the climate for venture capital and private equity in asia

8/14/2019 The Climate for Venture Capital and Private Equity in Asia

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The Climate for Venture Capitaland Private Equity in Asia.

A study prepared for the Asia-Pacific Venture CapitalAssociation Round TableSingapore – January 2006

This report has been designed, researched, and written by a team ofINSEAD MBA students, led by Michael Prahl and Michael Rogero, under

the supervision of Professor Patrick Turner, Affiliate Professor ofEntrepreneurship

INSEAD, Asia Campus, 1 Ayer Rajah Avenue, SINGAPORE 138676



Introduction

1. INTRODUCTION

Venture Capital (VC), or in a wider sense Private Equity (PE), is an attractive financinginstrument widely used in the USA and in the countries of the European Union. While it iswell established in these areas it is less known and used in Asia.

Here the development of many enterprises, especially the young and technology-orientedcompanies, is hampered by a lack of risk capital. Also the restructuring of matureindustries or the transformation of state-owned enterprises could be accelerated bypromoting the use of PE.

In order to make Asian countries an attractive destination for VC it is necessary to providea favourable environment similar to that in the more mature markets. Policymakers and

practitioners need to understand the factors that influence the nature and performance ofnational VC systems.

This study sets out to give a comprehensive overview of the current state of theenvironment for VC in Asia. In pursuit of this aim, key factors that influence the emergenceand success of VC investments have been derived. These have been grouped into foursets of criteria describing the economic, legal, social and entrepreneurial dimensions of anenvironment conducive to the flourishing of VC activity.

An analysis of these dimensions across twelve Asian countries was carried out, based onempirical data as well as on interviews with experts, both policymakers and practitioners.

It is the aim of the study to deepen the knowledge of the VC markets in leading,predominantly East Asian countries. While the document does not try to create any kind ofranking among the studied countries, one important goal is clearly to present examples ofespecially well designed factors, and promote the adoption of best practice across theregion.

Without an appropriate economic, legal and social environment the overwhelmingsuccess of VC in many places around the world would not have been possible. Theauthors hope that this study will enhance the development of this financing alternative inAsia to allow it to bring its many benefits to the region



Study design

2. STUDY DESIGN

The design of the study draws heavily on work by Dr. Peter Schöfer and Dr. RolandLeitinger for the analysis of the VC environment in Central and Eastern Europe 1. Their

framework as shown in the table below will form the theoretical foundation for this paper.

Table 1: Framework for successful VC investments

In their own words, ” the framework tries to visualize and categorize the factors that are important for the emergence of venture capital investments, and are primarily derived from the special qualities and characteristics of venture capital itself (Leitinger, Strohbach,Schöfer, Hummel, 2000). This framework has been inspired by the evidence of successful venture capital environments such as the USA.”

They categorised the environment for successful venture capital investments in four basicdimensions:

1. Economic environment

“The economic environment consists of factors such as a sufficiently large market for companies to be able to achieve high growth in sales and profits. This supports the company in delivering adequate returns on investment for the amount of risk taken by the

1 Schöfer, Peter and Leitinger, Roland, "Framework for Venture Capital in the Accession Countries tothe European Union" . EFMA 2002 London Meetings. http://ssrn.com/abstract=314412

Social environment



Study design

investors and is a basic prerequisite to attract prospective investors. A successful economic framework also needs efficient and liquid financial markets and stock exchanges to provide an exit for the VCists. The quality of the economic and technical education of the labour force and the quality of the service industry, such as banking services, consultancies and legal services, but also the availability of the key production factors on qualitatively high levels add to the economic framework. ”

Overall our analysis considered 16 main and 46 sub-criteria for the economicenvironment.

2. Legal environment

“A consistent legal environment needs corporate and tax laws that encourage entrepreneurial activities, quick and efficient procedures for the set-up of new companies and a public administration that sees itself as a service to entrepreneurs rather than red tape. In addition to liberalised investment guidelines for institutional investors such as insurances or pension funds, simple, but severe admission and disclosure rules for listings of stocks and bonds on public exchanges have to be adopted .”

We analysed 5 main and 9 sub-criteria for the legal environment.

3. Social environment

“The social environment needs to create an attractive climate for researchers leading to interesting research results and a high number of patents. In order to achieve these goals,an intensive cooperation between universities and the economy has to be institutionalised.As another important part of the social environment, members of the society should be prepared to take risks both as entrepreneurs and as money investors. To a certain extent,corporate failures should be socially accepted. ”

The social environment was examined along 11 main and 23 sub-criteria.

4. Entrepreneurial spirit

“The creation of an entrepreneurial spirit is the last but not a less important dimension of a successful environment for VC. This spirit stresses the importance of cooperation in partnerships instead of the philosophy of “I am the master of my house”; a clear orientation towards internationalisation and growth instead of a “Small is beautiful” mentality; the preparedness of sharing both risks and profits with external risk capital partners; and features such as creativity, initiative, open-mindedness – simply the courage to be an entrepreneur. ”

This dimension was split into 4 categories (equal main and sub-categories).

Based on this framework, 82 criteria have been selected as indicators of the environmentfor PE/ VC. The data we used is taken from the IMD World Competitiveness Yearbook2005.



Study design

The report covers 12 Asian countries - Australia, China, Hong Kong, India, Indonesia,Japan, South Korea, Malaysia, Pakistan 2, Singapore, Taiwan and Thailand.

The table below gives an overview of PE investment in these countries in 2004.

PEinvestment in 2004 (US$m)

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000

Japan

Australia

China

Korea

India

Singapore

Malaysia

Pakistan

Hong Kong

Thailand

Indonesia

Taiwan

Other

Source: Asia Venture Capital Journal

Table 2: PE investment in Asia in 2004

2 As Pakistan is not included in the IMD Competitiveness study, we did not perform a quantitativeanalysis, but included a country profile based on alternative data sources



Key findings

3. KEY FINDINGS

Comparison to Western Europe and the USA

Taken as a whole, Asia already offers today an environment as favourable to VC/PEactivities as that prevailing in Western Europe and within reach of the Americanenvironment.

This overall positive picture, however, masks large discrepancies between countries,which are further increased when looking at individual dimensions or single factors.

Singapore, Hong Kong, Taiwan, Australia and Japan all come out of the analysis betterthan the Western European average. Most of this group outperform based on their abilityto create a more favourable economic and legal environment and by the entrepreneurialspirit in their countries (with the exception of Japan).

The positive entrepreneurial spirit is true also for a wider range of other Asian countries;however in those countries, “shortcomings” in the economic and legal environmentprevent a better overall position. Furthermore, the foundation of a strong socialenvironment with a focus on education, research and non-tolerance of corruption tends tobe weak.

Table 3 below shows the comparison of the overall environment in the Asian countriesunder study with Western Europe.

Asian Private equity environement compared with Western Europe

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

Indonesia

China

India

Korea

Thailand

Malaysia

WesternEurope

Japan

Australia

Taiwan

HongKong

Singapore

Table 3: Overall environment for Asian PE compared to Western Europe

Compared to the USA, only Singapore and Hong Kong have a more favourable climate forPE investment. Having said that, the relatively small size of their economies clearlydistorts the comparison somewhat.

Table 4 below shows the overall comparison with the USA.



Key findings

Asian Private equity environement compared with US

0.0 2.0 4.0 6.0 8.0 10.0 12.0

Indonesia

China

India

Korea

Thailand

Malaysia

Japan

Australia

Taiwan

USA

HongKong

Singapore

Table 4: Overall environment for Asian PE compared to US

PE environment grouped by countries

Our data led us to separate the Asian countries considered in this study into six groups,each one sharing a certain profile and often on the same point of the development curve.

Group 1: Singapore and Hong Kong are liberal economies with the right foundation ofinfrastructure, and predictable but not restrictive legal systems. Singapore seems to betterbalance the social challenges coming with high growth and frequent changes. Bothcountries are highly attractive to PE as hubs in Asia, but less so as prime destinations dueto the small size of their domestic economies.

Entr. Spirit

Social

Legal

Economic

Singapore

HongKongAsia Average

Table 5: Singapore & Hong Kong profiles along 4 main dimensions3

Group 2: Australia and Taiwan as medium size economies provide a good economicenvironment as well as functioning legal systems. They score high for social environmentand entrepreneurial sprit. They are clearly interesting markets for PE.

3 The farther out along each axis the reference point is situated, the better.



Key findings

Entr. Spirit

Social

Legal

Economic

Australia

Taiwan

Asia Average

Table 6: Australia & Taiwan profiles along 4 main dimensions

Group 3: Japan and Korea are large and important Asian economies that are not usingPE and VC enough to their advantage. While providing good infrastructure, too much

regulation creates obstacles to the financing of growth companies or the transformation ofindustries through PE. The legal framework in Japan is good, while certain inconsistenciesexist in Korea. Both countries are strongly focused on education and R&D, but while theirhigher taxes mirror the regime in other developed countries, the level of bureaucracy isexceptionally high. This is clearly not helpful in encouraging the low entrepreneurialculture in both countries. Overall, they are attractive PE markets due to their size andmaturity, yet they are tricky to navigate.

Entr. Spirit

Social

Legal

Economic

Japan

Korea

Asia Average

Table 7: Japan & Korea profiles along 4 main dimensions

Group 4: In Malaysia and Thailand the economic environment has steadily improved,and in addition these countries now provide a good legal framework. That said,enforcement remains an issue. The entrepreneurial spirit is good, although hindered bytoo much bureaucracy in Malaysia. Furthermore the extremely low focus on R&D andscience will hamper future competitiveness. Overall, these are currently markets withselective opportunities for PE and VC.



Key findings

Entr. Spirit

Social

Legal

Economic

Indonesia

Asia Average

Table 10: Indonesia profile along 4 main dimensions



Country Review – Australia

4. COUNTRY REVIEWS

4.1 AUSTRALIA

According to Thomson Financial Ventures 4, Australia accounted for 22% of PE invested inthe Asia-Pacific region in 2004, although the country represented only 6% of the region’sGDP. Within the Asia-Pacific region Australia is an attractive destination for PE, presentingmost of the characteristics of a developed country with a mature, tertiary economy, fittingthe ‘western’ standards dear to PE investors.

Economic environment

In terms of economic environment, Australia has the characteristics of a typical tertiary,mature economy. On the positive side, compared to the Asia-Pacific regional average, area high GDP per capita, strong business culture, powerful and efficient financial institutions,and state-of-the art physical, telecom and IT infrastructures. However, Australia iscomparatively less well positioned on a number of other economic factors. The large sizeof the country implies long transport times, and as a result PE professionals’ investmentstend to be geographically concentrated, the cities of Sydney and Melbourne accountingfor the vast majority of Australian PE managers and investment events 5. The high cost oflabour also negatively affects Australia’s attractiveness, although this is mitigated by acomparatively high productivity when measured against Asia Pacific region standards.Australia also ranks poorly with respect to the exposure of its economy to global markets,with low exports. It should also be noted that, quite astonishingly, Australia’s corporatefinance industry only compares at par with the average of Asia Pacific countries, with, forinstance, little investment incentives.

Legal environment

Australia’s legal environment is also typical of a developed, mature economy, with astate-of-the-art judicial system as appraised in terms of fairness and efficiency, but alsorelatively rigid with respect to labour regulation, impairing flexibility and hence thecompetitiveness of enterprises in global markets.

With respect to the legal framework relevant to PE, Australia has come a long way sincethe submission to the Review of Business Taxation by the Australian VC Association(AVCAL) in 1999. In particular, the VC Acts 2002 have, among other measures,introduced VC Limited Partnerships (VCLPs) and Australian VC Funds of Funds (AFOFs).Despite some imperfections pointed out by PE professionals 6 that the government hascommitted to tackle, these measures raised Australia’s laws to ‘Western’ standards.

4 as cited in Venture Capital and Private Equity in Australia Data File Series 2005 , Axiss Australia, May20055 Over the 1996-2000 period, Sydney and Melbourne together accounted for 115 of the 143 PE managerspresent in Australia, and for 1,218 of the 1,387 investment events that took place in Australia. Source:Advance Consulting & Evaluation Pty Ltd, as cited in The Australian Venture Capital Industry

Development and trends , Axiss Australia, January 20026 Among the issues cited by Baker & McKenzie in Private Equity Update, The VCLP legislation - A

mild case of the hiccups - Suggestions for a cure, Issue 13, May 2003, are “a lack of mutual recognitionamongst the [Australian] States of the limitation of liability of limited partners (LPs) and no legislationexisting in the territories, the absence of recognition of a limited partnership as a separate legal entity,

the over-ride of Commonwealth laws over State law to the extent of any inconsistency, a lack of clarityas to whether the limitation of liability of LPs covers all obligations and liabilities of the limitedpartnership, LPs participating in certain “accepted aspects of a limited partnership’s affairs without



Country Review – Australia

Social environment

On the social environment dimension, Australia compares very favourably in theAsia-Pacific region, with exemplary general, scientific and economic education, a flexibleand adaptable workforce, general values that support competitiveness in the economicarena, and very little corruption.

Australia has nevertheless room for improvement with respect to applied sciences, with inparticular a relatively low number of patents granted per inhabitant together with mediocrefunding of R&D projects and technological development, and a relatively inequitabledistribution of income

Entrepreneurial spiritWith respect to entrepreneurial spirit, Australia has a contrasted profile: although thenumber of entrepreneurs compares quite favourably to other Asia-Pacific countries (andeven more when compared to other areas), the business environment in Australia doesnot favour the development of entrepreneurship, with, in particular, relatively burdensometaxes. More generally, as summarised by the Global Entrepreneurship Monitor, “at afundamental cultural level, [Australia is] a non-entrepreneurial nation” 7.

On the positive side, the above mentioned report highlights cultural and social normsfavourably geared towards entrepreneurship, a satisfactory entrepreneurial capacity, andthe cultural diversity of the population as factors favouring a dynamic level ofentrepreneurship. The weaknesses pointed out are a negative perception ofentrepreneurship in the collective mind, a lack of access to finance for entrepreneurs (dueto a lack of funding channels for both early and growth stages, as well as to a lack ofunderstanding from entrepreneurs of how and where to obtain funds), a lack ofspecifically-focused, purpose-dedicated entrepreneurship training, of skill developmentand awareness in the formal education system, and, finally, inadequate governmentpolicy, in particular, burdensome tax and compliance costs, inadequately structured for

start-up and early stage business.

Summary and overall evaluation

In summary, Australia’s “macroeconomic” environment is comparatively better suited tothe development of an active PE industry than the Asia-Pacific region average, reflectingthe country’s Western-style capitalist economy; the benefits of higher wealth (implyinggood education, communication, technological infrastructure, judiciary system andgovernment efficiency), more than compensating limited economic dynamism and growth.

The three factors on which Australia falls most behind the Asian average are trade(exports of goods and trade to GDP ratio), labour force (esp. wage levels, hours worked)

and labour regulations.

becoming liable for the debts and obligations of the partnerships, and the agency principle which was

currently at the core of the partnership relationship in Australia”.7 Westpack GEM Australia, A Study of Entrepreneurship in 2004, Global Entrepreneurship Monitor 2004 , Kevin Hindle & Allan O’Connor, Swinburne University of Technology, 2005



Country Review - China

4.2 CHINA

The year 2004 witnessed robust growth and in particular exciting exit results for theChinese PE industry. Overall PE investment was USD 1,269m, up 28% from the previousyear. The slowdown in investing in the first half of 2005 is expected to reverse following

the recent clarifications from the State Administration of Foreign Exchange.

China’s size and huge disparities make it hard to come up with one comprehensivedescription of its socio-economic environment, in particular because the boomingprovinces in the coastal area differ strongly from the Chinese average.


Over the last few years, China has made huge efforts in improving its infrastructure. Yetdistribution of goods and services over long distances remains a challenge. Another areaof investment has been the telecommunications sector. With current spending at recordheights (1.9% of GDP), China can be expected to rapidly close the gap with other Asian

economies.A similar development can be observed in the IT area, albeit starting from a much lowerlevel. Despite the high popularity of the internet among the younger generation the actualnumber of computers per capita is very low and prevents the development of widespreadinformation technology capabilities. Besides the traditional and politically necessary highlabour intensity, this might be one reason for the low productivity of the Chinese economy.Even disregarding the large proportion of people employed in the agricultural sectorproductivity in both industry and the service sector remains low.

This highlights the need for a fundamental reform of the State Owned Enterprise (SOE)sector. Remarkably, SOEs consume 69% of China’s industrial assets and 55% of China’sbank loans but only produce 16% of China’s GDP. The more than twice as highproductivity in the coastal area shows China’s potential going forward. Another handicapfor China’s industry is its high energy intensity. China is among the least efficient users ofenergy posing a threat of margin collapse in the current environment of high energy prices.Yet the goal of lifting energy efficiency by 20% within the next five years looks ambitious.

China’s transition from a planned towards a free market economy has not only increasedits trade with the outside world but also opened it up to western management practicesand know-how. While still lagging its peers, China is now starting to provide better trainedpersonnel in areas such as marketing and finance. The country is very conscious aboutincreasing its access to both western markets and technology, and still providesinvestment incentives for foreign firms establishing operations there.

A huge challenge for PE operating in China is the state of its financial institutions,including both credit and capital markets. The often cited problem of non-performing loans(estimated at around US$500bn) just exemplifies the problems of low transparency andprofessionalism in its banking sector. The government is addressing this problem bytightening bank credit to reduce lending and by allowing foreign financial players to enterthe market. Likewise the equity capital markets in China are in disarray (e.g. bankruptbrokerage houses). Therefore for the time being Chinese companies rely for listings onforeign exchanges, and especially Hong Kong, Singapore and NASDAQ.

The issue of transparency is also highlighted by the impact the black market economy hason the regular sector.

Legal environmentThe legal environment in China is still under development, creating insecurity in the short



Country Review – China

• legal infrastructure• general management and people quality• corporate governance and shareholder protection• lack of transparency and widespread corruption• deficient domestic Chinese exit markets• the uncertain regulatory/governmental environment

Yet China is dedicated to improve its socio-economic environment with strong progressmade in lifting incomes, improving infrastructure, establishing a more comprehensiveregulatory framework and maintaining overall stability in a high growth environment.

The three main areas for improvement are the number of patents (total and per capita),productivity across all sectors, and bribery.



Country Review - Hong Kong

4.3 HONG KONG

Hong Kong has earned an international reputation as a leading commercial and financialcentre. Long the gateway to China and a central hub for investing in Asia, Hong Kong isone of the most open economies being home to 3,800 foreign companies, Asian

headquarters or regional offices. Its outward orientation is, however, reflected in lownumbers for domestic PE investment ($250m in 2004).


After some roller-coaster years the economy is booming again with 8.2% GDP growth in2004 and expected 6.5% in 2005.

Hong Kong is a service economy with 89% of GDP being created in this sector. It has ahigh level of productivity, especially in services, resulting from a hard-working and welltrained population, as well as a state of the art network of transport and communicationsinfrastructure connecting the many islands into one mega-hub.

A large number of employees is computer-literate and possesses good finance andmarketing skills, while the constant stream of immigrants from mainland China provideslow cost labour.

Hong Kong’s financial institutions are transparent and well functioning providing easyaccess to capital via banks, VC and the stock market, which has become a majordestination for company listings from all over Asia. The only limitation arises from the highinterest rate spread existing in HK even after the abolishment of the interest rateagreement in 2001.

Hong Kong is an open economy and a major trading hub. Yet its dependence on China isstrong and increasing.

Legal environment

Hong Kong is characterised by a business-friendly environment, the rule of law, free tradeand free flow of information. It has a simple tax system with low personal and corporatetaxes. Its legal framework encourages enterprises and protects shareholder rights. Itslabour market is highly deregulated and judged by businesses as most favourable, whilethe unemployment rate stands at only 5.5%.

Yet while in general conducive to business, the principle of low government interferencealso permits the existence of informal cartels in several industries, making marketcompetition less than equal.

Social environment

The Hong Kong government as well as its enterprises does not invest strongly in R&D.This is apparent both in the low amounts of money spent as well as the low number ofR&D personnel per capita. Consequently the number of patents granted to its residents isminuscule.

Yet funding for technological development is strong, which, together with a supportivelegal environment, makes Hong Kong a good place to commercialise technology.

Hong Kong has for a long time strongly focused on education, resulting in a well educated

work force, and specifically a high percentage of people with higher education. Economicliteracy in the population is high.



Country Review – Hong Kong

Hong Kong society encourages competitiveness and flexibility. Yet bribing and corruptionremain comparatively low. Hong Kong promotes a laissez faire form of capitalism, and asa result, shows the highest income inequality in Asia. While this provides a pool of lowcost workers, upward mobility is strong, promising participation in the wealth created.

Entrepreneurial spirit

As a result of its social environment, Hong Kong is most liberal and entrepreneurial. Itspeople share a positive view on globalisation and its managers are entrepreneurial toembrace the opportunities provided by it. The state does not discourage entrepreneurialactivity by either excessive taxes or a cumbersome bureaucracy.


Hong Kong is widely regarded as amongst the freest and most competitive economies inthe world. Its legal framework, functioning financial institutions, the entrepreneurial drive ofits managers and its location make it an excellent hub for PE in China and the rest of Asia.Despite its lack of strong R&D it also provides an attractive environment for venturebacked commercialisation of technologies including the potential exit via the stock market.

The three main areas for potential improvement are R&D, science and the number ofpatents, and inequality in income.



Country Review - India

4.4 INDIA

According to Asian Venture Capital Journal figures, India accounted for 7% of total PEinvestments in Asia in 2004 (>$1.2bn). The country has increasingly become an attractivedestination for PE capital over the last few years, given its promise of growth and its large

population base. It is still quite early in its cycle of development, and opening up to foreignmarkets and investment. The inflow of FDI is catalysing this change, however the pace ofthe change has, for many observers, been slow.


India is the largest democracy in the world and the second most populous country withover 1.1 billion people. Historically, India has been a protectionist and self-sufficientminded country. However, over the last fifteen years India has accepted the reality ofglobal business and started opening up to foreign markets and ownership. GoldmanSachs, in their October 2003 BRICs 8 report, estimated that India would be a topeconomic force to be reckoned with in the next 25 years or so 9.

India has exhibited a real GDP growth rate of 5.8% over the last 15 years with the realGDP growth in 2004 being 6.8%. The GDP per capita in absolute terms is currently ameagre US$580, although on a purchasing power parity adjusted basis, it is a morefavourable US$3,287. However, both these measures are low in comparison to the moredeveloped Asia-Pacific economies e.g. Australia, Japan, Hong Kong and Singapore.

Furthermore, by most measures, India has a nascent communication, transportation andlogistics infrastructure. There are currently 46 fixed lines and 24.7 mobile lines perthousand inhabitants. There are multiple mobile operators in the country and the industryis experiencing a very strong growth rate. India has a road network of 3.3 millionkilometres and a rail network of 63,100 kilometres. This is small in comparison to the USwhere the road network is 6.3 million kilometres and the rail network is 235,100kilometres.

The country has a vast labour pool of over 465 million workers, and the Indian institutionsproduce over 2.5 million graduates a year. This availability of talent has been recentlyutilised by the outsourcing and services industries, and these industries will continue toflourish for some time to come. Wages in India are still quite low compared to moredeveloped nations, however recent years have seen an up-tick in wages in the servicesindustry.

The Central and Provincial governments of India are focused on economic developmentand have moved to open up the economy and allow foreign ownership in various sectors.Economic reform, however, has been slow to come. This has in part been due to a weak

coalition in the central government.

The stock markets of India have kept pace with the positive note in the economy andcurrently have a market capitalisation of over US$ 400 billion with daily turnover aroundUS$ 1.5 billion. The Bombay stock exchange has performed handsomely and boasts ofover 5,600 listed companies, with over 60 companies with a market capitalisation of overUS$ 1 billion.

As a result of the attractive economic environment and booming capital markets, FDI hasentered India at record levels. The capital inflows in India in 2004 were US$5.3 billion.Furthermore, PE investing in India is also at record levels, with the pace of investment

8

Brazil, Russia, India, China9 Global Economics Paper No. 99: Dreaming with BRICs: The Path to 2050 , Goldman Sachs, October2003



Country Review - Indonesia

4.5 INDONESIA

Indonesia has gone through periods of investment growth and retraction due to asomewhat erratic past, and this is reflected in the numbers for PE investment - $650m in2003 vs. $70m in 2004. However, investors continue to return seeking to benefit from the

growth and development activities within the country. The recent past has seen a changeof government and renewed hope for changes to encourage more investment, whiledisasters continue to besiege the country and threaten its stability.


While the fourth most populous nation (and largest within Southeast Asia), Indonesia alsohas one of the least developed economic infrastructures. Physical distribution can beproblematic, with the transportation systems being under-funded. Moreover, thetelecommunications and information technology infrastructure are among the leastdeveloped in the region.

In total, Indonesia falls behind in technology, infrastructure, productivity, organised capitalmarkets, and corporate finance, when compared to the other Asian economies underconsideration in this report. Nevertheless, however lagging these factors are, there arestill powerful economic reasons for Indonesia to remain relevant. In particular,development of infrastructure, technologies, and mass consumer products provideopportunities to PE, in and of themselves. Furthermore, Indonesia’s large population andpossession of gas reserves are strong reasons for it to remain attractive for investment.

That said, investors must be wary of changing economic policies, such as the rise ininterest rates to prop up the Rupia in late 2005. Additionally, government subsidies on gasand diesel have recently been significantly reduced in order to avert fiscal collapse. In theshort term, this will continue to wreak havoc on industries struggling to deal with highercosts, price controls, and overall inflation. The ever-present black market in Indonesia willalso remain an obstacle for certain industries wishing to capitalise on the country’s largeconsumer base.

Legal environment

The legal environment in Indonesia is, not surprisingly, behind that of its neighboursacross many areas, including legal frameworks, taxation, and, most significantly, labourregulations and competition laws. The past couple of years have seen a number ofinitiatives to improve competition laws and labour regulations but with mixed results. Theelectricity industry was set back in 2004 when projected improved regulations wereabandoned. This leaves in question the time line that Indonesia will follow in its forwardprogress toward making foreign investment more attractive.

In the near term, it is safe to say that these problems will remain, but a large budget deficitand recent attempts at policy change reveal the understanding for action and will likelymake headway in the coming years. Until then, investors will need to use careful tactics toavoid the legal pitfalls.

Social environment

Indonesia remains an industrial and agrarian economy, reliant on its natural resources. Assuch, investments in social capital have lagged behind. Spending on education is amongthe lowest in Asia, with higher education (university and research institutions) receivingthe least attention. Of particular concern is the existence of high levels of corruption within

industry. This can create obstacles for investors at all levels, from regulatory actions tointeractions with local partners. Although there is an awareness of the problem, majorheadway is yet to be made in reducing it.



Country Review – Japan

surrounding R&D as well as income distribution within the society. In Japan, both thepublic and business sector invest the largest amount of human resources in R&D in theregion. As a result of these efforts, it has one of the highest ranking number of patents perresident as well as the number of patents enforced. Finally, Japan has one of the richestsocieties, with the percentage of income going to the lowest 20% being the highest in theAsia Pacific region.

However, while funding for technological development and technological cooperationbetween companies are at relatively satisfactory levels, the development and applicationof technology are not supported sufficiently by the legal environment. In addition, while theratio of student to teaching staff and tertiary education are high, the education system anduniversity system are not adapted to a competitive economy, and science and financeeducation are insufficient.


Japan is hampered by a low level of entrepreneurial spirit among its managers and anegative attitude toward globalisation, while at the same time having high levels of realcorporate taxes and bureaucracy.


In summary, Japan’s stable social economic environment, emphasis on R&D, and reformsin the economic environment are positive factors for the development of PE in the AsiaPacific region. However, bottlenecks in the legal environment and a low entrepreneurialspirit are areas which need to be assessed by firms when considering the allocation offunds and conducting due diligence of individual target companies .

The three factors where Japan falls most behind the Asian average are trade (exports ofgoods and trade to GDP ratio), entrepreneurial spirit, and real taxes.



Country Review – South Korea

4.7 SOUTH KOREA

South Korea has taken large steps in opening its doors to foreign investors after the Asianfinancial crisis. According to the International Herald Tribune, foreign investors own 47%of the top 10 conglomerate companies and 42% of the shares on the Korean stock

market, compared to 9.1% in 1997. There have also been some significant deals by PEfirms. For example, Carlyle made a US$1 billion profit when it sold a 36.6 % stake inKoram Bank to Citigroup for US$2.7 billion in 2004.


Since the Asian financial crisis (1997-1998), South Korea has undergone several reformsin the banking sector as well as developed global power houses in the electronics industrysuch as Samsung and LG. South Korea currently has a GDP of US$832 billion and a realGDP growth of 4.3% (both 2005 forecasts). Unemployment is at a relatively low level of3.5% (2004), while inflation is running at 3.7% (2005 forecast).

The country’s strong economic performance is driven by its strengths in IT andtelecommunications. With regard to telecommunications, South Korea has a highinvestment as a percentage of GDP as well as a high number of main lines per 1,000inhabitants in the region. On the IT dimension, the country boasts high computerownership as well as internet penetration.

However, issues around its labour force, business practices and financial institutionshinder the overall economic performance. The bottlenecks, especially for themanufacturing workforce, are low compensation levels and hostile labour relations. On thebusiness skill side there is a relatively low availability of finance skills. Concerningfinancial markets, financial institutions lack transparency and there is low marketcapitalisation compared to other countries in the region.

Legal environment

In general, South Korea scores well in the areas of tax collection, as evidenced by thecollected tax revenue as percentage of GDP. However, it lags behind other countries inthe region when it comes to having a general legal framework and in terms of labourregulations.

Meanwhile, specifically relevant to PE firms, recent moves by the government have"spread fears that the country is no longer friendly toward foreign capital," as it was put byJunn Sung Chull, head of the Seoul-based Institute of Global Management, quoted by theInternational Herald Tribune. In March 2005, South Korea required any shareholderacquiring more than 5% of a local company to disclose whether it intended to influence the

company's management, to declare the names of its largest backers, and to reveal how ithad raised the money for the investment. Separately, a bill, opposed by the government, ispending in the National Assembly to limit the number of foreign directors on the board ofdomestic banks.

Social environment

The country has a relatively strong social environment when compared with othercountries across the region. This is mainly supported by areas such as R&D and patents,the result of the country’s high expenditure in this area. As a result the country has one ofthe highest number of patents per resident as well as the number of patents enforced.However, areas such as science, number of qualified engineers, and the flexibility/

adaptability of the people when faced with a new challenge rate much lower, and need tobe further addressed



Country Review – South Korea


While South Korea has a high rating for globalisation, real corporate taxes andbureaucracy are considered to be the bottleneck in reaching its full potential.


In summary, South Korea has made much headway since the Asian financial crisis. It hasbuilt its strengths in IT and telecommunications, supported by a significant focus on R&D.However, PE firms need to monitor changes in legislation to observe whether South Koreawill continue to open its doors to deregulation, or revert back to a policy of protectionism.

The three most important areas of improvement for a better PE environment in SouthKorea are science, labour regulations, and the overall legal framework.



Country Review – Malaysia

4.8 MALAYSIA

Malaysia has a strong economic development track record amongst its Asian neighbours.The country’s long-standing efforts to evolve into a knowledge economy have resulted in afavourable environment for VC investment (up to US$590m in 2004), although challenges

do remain.


Malaysia’s economic environment, as it stands today, represents the average Asian profilein terms of urbanisation and availability of general infrastructure. A middle-income country,it transformed itself from 1971 through the late 1990's from a producer of raw materialsinto an emerging multi-sector economy where growth in recent years has been almostexclusively driven by exports, particularly of electrical and electronic products thataccounted for approximately 70% of all exports. It has also made significant investment intelecommunications though per capita availability of telecoms and computers is still low,possibly due to relatively low GDP per capita and a skewed income distribution.

Malaysia’s key economic challenge today is enhancing productivity growth. Though thecountry has competitive labour rates and overall comparable industrial conditions, labourproductivity in industry and services is below its Asian peers. Given that manufacturingaccounts for a large share of the economy and some of its Asian neighbours have comeup as strong competitors, there is a need for Malaysia to urgently address this issue.

The government appears cognisant of the changes required and committed toimplementing these. In 1991 the Malaysian Government launched its Vision 2020statement that outlined a broad plan for Malaysia to achieve developed economy statusby the year 2020. The policy sets privatisation as a cornerstone of national development,while retaining an emphasis on foreign investment to sustain industrialisation.

Another challenge for PE investors is Malaysia’s relatively small capital markets, with lowmarket capitalisation and small number of listed companies. The government hashowever announced several initiatives in its 2005 budget that seek to address the aboveissues, including its focus on privatisation that may generate some opportunities for PEdeals. In order to attract more foreign direct investment and strengthen the capital marketsit has relaxed foreign ownership limits in the stock brokering sector; five foreign stockbroking firms were given licenses to operate without local partners in March 2005. TheMalaysian government will also allow 100 % foreign ownership of VC companies and fiveglobal fund managers will be allowed to operate in Malaysia without local partners.

Legal environment

Price controls are one area of concern for Malaysia. Considering the sustained high oilprices, price controls leave energy intensive industries with few options to combat risingcosts. Otherwise, the legal environment is relatively close in other respects to similarAsian nations.

Social environment

Malaysia remains a largely industrial economy though it has been taking steps in recentyears to develop its high technology services base through initiatives like the MultimediaSuper Corridor. Lack of human capital in the knowledge based economy, however,remains its key challenge in creating this shift. Malaysia has the highest expenditure onpublic education amongst its Asian peers but levels of tertiary education remain well below

average. In its 2005 budget, the government has identified development of human capitalas a catalyst for future growth and one of the four strategic areas of focus.



Country Review – Malaysia

Value creation through innovation and R&D also remains extremely low. Thoughtechnological adoption is fairly high and Malaysia is home to a number of electronicsmanufacturing companies, local corporate spend on R&D is significantly below regionalaverage. This presents limited opportunities for VC type of activities.


The entrepreneurial environment is at par with the Asian average in terms of generalinfrastructure, business skills, and level of corporate taxes. However, bureaucratic redtape and bribery levels need to be improved to provide greater stimulus to entrepreneurialactivity.


Malaysia is one of the more developed regional economies, and though severalchallenges remain, the government’s commitment to making the economy a moreknowledge based one holds promise for PE, and particularly VC type of activity. Thegovernment recognises that foreign capital is essential to grow further, and in order toattract this, has taken several initiatives targeted at improving the overall businessenvironment, making government business-friendly, and increasing foreign capital flowsthrough direct initiatives like 100% foreign ownership of VC and support for APVCAactivities.

The factors in which Malaysia most falls behind the Asian average are R&D and scienceand number of patents, as well as development of GDP (GDP, gross domestic investmentand gross domestic saving per capita).



Country Review – Pakistan

4.9 PAKISTAN

Pakistan, while being situated next to a booming India, has been relatively elusive incapturing the headlines in the PE and VC arena. However, recently there have been somelimited but key events such as Temasek Holdings, Singapore's state-owned investment

company, almost tripling its stake in Pakistan's NDLC-IFIC Bank Ltd. (NIB.KA), or NIB,from 25% to 72.6% for a total cost of US$57 million.


Pakistan, a nation of 163 million people and a literacy rate of 49%, has exhibited anattractive economic environment for investing over the last few years. The reported GDPwas US$ 69 billion in 2004, and it exhibited a real GDP growth rate of 6.1%, whileindustrial growth increased at 13.1% for the same period. Pakistan boasts of a labourforce of 45 million and 8.3% unemployment, but substantial underemployment. The PPPadjusted purchasing power is $2,200 per capita. The Government expects a GDP growthrate for 2005 of 7.5%.

Though a country with limited urbanisation and general infrastructure, the forces ofchange in Pakistan are leading the country on a path of rapid industrialisation and growth.The telecommunications industry and IT industry have shown remarkable penetration withnow over 10 million mobile phone user base and over 1.5 million internet users.Furthermore, Pakistan has a network of over 4 million fixed lines in the country.

Despite a shortage of natural resources in some parts of the country, overall, Pakistan is acountry rich in natural resources deriving most of its energy needs from hydro-electricgeneration, natural gases and imported crude oil.

In recent years Pakistan has witnessed a booming banking and real-estate sector drivenprimarily through banking reform, increased foreign ownership, and low interest rates. Thegovernment has driven the privatisation of a number of leading commercial bankinginstitutions. Pakistan has also expanded its charter of Islamic banking, which lendsprimarily through an equity ownership programme, a concept similar to PE.

The capital markets have also exhibited an increase in activity level. The Pakistani stockmarkets have performed very well over the last few years and currently boast a marketcapitalisation of over US$30 billion. The number of new equity offerings has increasedfrom 3 in 2001 to 17 in 2004. Furthermore, the commercial banks and lending industryhave doubled the amount of credit extended in 2004, the total figure growing from US$2.9billion in 2003 to US$5.9 billion in 2004.

As a result of the attractive economic environment and burgeoning economy, Pakistan

has witnessed a significant increase in reported FDI. The foreign direct investment hasincreased from US$322 million in 2001 to US$1,524 million in year ended June 2005.Furthermore, multiple investment firms and private investment enterprises have reportedlya ‘war chest’ of over US$500 million, spread over notable international firms such as Actis,Emerging Markets Partnership, Temasek, Shuaa Capital among others.

Legal environment

Pakistan’s legal system is based on the English common law system, with provisions toaccommodate for the status of Pakistan as an Islamic state.

Reportedly the overall legal environment in Pakistan is modest, with a backlog of pending

courses in all level of courts. The current government has introduced legal reform but hasyet to make a significant improvement in the environment. As a result, business dealingsare primarily on the basis of trust and personal relations. However, at the same time, the



Country Review – Pakistan

government has introduced major corporate reforms and is in the process of introducinglaws for PE, aimed at promoting the industry.

Pakistan’s legal position offers protection to minority shareholders and foreign ownership,and except for a few strategic industries, is largely unrestricted. According to abenchmarking of business regulations conducted by the IFC, Pakistan scores higher thanthe OECD index on all dimensions used to assess investor protection. Included in thesedimensions are: disclosure, liability for self-dealing, ease of shareholders suit.Furthermore, capital repatriation and bilateral tax treaties make Pakistan attractive forforeign investors.

The labour environment is Pakistan is recovering from the British legacy as well as a‘nationalised’ economic history. Most private enterprises have a reasonable amount offlexibility in their operations.

Social environment

The social environment is conducive to business development and enterprise growth.With a relative abundance of professionals, including doctors, engineers, lawyers andaccountants, Pakistan offers an opportunity for scalability up to a mid-size enterprise. Thecountry has yet to see the emergence of global level players as seen in China or India, butboasts of large employers in the natural resources and public utilities sectors. The privatesector now has some notable players with large enterprises, especially after the recentprivatisations.


Historically, given the lack of employment opportunities due to a stagnant economy forover a decade, entrepreneurship was the only viable course of economic survival. As aresult, there is a wide network of small private enterprises. This has resulted in a strong

bent towards entrepreneurship in the economy. However, given the excessive burden ofbureaucracy on SMEs, most of them have operated on an ‘unreported basis’. As thegovernment now focuses on simplifying red tape, more of these enterprises are enteringthe net of the reported economy. These entrepreneurs represent an attractive labour poolas well as significant opportunities for growth.


While definite trends in growth relative to the PE and/or VC market have still to beobserved, the Pakistani market shows a positive platform being formed. This is not onlyevident from the already existing high investor protection and large entrepreneurcommunity, but also through the reforms being driven by the government.



Country Review – Singapore

4.10 SINGAPORE

Singapore is clearly one of the most overall competitive countries in the world, #3 on theglobal competitiveness list of IMD, and the second most competitive in Asia, having beendisplaced from #2 globally to #3 by Hong Kong in 2005. Singapore presents itself well on

almost all factors of importance to the PE markets, which are under the control of thegovernment. The few shortcomings are mostly a result of the city-state’s limited populationand territorial size. As a result, Singapore’s importance for PE lies predominantly in itsfunction as a regional hub with, however, occasionally large investment opportunities aswitnessed in 2004, when they contributed to the large size of PE investment in that year(more than US$1.2bn).


In the dimension of economic environment Singapore is second in Asia only to Hong Kong.Singapore does especially well in factors such as productivity, compensation, labourrelations, and working hours. The labour force has a productivity level second to none in

the region, an industry productivity rated second in the world, and is working significantlylonger hours than its peers in Europe. Labour relations are also good. In factors morechallenging to Singapore - GDP size (PPP), total employment, and GDP total - the smallsize of the city state hampers its place in the rankings.

The capital markets of Singapore are also highly regarded, with financial transparency,cost of capital, and availability of credit similar to the United States. However, the totalnumber of companies listed on its stock exchange and low total trading is a concern as anavenue for private exits. Three items of note to the VC community about Singapore’scapital structure are: 1) the wide interest rate spread, 2) the high ability to self-finance, and3) the high investment incentives in Singapore. The interest rate spread of 4.90% putsSingapore near the bottom of the world. A large proportion of entrepreneurs able toself-finance, the largest in Asia, along with aggressive incentive programmes, maypartially explain the general perception of a dearth of seed capital in Singapore.

Economically, Singapore offers a positive environment in terms of labour, as well as atransparent and advanced financial system. However, the country is hampered by itssmall size, and limited market.

Legal environment

Singapore’s perceived government efficiency is the world’s best, combined with which are,a strong legal framework and competition laws. The low maximum corporate tax rate of20%, combined with low personal tax rates, offers considerable incentives to invest inentrepreneurial activities.

The only category where Singapore does not have a strong showing is total collected taxrevenues, again due to its limited size and population.

Social environment

Strongly influenced by traditional Chinese Confucian philosophy with its stress oneducation, it is not surprising that Singapore ranks very high in societal values andeducation. This is mirrored at the government level with the country’s reputation for lack ofcorruption, which ranks near the top in the world.

Singapore also stands out for its educational system and its focus on mathematics,

technology and science. The country ranks first in the world for technical graduates. Thisis followed on with a very strong tertiary programme with 45.4% of the population between25-34 having attained tertiary education. Singapore emphasises development and



Country Review – Singapore

application of technology, funding for technical development, and science in schools. Theeducational system is clearly seen to be meeting Singapore’s competitive needs

The social fabric of Singapore is very conducive to creating a strong technical base forinnovation and development, and can be seen as one of the premier places in the worldfor a social environment conductive to VC.


Under this lens, Singapore has both strengths and weaknesses. For strengths, theSingapore government is ranked top in the world for minimising bureaucracy that hindersbusiness. Society’s view of globalisation is very positive, and the real overall corporate taxrate is excellent on a global comparison. However, there is a general question of whetherentrepreneurship is widespread among managers. In order to combat this perception, thegovernment has launched a number of initiatives to spur entrepreneurship, such as theheavy incentives mentioned. The lack of entrepreneurship is likely the result ofeducational training over the last 20 years, during which Singapore was primarily seen asa hub for multinationals needing cadres of well trained managers, but not entrepreneurs.The current period needs a much more entrepreneurial society, and creating such asociety is clearly a very high priority of the Singapore government.


Under the criteria considered as part of this research project, Singapore clearly ranks verywell, with an economic, legal and social environment very conducive to entrepreneurialventures. While Singapore has to face the realities of its small size, and the challenge ofinstilling more entrepreneurial activity within the country, all of the necessary ingredientsare already present. The underlying system is transparent and very supportive ofentrepreneurship, and as Singapore rises to the challenge of changing economics of Asia,it is likely to spawn a number of new enterprises leveraging the country’s natural position

as a hub in Asia, and the education and technical skills of its workforce.

The only areas where Singapore ranks below the Asian average are income distribution,capital markets, and entrepreneurial managers.



Country Review – Taiwan

4.11 TAIWAN

Massive amounts of foreign direct investments in Taiwan, beginning in the 1950s andtotalling US$ 59.4 billion over the period 1952 – 2004, helped propel Taiwan to be one ofthe early “Asian Miracles”. Over the years, Taiwan developed into a leading high-tech

centre in Asia. In 2005, while there is some concern about a hollowing out of Taiwan’seconomy as many indigenous industries move operations to China, the climate for foreigninvestment remains one of the best in Asia. Yet the PE investment amounts in Taiwanremain minuscule (less than $50m in 2004).


Taiwan has a well-developed and extensive general infrastructure which ranks almostequal to the United States on a number of infrastructure related criteria, includinginfrastructure maintenance, and development and distribution infrastructure. Due to itsgeographical location, the country has developed itself into one of the world’s leadinglogistics hubs.

Taiwan’s telecommunications sector is also second to none. Deregulation of the industryin 1996 led to vast amounts of investment. Currently the country enjoys one of the world’shighest penetration rates in both fixed and mobile phones, and the highest number ofcellular subscribers in Asia, with more cellular accounts than inhabitants 11 .

Taiwan is a high-tech focused economy, and the country enjoys high levels of labourproductivity, especially in the services sector where Taiwan ranks the best in Asia and veryclose to the United States. Maybe surprising, however, is the fact that Taiwan’smanufacturing productivity ranks below many countries in Asia, and below the worldaverage. This can be partially explained by the numbers of manufacturing entities whichhave moved to China, leaving less able competitors behind. Labour relations, workermotivation, and working hours are all near the top for Asia

The educational level is relatively advanced, especially in critical business areas such asfinance and marketing. However, the availability of workers with key skills, includinginformation technology, finance skills and international experience, all only rank towardthe middle of the pack in Asia.

With regard to the financial environment, Taiwan is very close to the world average interms of financial institution transparency, access to capital markets and investmentincentives, though some way behind the global leaders of Hong Kong and Singapore.Even so, Taiwan has one of Asia’s largest VC industries, and one of the region’s mostadvanced capital markets.

Legal environment

With entry into the WTO, Taiwan has further strengthened the overall environment forinvestment through the removal of the majority of limits on control of companies, andgeneral opening of almost all industries to competition 12. Within Asia, Taiwan ranks nearthe top for competition and product and service liability laws. However in terms of therights of shareholders and labour regulations, Taiwan is only in the Asian midfield.

Taxes in Taiwan are relatively favourable, with a maximum corporate tax rate of 25%. Thereal personal tax rate is also considerably below the world average. However, total

11 The Economist Intelligence Unit, Asia: Profound developments this year in telecoms sector, December

18, 200212 2005 Investment Climate Taiwan, http://hongkong.usconsulate.gov/ustw/economic/2005



Country Review – Taiwan

collected tax revenue is toward the bottom of the Asian league table, near Indonesia andIndia.

Social environment

Taiwan has traditionally been one of the world’s leading high-tech hubs. R&Dexpenditures per capita are above average, and the country churns out an extremely highnumber of patents every year. Indeed, compared to its Asian neighbours, Taiwanproduces by far the highest number of patents per year. The country holds the fourthhighest number of US patents of any country in the world. However, the current level ofR&D spending presents a mixed message on development, with Taiwan ranking far belowthe average in the world, or indeed Asia, in total research and development spending.

The educational system is well developed, with a leading curriculum in science andtechnology, and total higher education achievement. The overall societal bias towardpositive societal values, hard work, and high flexibility are all positive for VentureCapitalists. In addition, the educational system is above average, and care is taken toteach business skills to students early in their life. The share of population with auniversity degree is above average.


Historically, Chinese people have been among the most entrepreneurial in the world. Thisis very much the case for Taiwan, and the government has decreased its control overinvestment and foreign trade during the last few years 13. Bureaucracy is also relativelylow, with Taiwan being one of the best places in Asia in this respect.

In general, the population has a very positive attitude towards globalisation and foreigninvestment as a whole, as it is widely understood that it is these phenomena that havefuelled Taiwan’s growth over the last 40 years.


In summary, Taiwan offers a very attractive environment for PE investments. Although inrecent years, venture funds have decreased, as China began to draw away much ofTaiwan’s industry and challenge its key areas of competitiveness 14 . While itscompetitiveness has been challenged, Taiwan’s government has adapted and openeditself up, solidified its legal system, and worked to move the company further up thetechnology ladder to remain an attractive base of operations.

The three areas with most improvement potential are science, trade, and shareholderrights protection.

13 CIA Factbook. Taiwan. http://www.odci.gov/cia/publications/factbook/geos/tw.html#Econ 14 www.tvca.org.tw/indexe.htm



Country Review – Thailand

4.12 THAILAND

Low wages and high productivity, coupled with infrastructure and governmental support,make Thailand an interesting prospect for PE activity, yet some key elements still remain toprevent this prospect from being fully exploited. These include a fairly small economy, unclear

educational reform, and volatile oil prices. Nonetheless, high growth, governmental policies,and external factors appear to be leading Thailand in a positive direction, potentially attractiveto PE firms. This is reflected in the fact that investment by PE firms increased to US$230m in2004.


Thailand’s underrated labour force, heavily industrial base, and under-utilised capital marketsall present opportunities for the Thai government to continue introducing improvements aimedat making Thailand a more attractive opportunity for PE investing.

Despite the strong international focus on cheap Indian and Chinese labour, close examinationreveals Thailand to be as good or better on all labour and productivity measures. In fact, withcompensation levels close to those of India and China but with higher productivity, Thailandmay have advantages not fully exploited. Considering the 2.1% revaluation of the Yuan in July2005, and continued pressure for more such moves, labour cost differences will likelycontinue in Thailand’s favour. And, although Malaysia looks similar or superior in most ofthese same aspects, higher compensation levels may cancel out Malaysia’s advantages.

However, industry, which makes up the second largest sector of the economy, remains highlyreliant on energy. This is further exacerbated by current high oil prices, recent changes to fuelsubsidies, and the limited ability of companies to pass costs on to consumers.

Although Thailand’s capital market infrastructure, business support, and financing are close tothose of any other Asian countries, utilisation and total value remains low. Yet the adoption oftax incentives in 2001 by the Thai stock exchange led to strong interest, with currently abacklog of companies wanting to list. While this in the short term limits exit opportunities forPE firms, future conditions may be greatly improved if capital market continues to get better.

Legal environment

The legal environment of Thailand reveals few real differences from its other Asiancounterparts; only labour regulations stand out. Here indices for costs for hiring and laying offas well as employment complexities, such as difficulty in hiring, laying off, and affectingsalaries, put Thailand above all Asian countries except Hong Kong and Singapore.

Social environment

Lack of innovation and the presence of real and perceived corruption continue to limitdevelopment within Thailand. In particular, R&D produces few advances, while spending andeducation for basic science and R&D remain very low.

Instead, the government and local companies remain open to partnerships, which bringtechnologies to Thailand in many areas of manufacturing and production. Indeed, the countryhas targeted the automotive and electronics industries as key growth drivers with greatsuccess. This continues to improve the technological environment, and increases thedemand for further improvements in education.



Country Review – Thailand

Even so, corruption remains a problem, as in several other Asian countries. These activitiescontinue to complicate the competitive environment and add volatility to any foreigninvestment.


Although neutral in the ranking in comparison to its Asian counterparts, Thailand andMalaysia are the only low labour cost countries that stand out as entrepreneurial in nature. IfVC markets could be developed in Thailand, these characteristics would become morepronounced. Until then, these qualities will remain under-utilised.

In addition, most PE firms will be concerned with the level of bureaucracy, as well ascorruption, when evaluating any deal. Yet considering that Thailand has a better record inboth areas when compared with China, the country can market itself as a low cost option withgreater stability and efficiency.


Overall, Thailand remains competitive especially because of its low cost labour base.However, the largely industrial economy remains volatile to high energy prices, and basicR&D lags far behind. High energy prices may open up distressed opportunities if localcompanies cannot take appropriate measures.

The factors in which Thailand could most improve the environment for VC and PE are R&Dand number of patents, investment in IT & Telecom infrastructure, and development of GDP(gross domestic investment and gross domestic saving per capita).



Appendix 1

Economicenvironment Explanation (Part 1)

• Urbanization • Cities drain national resources (low) vs. do not drain national resources .• Infrastructure maintenance and • Infrastructure maintenance and development is not adequately planned and

development financed (low) vs. is adequately planned and financed .• Distribution infrastructure • Distribution infrastructure of goods and services is generally inefficient (low)

vs. is generally efficient .

• Investment in telecommunications• Investment in telecommunications in % ofGDP

• Telephone lines • Number of telephone lines per 1,000 inhabitants• Cellular mobile tel. subscribers • Number of subscribers of cellular mobile telephones per 1,000 inhabitants• Computers per capita • Number of computers per 1,000 people• Internet users • Number of internet users per 1,000 people• New information technology • Implementation of new information technology does not meet business

requirements (low) vs. meets business requirements.• Availability of information technology • Qualified information technology employees are not available in your

skills country (low) vs. are available .• Overall productivity (PPP) • Overall productivity (at PPP) as GDP / person in USD• Labour productivity (PPP) • Labour productivity (at PPP) as GDP / person in USD• Productivity in industry • Productivity in industry as GDP / person employed in industry, in USD• Productivity in services • Productivity in services as GDP / person employed in services, in USD• Compensation levels • Total hourly compensation for manufacturing workers in USD

(wages + benefits)• Working hours • Average number of working hours per year• Labor relations • Labor relations are generally hostile (low) vs. are productive .• Worker motivation • Employees do not identify with company objectives (low) vs. do identify

with company objectives .

• Energy intensity • Amount of commercial energy consumed for each $ of GDP in Kilojoules• Electricity costs for industrial clients • Electricity costs for industrial clients in USD per kwh• Availability of finance skills • Skills in finance are not available in your country's labor market (low)

vs. are available .• International experience • Management usually has no experience in international business and

postings abroad (low) vs. has significant experience .• Marketing culture • A dynamic marketing culture does not exist in your country (low) vs. exists .• Financial institutions transparency • Financial institutions do not provide adequate information about their

activities (low) vs. provide adequate information .• Cost of capital • Cost of capital hinders business development (low) vs. does not hinder

business development .• Availability of credit • Credit does not flow easily from banks to business (low) vs. flows easily

from banks to business .• Availability of venture capital • Venture capital is not easily available for business development (low)

vs. is easily available for business development .• Ability to self-finance • Companies do not generate enough cash flow to self-finance their

investments (low) vs. do generate enough cash flow to self-finance .• Interest rate spread • Interest rate spread (lending rate minus deposit rate)• Investment incentives • Investment incentives are not attractive to foreign investors (low)

vs. are attractive to foreign investors .• Access to local capital markets • Access to local capital markets is restricted for foreign companies (low)

vs. is not restricted .



Appendix 1

Economic environment Explanation (Part 2)• Stock markets • Stock markets do not provide adequate financing to companies

(low) vs. provide adequate financing .• Stock market capitalization • Stock market capitalization in billion USD• Value traded on stock markets • Value traded on stock markets in USD per capita

• Listed domestic companies • Number of listed domestic companies• Insider trading • Insider trading is common in the stock market (low) vs. is not common .• Corporate boards • Corporate boards do not prevent improper business practices in corporate

affairs (low) vs. prevent improper business practices .• Shareholder value • Shareholder value is not efficiently managed (low) vs. is efficiently manage• Cross border ventures • Cross border ventures cannot be negotiated with foreign partners without

government intervention (low) vs. can be negotiated without intervention .• Access to foreign capital markets • Access to foreign capital markets is restricted for domestic companies (low)

vs. is not restricted .• Foreign and domestic companies • Foreign and domestic companies are not treated equally (low)

vs. are treated equally .• Foreign financial institutions • Foreign financial institutions do not have access to the domestic market (lo

vs. have access .• Real GDP growth • Real GDP growth in % change in national currency• GDP/capita (PPP) • GDP/capita (PPP) in USD• Gross domestic investment/capita • Gross domestic investment/capita in USD• Gross domestic savings/capita • Gross domestic savings/capita in USD• Share of industry in GDP • Industry in % of GDP• Share of services in GDP • Services in % of GDP• Exports of goods • Exports of goods in % of GDP• Trade to GDP-ratio • Trade to GDP-ratio as (Exports + Imports)/(2*GDP)• Integration into regional trade • Integration into regional trade blocks does not provide enough access to

blocks foreign markets (low) vs. does provide enough access .• Black market economy • Black market economy impairs economic development in your country (low)

vs. does not impair economic development .

Legal environment Explanation• Collected total tax revenues • Collected total tax revenues as % of GDP• Real personal taxes • Real personal taxes discourage people from working (low)

vs. do not discourage people .• Average corporate tax rate on • Average corporate tax rate on profits as % of profit before taxes

profits• General legal framework • Legal framework is detrimental to your country's competitiveness (low)

vs. is not detrimental .• Legal regulation of financial • Legal regulation of financial institutions is inadequate for financial stability

institutions (low) vs. is adequate for financial stability .• Rights and responsibilities of • Rights and responsibilities of shareholders are not well-defined (low)

shareholders vs. are well-defined .• Confidentiality of financial • Confidentiality of financial transactions is not guaranteed (low)

transactions vs. is guaranteed .• Competition laws • Competition laws do not prevent unfair competition in your country (low)

vs. do prevent unfair competition .• Product and service liability • Product and service liability over-restricts business (low)

vs. does not over-restrict business .• Government price controls • Government price controls affect pricing of products in most industries (low)

vs. do not affect pricing .• Labor regulations • Labor regulations are not flexible enough (low) vs. are flexible enough .



Appendix 2

6. APPENDIX 2 – INDIVIDUAL COUNTRY SCORES FORTHE FOUR KEY DIMENSIONS

Economic dimension – relative ranking Asian countries

Legal dimension – relative ranking Asian countries

Urbanization

Gen.infrastruct

ure

Telecommunications

IT Productivity

Laborforce

Energy Businessskills

Fin. inst.

Australia 10.5 10.1 14.2 15.9 17.7 7.5 13.3 11.2 13.5China 6.5 6.9 10.0 3.3 3.2 11.3 3.6 7.4 5.4HongKong 13.0 14.5 14.1 14.6 14.9 12.2 11.5 13.1 12.5India 8.8 6.6 3.1 4.5 2.5 12.2 5.1 10.6 10.4Indonesia 7.6 5.4 1.3 2.5 2.8 10.8 9.1 7.2 7.4Japan 11.3 11.3 10.3 14.4 16.1 7.9 9.8 8.6 7.8

Korea 9.9 10.1 14.2 15.1 10.8 7.7 12.1 10.0 10.2Malaysia 9.9 10.2 8.7 8.7 7.1 11.7 9.1 9.9 9.9Singapore 13.9 14.7 11.1 14.7 15.2 10.7 12.2 11.4 12.2Taiwan 10.6 11.3 16.9 11.5 14.8 11.3 12.1 10.6 10.3Thailand 8.1 9.0 4.3 4.4 4.6 12.0 8.9 10.1 10.3Asian Average 10.0 10.0 9.8 10.0 10.0 10.5 9.7 10.0 10.0

Corporatefinance

Organizedcapital

markets

Internationalisation

Developmentof GDP

Sectors ofeconomy

Trade Black m. Economicenvironme

nt

Australia 10.6 11.5 11.5 15.2 12.4 2.6 13.3 11.9China 7.7 7.2 6.0 5.3 5.2 5.4 3.7 6.1HongKong 12.7 12.5 13.3 16.1 16.2 20.0 14.0 14.1India 9.5 8.9 9.0 3.4 10.1 2.1 5.6 7.0Indonesia 5.6 5.0 9.3 3.0 7.3 4.3 5.9 5.9

Japan 10.3 13.3 9.6 15.3 11.0 1.9 13.9 10.8Korea 10.4 8.9 10.0 10.6 10.1 5.8 10.0 10.4Malaysia 9.9 6.7 9.5 6.2 8.1 16.4 8.0 9.4Singapore 11.8 9.0 12.0 15.9 10.9 20.0 14.9 13.2Taiwan 11.4 10.2 10.2 9.9 11.7 9.1 11.5 11.5Thailand 10.1 6.1 9.6 4.6 7.1 9.9 9.3 8.0Asian Average 10.0 9.0 10.0 9.6 10.0 8.9 10.0 9.8

Taxes Legal f. Financiallegal

matters

Competition

Lab.reg. Legalenvironme

nt

Australia 11.3 11.4 13.9 12.5 7.6 11.3China 10.0 9.5 6.1 8.9 11.7 9.3HongKong 11.0 14.5 11.5 11.8 15.1 12.8India 8.1 8.9 10.3 8.7 6.4 8.5Indonesia 8.4 5.6 8.7 6.9 4.6 6.9Japan 8.6 8.4 8.3 10.4 10.4 9.2Korea 11.2 6.4 9.7 9.6 5.9 8.6Malaysia 10.3 11.0 10.5 9.5 11.3 10.5Singapore 11.7 13.8 11.8 11.6 14.7 12.7Taiwan 9.7 10.2 9.2 11.0 9.8 10.0Thailand 9.7 10.2 10.2 9.3 12.4 10.4Asian Average 10.0 10.0 10.0 10.0 10.0 10.0



Appendix 2

Social dimension – relative ranking Asian countries

Entrepreneurial dimension – relative ranking Asian countries

R&D Technology

Science Education Patents Econ.education

Qu. Eng. Bribing Income Flexib. Values Socialenvironme

nt

Australia 10.2 10.8 14.6 13.5 7.6 12.7 10.5 18.4 9.0 11.8 11.4 11.9China 3.8 7.2 12.8 6.6 1.8 5.9 6.3 3.2 7.2 7.4 8.9 6.5HongKong 3.8 12.2 5.4 11.6 3.5 12.7 10.6 16.8 5.3 12.6 13.4 9.8India 0.8 10.2 10.2 7.7 0.2 10.2 13.6 3.6 13.6 10.7 9.6 8.2Indonesia 0.0 5.9 3.1 5.2 0.0 6.8 6.6 2.4 12.8 7.2 6.9 5.2Japan 20.0 10.7 14.2 11.0 20.0 9.0 10.7 12.3 16.2 8.5 8.7 12.8Korea 12.7 10.5 4.4 10.2 14.8 9.4 9.6 9.8 12.1 9.5 9.5 10.2Malaysia 1.0 9.8 5.3 10.9 0.0 10.0 10.0 7.5 6.7 9.9 9.6 7.3Singapore 13.7 12.7 6.7 12.9 10.1 12.7 11.9 18.1 7.6 10.4 11.5 11.7Taiwan 11.2 11.4 6.4 11.9 17.9 11.3 11.0 12.0 10.2 11.7 11.4 11.5Thailand 0.4 8.7 3.7 8.5 0.1 9.3 9.0 5.9 9.3 10.2 9.2 6.8

Asian Average 7.1 10.0 7.9 10.0 6.9 10.0 10.0 10.0 10.0 10.0 10.0 9.3

Globalisation

Entrep. Real tax Bureauc. Entrepreneurial spirit

Australia 10.4 11.0 8.1 10.9 10.1China 8.5 8.7 10.9 5.2 8.3HongKong 12.2 13.7 14.1 14.9 13.7India 9.3 10.0 10.9 7.2 9.4Indonesia 6.8 7.4 6.3 4.9 6.4Japan 9.9 7.3 7.6 8.2 8.2Korea 10.4 10.2 7.8 9.2 9.4Malaysia 9.3 9.9 10.4 8.9 9.7Singapore 11.4 9.3 13.5 18.0 13.1Taiwan 11.5 12.0 10.3 12.1 11.5Thailand 10.3 10.4 10.1 10.4 10.3Asian Average 10.0 10.0 10.0 10.0 10.0



References

7. REFERENCES

IMD World Competitiveness Yearbook 2005

CIA Factbook, http://www.odci.gov/cia/publications/factbook

Schöfer, Peter and Leitinger, Roland, "Framework for Venture Capital in the AccessionCountries to the European Union". EFMA 2002 London Meetings. http://ssrn.com/abstract=314412

Leitinger, R., Strohbach, H.; Schöfer, P.; Hummel, M., 2000, Venture Capital undBörsen-gänge – Von der Produktidee zum internationalen Nischenspezialisten, Manzsche Verlagsund Universitätsbuchhandlung, Vienna/Austria

Zero2Ipo-China VC Annual Report 2004



Acknowledgements

8. ACKNOWLEDGEMENTS

The following INSEAD MBA students have contributed to the preparation and writing ofthis report:

Marc-Elie BernardHiroyuki HataFeisal JafferMaximilian KroellMichael PrahlMichael RogeroNiaz SalmanLeo ShimadaBhavna SinghChris TarrPaul Thienprasit

the climate for venture capital and private equity in asia

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