Academic journal article Baltic Journal of Economics

Public Venture Capital in Latvia

Academic journal article Baltic Journal of Economics

Public Venture Capital in Latvia

Article excerpt


The first generation of Latvian public venture capital programmes was launched in 2005 and so far five programmes have either been launched or are being planned. Given that the explicit focus from the side of the policy maker has been to supply the Latvian venture capital market with capital, the programmes could be seen as a partial success. However, the programmes have failed to address the demand side. This is of particular importance for the future development of the Latvian venture capital market since the evidence reported suggests there are not enough good projects to invest in, while at the same time Latvian entrepreneurs look for venture capital outside Latvia. The paper also pinpoints severe weaknesses in the design and implementation of the five public venture capital programmes.

JEL classification: G24, G28, L26

Keywords: Public venture capital, Latvia, entrepreneurship

1. Introduction

The Latvia Competitiveness Report (Cunska et al., 2012) identifies financial market development as one of the areas where Latvia lags behind comparable countries in Central and Eastern Europe. For a country at Latvia's stage of economic development, using the terminology of the World Economic Forum Global Competitiveness Report, moving from an efficiency driven economy to an innovation driven one (Schwab, 2013) well functioning capital markets are of crucial importance. Through its specific features venture capital can play a pivotal role in this process - in particular since it is in general associated with rapidly growing entrepreneurial start-ups that usually operate in high-tech industries. Furthermore, as discussed in Dessi and Yin (2012), empirical evidence suggests that development of a well-functioning and active market for venture capital is more or less a pre-condition for economic growth based on knowledge-intensive industries. Further evidence on the relationship between venture capital, innovation and growth of the knowledge-based sector can be found in Bessler et al. (2012). After surveying the literature on causality between venture capital and innovation they conclude that:

* Venture capital investments stimulate patenting activity three times more than corporate R&D spending: though patenting activity in a particular company tends to decrease after venture capital investment.

* Increased early-stage venture capital supply stimulates new business creation in knowledge-intensive industries and hence economic growth.

* Venture capital-backed firms create more innovative products than non-venture capitalbacked firms and are also more profitable.

With these observations as a point of departure this paper will analyze development of the Latvian venture capital market with particular emphasis on public venture capital programmes and their impact. In doing so the rest of the paper is organized as follows. For readers not familiar with the concept of venture capital, the next section provides a brief introduction focusing on the features distinguishing venture capital from other sources of funding. This is followed by a discussion of the not entirely uncontroversial role of public venture capital. The Latvian capital market is briefly discussed in the fourth section, whereas the fifth section, the main part of the paper, provides an analysis of the role and impact of public venture capital in Latvia. The final section provides conclusions.

2. The venture capital market: basic concepts

For an entrepreneur wishing to launch or further develop their idea or business, essentially five different sources of financing are available:

* self-financing (including personal savings, family and friends);

* debt financing (bank loans);

* equity financing (venture capital, private equity);

* government or public funding through various programmes targeting start-ups and SMEs; and

* stock market flotation.

Out of the five, self-financing, if available, might be suitable for the initial phase of a business. …

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