Financing Southeast Asia's Economic Development

6. Developing the Role of Venture Capital in Southeast Asia

Khalili Khalil 176© 2003 Institute of Southeast Asian Studies, Singapore 1. Introduction The development of the venture capital (VC) industry in Southeast Asia is at various stages: from the quite mature stage of Singapore, to the developing stage of Malaysia, Thailand, and some others countries in the region. In addressing this topic, the chapter primarily examines the Malaysian experience of venture capital, as well as referring to some elements of Singapore’s world-class experience. Malaysia was chosen because of the author’s knowledge of the VC industry in this country, whilst Singapore provides an advanced benchmark. However, Malaysia offers a more appropriate case study for most of the other countries in Southeast Asia, and many of the comments made about Malaysia’s VC industry are equally pertinent to Indonesia, the Philippines, and Thailand. The development of Malaysia’s VC industry has been one of slow 6 DevelopingtheRoleofVenture CapitalinSoutheastAsia KhaliliKhalil Reproduced from Financing Southeast Asia’s Economic Development, edited by Nick J. Freeman (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at 177 6. Developing the Role of Venture Capital in Southeast Asia© 2003 Institute of Southeast Asian Studies, Singapore growth, although there has been no lack of funds or target companies. With a total fund size of RM1 billion (about US$265 million), the industry lags significantly behind Singapore’s US$5 billion (1999 figures), despite the fact that both industries started at around the same time. A wide range of factors, such as restrictive investment criteria, entrepreneurs’ attitudes to venture capital, poorly communicated business plans and low public awareness, have all been offered as causes of the lethargic Malaysian VC industry. 2. Achieving a Self-Reinforcing Cycle of Economic Prosperity: New Growth Theory, K-Economy, and Venture Capital In 1986, Stanford economist Paul Romer developed the New Growth Theory in an attempt to explain the causes of long-term economic growth; a situation which traditional economics had difficulty explaining (Romer 1986, 1990). The cornerstone of the New Growth Theory is the premise that economic growth does not just happen. Rather, it is driven by the accumulation of knowledge, which in turn encourages technical advancement. New Growth theorists regarded investment in technological advancement as very crucial in sustaining long-term growth, because it creates a non-competitive (and hence, monopolistic) platform from which a country can leapfrog in terms of productivity and efficiency. With the help of the economic multiplier, a technological paradigm shift could raise economic growth permanently when commercialized via a process widely known as “innovation” (Aghion 1998; OECD 1996a, 1996b; World Bank 1999). A recent comparative study on the highly successful San Francisco Bay Area/Silicon Valley has shown that the benefits of technological progress tend to put an economy into a self-reinforcing cycle of economic prosperity (Figure 6.1). Venture capital is shown to be an important element in this cycle, as one of the components that will promote outstanding business performance. The ideas behind the knowledge economy (k-economy) are not new, and are based on the model advocated by the New Growth Theory. Similarly, the knowledge economy model is based on the proposition that knowledge generation and technological advancements will achieve greater and sustainable economic growth. When technology is Khalili Khalil 178© 2003 Institute of Southeast Asian Studies, Singapore commercialized — innovation — it creates a non-competitive platform from which a country can enjoy permanent growth. Technological breakthroughs are achieved through research and development (R&D) that are costly and long term. Therefore the ability to obtain long-term risk-bearing capital, or venture capital, for successful commercialization is critical. So, what is venture capital? VC financing is the provision of longterm risk-bearing capital, usually in the form of equity participation, to companies with high-growth potential. In the Silicon Valley experience, VC financing has spewed forth a whole plethora of success stories, from IBM to Intel to Apple. According to data supplied by Venture Economics Information Services (1998), there were 616 venture-backed initial public offerings (IPOs) on the NASDAQ between 1989 and 1997. Venture capital is a necessary component in financing and spurring innovation and thus, technological progress for the following reasons: • Innovation comes with uncertainty (Levy 1998). It is the paradox...