Venture finance, small firms and public policy in the UK

Abstract

During the tenure of the current Conservative administration, public policy in Britain has very much favoured the smaller firm. This policy emphasis appears to be based on a belief in the superior job creating potential and innovatory capacity of smaller firms over their larger counterparts. Evidence presented in the paper shows that small firms have, indeed, made an important contribution to innovation in the UK and that their share of significant British innovations has increased significantly since the mid-1970s. An important aspect of small firm policy in the UK has been the introduction of several schemes designed to increase the flow of capital into the small firm sector, with special emphasis being placed on venture capital. The first of these schemes, the Loan Guarantee Scheme, has directed capital from the banks into over 14,000 small firms. The second scheme, the Business Expansion Scheme, has increased significantly the overall flow of venture capital and has biased investments towards start-up and early stage financing. These two schemes, together with the establishment of an Unlisted Securities Market, have provided some impetus to the development of private sector venture capital in Britain, which is growing apace. Essentially, the public sector schemes have underwritten the costs of entry to the venture capital market of both individual and institutional investors. In other words, they have had an important catalytic effect in stimulating the growth of private sector venture capital industry which is now the largest in Europe.