Venture Abroad: Developing Countries Need Venture Capital Strategies

At the fall meeting of the Mont Pelerin Society, a preeminent international group of free-market scholars, economists wrestled with how best to implement market principles in formerly communist economies. Under certain circumstances, the surest ideological route from Red Square to Mont Pelerin may be via Silicon Valley. The same can be said for other developing countries. A number of economic and political trends signal a more prominent role for Silicon Valley-type growth fueled by venture capital. The challenge is to mesh this dynamic and innovative form of financing with the goals of development aid providers and governments.

WHAT'S GOOD FOR BUSINESS

There is an increased global awareness that a modern economy cannot reach its full potential without nurturing the innovation of its entrepreneurs, and that realization enhances the prospects for venture capital. Venture capitalists provide equity or other types of financing for small- and medium-size enterprises that have growth potential and are not quoted on stock markets. They combine access to cash not available elsewhere with active management support. Their main objective is long-term capital gains to justify their financial risks.

A new emphasis on the entrepreneurial process in developing countries is not enough, however, to increase and accelerate the flow of venture capital, particularly new capital from the developed world. A government-created "enabling framework" is first needed in developing countries to create an attractive playing field and entrepreneurial infrastructure for venture capitalists.

The replacement of centrally planned economies with free-market ones is stimulating the demand for venture capital. The World Bank lists 80 countries that in recent years have made privatization their primary public-policy concern. (More than 7,000 large-scale privatizations have been undertaken, along with 100,000 small- and medium-size companies that have been sold to private parties.) Many of these newly privatized enterprises are insolvent and thus will be searching for alternative means of financing. For many of these economies, a logical next step should include a primary role for venture capital to nurture the entrepreneurial seeds planted by the privatization process.