Venture capital financing in the Thai economy.

SUMMARY

This paper is concerned with the management of venture capital financing in the Thai economy. It presents Small and Medium Enterprise Development Bank of Thailand (SME Bank) activities in support of the generation of new businesses and innovations. Being the bank for technology-based businesses to increase the nation's innovation capacity is the great challenge for SME Bank as the bank needs to garner the integrated financial and entrepreneurial support as well as a network of alliances. The paper proposes the model of venture capital management for changing the innovative environment to create the tech economy. Innovative initiatives at SME Bank would be useful for economies in other developing countries to launch programmes supporting the diffusion and commercialisation of innovations.

KEY WORDS

small--and medium--sized enterprise (SME); technology bank; silicon valley; technology--based businesses; venture capital (VC); technology commercialisation

INTRODUCTION

This paper is concerned with the management of venture capital financing in the Thai economy. It presents the Small and Medium Enterprise Development Bank of Thailand (SME Bank)'s activities in supporting the generation of new businesses and innovations. SME bank is a special-purpose bank reshuffled from the Small Industry Finance Corporation (SIFC) to focus on providing financial facilities to SMEs. SME Bank was established in 2002 to assist SMEs in accessing sources of funds, preparing a business plan, and providing advice on operational issues. It is state owned--the Finance Ministry holds an 86% stake. The mission of SME bank is to act as a financial intermediary to support SMEs with growth potential to significantly improve their products or services. The goal of SME Bank is to assist businesses that have been shut out of the commercial banking system. In other words, it is the bank set up to help small businesses realise their entrepreneurial potential. The bank has initiated many activities to assist, promote and develop Thai small- and medium-sized enterprises (SMEs). SME Bank has been awarded Bank of the Year 2004 for having the most outstanding performance in helping 11,035 entrepreneurs and setting up 80 branches all over the country. Currently, it has the policy of shifting the paradigm from helping the small businesses towards supporting technology-based start-ups to produce innovative capacity for the Thai research & development (R&D) market.

In extending the bank's lending-based services to venture capital (VC) financing, SME Bank is taking higher risks on start-up ventures. In the move towards the bank for technology-based businesses (Technology Bank), SME Bank had set aside capital to support the entrepreneurial start-ups in the technology sector. The bank has committed in extending the supply of capital to technology-based businesses to facilitate the process of developing and commercialising technologies which would help drive the country's economy. Following on the introductory section, there are 4 further sections. Section 2 discusses the importance of the Triple Helix model in encouraging economic growth and development. The model provides a basis for an empirical analysis. Section 3 presents the innovative activities undertaken at SME Bank to promote the venture capital economy of Thailand. Section 4 presents the model of venture capital management to create the tech economy and promote innovations in SMEs. Section 5 concludes the paper.

THEORETICAL FRAMEWORK

Triple Helix model emphasising network interactions to foster innovation

Etzkowitz (2003) has developed the model of double helixes (university--industry, government--university, industry--government) and the new model version of triple helixes (government, university, industry). Indeed, the most important change in the model has been the move from bilateral interactions to trilateral interactions. The networks connecting the productive sector and the government are emphasised by the Triple Helix model to enhance economic development and competitiveness. The model postulates an interaction among the institutional spheres to foster the condition for innovation (Etzkowitz & Leydesdorff 1998, 2000; Etzkowitz 2002; Etzkowitz 2004; Cowan & Jonard 2004; McEvily et al. 2004).

The interaction characteristic process of the Triple Helix model plays a vital role in creating phenomenal economic growth of the 2 leading US high-tech regions, Silicon Valley and Boston Route 128 (New England). Figure 1 shows the total venture capital investment in the US which drives innovation and competition and encourages the competitiveness of the regions. The VC financing is a significant force behind the growth and economic development of Silicon Valley and Boston Route 128 (New England).

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Figure 2 shows the Triple Helix model emphasising the integration of 3 institutional spheres (university--industry--government relations). Indeed, firms benefit from networks of collaborations among universities, research centres, small and large firms along several activities such as R&D, production and marketing. The interactions help facilitate the move of technologies from universities/ research organisations into the private sector. It is argued that the government policies should support these interactions for knowledge generation and industrial development (Etzkowitz & Leydesdorff 2000; Gay & Dousset 2005).

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In high technology sectors, the Triple Helix model provides a platform for innovators through university--industry--government relations. Early stage investments in high-technology companies are of high risk and thus need the government support programmes for venture development. The next section will describe the attempts of SME Bank in developing the tech economy by helping SME access to venture capital funds. SME Bank has tried to strengthen the venture capital industry by providing financial services to emerging growth and high-tech companies. It is challenging for SME Bank in opening up opportunities for entrepreneurial firms and encouraging economic growth through VC financing.

VENTURE CAPITAL ECONOMY OF THAILAND

In Thailand, commercial banks are the major financial institutions initiating financial programmes to help SMEs. Among the commercial banks, Krung Thai Bank is the country's largest state-run bank, playing a major role in providing finance to SMEs. The National Innovation Agency (NIA) is one of the major organisations supporting innovation development in Thailand. NIA has provided a range of financial programmes to promote investment to venture businesses. The financial programmes to support SMEs are, for example, Good Innovation Zero Interest, Technology Capitalization, Innovation Cluster Grant, Venture capital. SME Bank is another prominent bank playing a role to assist young entrepreneurial firms. SME Bank was established in 2002 to mitigate the risks of SMEs by assisting them with access to sources of funds, business plan preparation, and advice on operational issues.

The influential factors in the process of technology commercialisation are shown in Figure 3. It can be seen that capital has been the most important factor as the entrepreneurial firms often have problems finding financing for their innovation or idea. In other words, for the firms to deliver innovative products and technologies, securing funds is often the problem. Public venturing is therefore a key first step in supporting venture capital-backed spin-offs.

SME Bank has taken up the role of small innovation business development in the VC industry. The bank has eased lending criteria and taken greater risks than commercial banks do in order to ease the SMEs' financial crunch and support the generation of new businesses. However, to limit possible damage incurred from lending, the main target customers of SME bank are projects initiated in line with the government's economic stimulus programmes such as the industrial and agricultural restructuring programmes, the village fund and social investment schemes.

In making contribution to the government's objective of making entrepreneurs more innovative and competitive in the market, SME Bank considers that it needs to readjust its financial offerings to the evolving needs of SMEs, including the new technology-based businesses whose risk and credit profiles fall outside the scope of most financial institutions. SME Bank has extended the services beyond serving the needs of its traditional clientele by investing in early- and expansion-stage capitalisation through equity financing. SME Bank has adopted a proactive approach by establishing many forms of collaboration with the government and private sector organisations as well as financial institutions like KfW (Germany's state-owned development bank), financial institutions in the Asia-Pacific Economic Cooperation (APEC) region, various financial institutions in Japan, India, South Korea, China, Sri Lanka as well as other Asian countries to support and strengthen SMEs. In 2005, SME Bank focused on providing full network services from incubation, financing, mentoring, strategic alliances, to capital raising on the stock market (initial public offering or IPO support). Table 1 shows SME Bank's commitment to develop strategic clusters in line with the national strategic cluster policy.