Business Finance in Less Developed Capital Markets

By Klaus P. Fischer; George J. Papaioannou | Go to book overview

1
Venture Capital: Is It Appropriate for Developing Countries?

RICHARD KITCHEN

Venture capital . . . unlikely people financing unlikely things

Anonymous

A well-known writer on small-scale enterprises (SSEs) in developing countries, Malcolm Harper, expressed this view:

Specialised venture capital or equity financing schemes, such as have been successful in the United States, are unlikely to be appropriate for the financial needs of small scale enterprises in developing countries. It is difficult enough for an unsophisticated enterpreneur to appreciate the differences between his own investment and any loan he may have received. The distinction between short and long term financing adds a further complication. The addition of outside equity and the associated need for incorporation, shared responsibility and dividends as opposed to drawings is unlikely to be manageable. ( Harper 1984, pp. 60-61)

Two years later, I made an equally broad generalization, but with a rather more positive view of the possibilities of venture capital:

For many developing countries we see considerable potential in the venture capital approach to SME (Small and Medium Enterprises) financing. The provision of equity, rather than loan, capital conforms to the principle that the higher the risk, the lower the debt to equity ratio should be. More important, it also enables suppliers of funds to share in the growth of successful companies which will offset the losses subsequent on financing the companies which fail. ( Kitchen 1986, p. 293)

Such generalizations need more detailed consideration. The objective of this chapter is to examine the need for venture capital in developing countries and the conditions required for its successful implementation. The chapter will consider the financing of SMEs, the role and limitations of capital markets and existing methods of SME financing, and the role that venture capital might play. We will then discuss venture capital in industrialized countries and the embryo venture-

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