Venture capital funds in transition countries: An empirical study of Bosnia and Herzegovina

Abstract

Small and medium sized enterprises (SMEs) are the dominant form of business organization in both developed and developing economies [Harvie et al. (Small and medium enterprises’ access to finance: evidence from selected Asian economies, 2013; OECD (Financing SMEs and entrepreneurs: An OECD scoreboard final report, 2013)] as they play a major role in economic development [IFC (Scaling-up SME access to financial services in the developing world. World Bank, 2010)]. They account for 95–99 % of enterprises, depending on the country, and are responsible for 60–70 % of net job creation in OECD countries [OECD (Financing SMEs and entrepreneurs. OECD, 2006)]. “Across the EU28 last year, some 21.6 million SMEs in the nonfinancial business sector employed 88.8 million people and generated €3666 trillion in value added. Expressed another way, 99 out of every 100 businesses are SMEs, as are 2 in every 3 employees and 58 cents in every euro of value added. This illustrates how critical SMEs are and reflects the value of the present report” [European Commission (A partial and fragile recovery, 2014, p. 6)]. In Bosnia and Herzegovina (B&H) where this research has been conducted, SMEs represent around 99.5 % of enterprises. However, when analyzing the state of the SME sector, we used a variety of sources, and we concluded that the data on the number and size of companies are different depending on the source. One of the main problems that SMEs are facing in transition countries is access to favorable external sources of financing [OECD (Financing SMEs and entrepreneurs: An OECD scoreboard final report, 2013); IFC (Scaling-up SME access to financial services in the developing world. World Bank, 2010); Balling et al. (Financing SMEs in Europe, SUERF—The European money and finance forum Vienna, 2009); Burk and Lehmann (Financing your small business. Sphinx Publishing, 2006)]. All companies are facing this problem, regardless of whether they are companies that already have a well-developed business or those that are start-ups. In particular, this problem relates to SMEs in early stages of development (start-up companies) that do not have sufficient funds for the activities of research, development, and commercialization of innovations. It is also extremely difficult to find sources for funding research, development and innovation projects. Research evidence suggests that VC is one of the most reliable sources of funding for new ventures. However, VC is not suitable for the vast majority of new ventures or SMEs [Smith (Strategic Change 19(7–8):285–292, 2010)]. It is attractive for a specific type of new venture—one that has high growth potential and typically is characterized by a high level of risk. The significance of VC for the development of the company is also indicated by the fact that in the period between 2000 and 2008 more than one-third of companies around the world used funds from the VC that were not located in the country where those companies were [Schertler and Tykvova (Venture capital and internationalization, 2009)]. However, equity financing was severely affected by the financial crisis. A sharp decline in VC and growth capital occurred between 2008 and 2009. In 2010, equity funding had not recovered to its 2007 level, despite an overall positive economic trend. Countries with high growth rates for VC in 2011 include Denmark (+80 %), Hungary (+62 %), the Netherlands (+56 %) and Canada (+30 %). On the other hand, a strong decrease was observed in Portugal (−80 %), New Zealand (−61 %), Switzerland (−37 %), Sweden (−25 %) and Ireland (−11 %) [ОЕCD (Financing SMEs and entrepreneurs: An OECD scoreboard final report, 2013, p. 28)]. Against this backdrop a question arises as to what are the factors that discourage and slow down the formation of VC in the transition countries, and how to overcome these obstacles? In the recent economic history, transition countries represent a useful laboratory to assess changes of economic systems from one type to another [Estrin et al. (Effects of privatization and ownership in transition economies, 2009)]. B&H, Macedonia, Serbia and Montenegro are rarely found in samples of cross-country analysis of transition economies. Slovenia was the only ex-Yugoslavian country that was very often included in researches, while in case of Croatia the situation is different. Probably the most used examples of transition economies are those included in Transition Report of European Bank for Research and Development which in 2013 included 34 very different countries and group of countries [EBRD (Transition report 2013, stuck in transition. European Bank for Reconstruction and Development, 2013)]. The aim of this chapter is to analyze the possibilities and limitations of funding promising start up SMEs in B&H, through VC, as well as the interest of SMEs in using VC as source of finance. Our departure point was the following research assumption: Encouraging the formation of VC funds will contribute to the economic growth and development of B&H through the comprehensive support for the development of innovative SMEs, measured by the increase of the level of employment and the commercialization of innovations. Quantitative and qualitative research was conducted using a random sample method of 124 companies (122 SMEs) in Republic of Srpska (RS), one of two entities in B&H and 205 VC funds from Europe, with a semi-structured questionnaire and interviews in the period from July to November 2013. The chapter is organized as follows: Sect. 1 provides the conceptual understanding of VC funds, their role in the modern economy and VC Funds access in Western Balkans countries. In the Sect. 2 we elaborate the research methodology in which we combine both qualitative and quantitative approaches. The results and discussion are presented in Sect. 3, followed by the chapter summary in Sect. 4.