Finnish Industry Investment ltd: an International Evaluation

Abstract

The Finnish Industry Investment Ltd. (FII) is a government owned investment company, which started its operations in 1995. Its core purpose is to stimulate the development of the Finnish venture capital industry particularly in those areas where market failure has constrained the supply of equity finance to high potential, small and medium sized Finnish enterprises. FII invests in young firms ‘indirectly’ via participating as a cornerstone investor in the new funds of venture capital firms, as well as investing ‘directly’ into Finnish firms. In common with other European venture capital industries, the Finnish industry grew very rapidly between 1995−2000. However, the Finnish market is still very small and under-developed by international standards, particularly, if the high knowledge intensity of the Finnish economy is taken into consideration. The limited availability of early stage (seed and start-up) venture capital to attractive young firms is the most urgent and persistent failure in the Finnish venture capital market. The primary policy goal of FII has been to address this problem by helping to set up, develop, and provide finance to venture capital funds investing in seed and start-up firms. However, FII has also has had a requirement imposed by government to operate profitably. This has lead the organisation to seek later stage investments in order to meet the profitability target. FII’s focus on profitability goal and its practice of investing on equal terms with private investors has lead to a reduction in its effectiveness in resolving the market failure in early stage venture capital. FII’s reduced impact has occurred at a time of worsening market conditions when the need for effective government intervention is highest. The main conclusion of the evaluation is that FII should focus its operations more directly on resolving remaining market failures in the supply of early stage venture capital. The evaluation also argues strongly that FII should concentrate on an indirect operating mode whereby it finances, and incentivizes by asymmetric profit sharing, private investment professionals to set up venture capital funds targeted at seed and startup stages. The same indirect approach should also continue to be used to resolve market failures in the provision of regional venture capital. Additionally, FII has a valuable role in helping channel foreign capital, including finance from EU, to Finnish early stage venture capital funds. Direct investments by FII to target companies should be avoided as an operating mode. Given the FII’s responsibility for addressing market failures, its performance measurement and governance systems should fully reflect this primary goal. The evaluation also finds that FII’s communication and collaboration with other actors in the Finnish innovation system should be improved. In addition to the need for improved coordination between the government special financing agencies, there is also a need for more effective direction and coordination of policy at the highest executive level, for example in ensuring the integration of enterprise policy and general financial policy to enable significant improvements in the environment for growth-oriented entrepreneurship in Finland.