one interview (M. Cassier) was done by phone; each interview lasted at least one hour and some persons, notably P. Battini, have been met
several times.

Emmanuelle Dubocage and Dorothée Rivaud-Danset participated to the Capital 2000 summit of
venture capitalists and equity investors, Montréal, Québec, 11-13 July 2000. They participated to
the 3i Conference "Venture Forward: the role of venture capital in enabling entrepreneurship" and
presented a communication, Brussels, 28 November 2000.


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