Public Financing of Young Innovative Companies in Finland

Abstract

The access of young innovative companies in Finland to professionally delivered sources of start up and early growth finance has improved significantly over the last decade. Despite this long-term positive trend, there are major challenges that still remain. Finland’s world class innovation reputation is not yet matched by equivalent commercial success for its innovative products and services despite many recent successes. At the start of the present century, the international decline of the financial markets following the bursting of the dot.com bubble caused serious damage to technology investors in Finland given the immature venture capital infrastructure at the time. Promising but early stage enterprises were particularly vulnerable to negative market sentiments. At this crucial time, Tekes, Finnish Industry Investment Ltd., Finnvera, and Sitra all directly addressed elements of the financing problem for entrepreneurs. Each agency helped to fill the ‘financing gap’ experienced by young but high potential Finnish firms with a range of targeted financing instruments. Public policy enacted through these agencies has been extremely valuable, and probably essential, in helping many new young innovative companies to emerge and in supporting existing young enterprises to survive the hostile first years of the twenty-first century. However, over the next five to seven years, Finland needs to further develop the financing of young innovative companies to reflect current and new challenges, and to ensure the continuing effectiveness of the Finnish financing system across different stages of the economic cycle. A number of recommendations are made in this report. First, Finland should set an ambitious goal to make Finland one of the most vibrant investment markets in the world for investing in and creating and capturing value from young innovative companies. This market should be privately led and provide clear incentives for professional investors as well as for the entrepreneurial owner-managers to invest in and create and capture value from young innovative companies. Second, the government should give clear signals of commitment of making high growth entrepreneurship and private risk taking valued and rewarded in Finland. Tax incentives could be used to catalyze entrepreneurial activity and private investment and to reinforce this signal. Third, Finland should take an open and global approach and leverage all available financial and human resources to the nation’s long term advantage regardless of their origin. Fourth, Finland should be determined in implementing this market-centered strategy. Accordingly, the government should remove unnecessary duplication, fragmentation and unwarranted growth of public services. The improvement of inter-agency coordination and a greater customer orientation in the provision of public finance should be a priority. The state’s primary responsibility is to create the long-run conditions for the optimal working of competitive and efficient markets. Actions by the state that replace or substitute for the private and fully commercial actions of professional investors should be taken with great caution and should, at best, be viewed as temporary.